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Most are confused by the massive disconnect about the interpretation of FRB Chief Powell’s comments.  The WSJ wrote “Mr. Powell could not have been clearer in his meeting press conference that he thinks inflation remains a problem and the Fed is a long way from done.”  The word disinflation, the word that was a catalyst for the advance, is defined as “a moderation of inflationary pressures.”

Bloomberg writes “There is a dangerous game of chicken being played between the markets and the Federal Reserve. The Fed holds all the cards, and it can potentially end disastrously for those not believing the Fed.”

A Dow Jones Newswire headline read “The Fed’s integrity is being fully challenged.”

Another headline read “The Markets thinks the Fed is bluffing.”

The markets firmly believes the Fed will lower interest rates at the June meeting.  The Committee has declaratively stated rates are going higher and will remain there until well into 2024.

Who is correct?

The FOMC has stated jobs is a primary determinate of monetary policy.  Yesterday’s release of weekly jobless claims indicated continued strength in the labor market as claims are at the lowest level since April.

Today the BLS releases the January labor report.  Will it confirm the momentum in the JOLTS data, an indicator that Powell greatly favors?

Analysts are expecting a 190k increase in both non-farm and private sector payrolls, a 3.6% unemployment rate, a 4.3% increase in average hourly earnings, a 34.3-hour work week and a 62.3% labor participation rate.

Some believe the NASDAQ is following January 2001.  The NASDAQ surged over 25% from its early January 2001 lows after plunging over 40% in 2000.

The question at hand is whether the performance of the next two months be like that of 2001.  Two months later, the NASDAQ was 42% lower from its late January peak.

The primary determinates to the answering of this question are perhaps interest rates and earnings.  If we are to believe the intended course of the Federal Reserve, the interest rate question is already answered; the Fed Chair said rates will be higher.

And then there are earnings.  Bloomberg has commented that earnings season is “underwhelming” and 2023 forecasts are being reduced from an expected increase to now an expected decline.

JP Morgan wrote yesterday “trading orders from the retail army in stocks and exchange traded funds accounted for 23% of the market’s total volume since mid-January, above the previous high of 22% reaching during the 2021 meme mania.”  Retail volume on out of the money short dated call options is also “surging,” an ominous bearish indicator.

The Bank further stated, “professional investors are mostly staying on the sidelines until there is greater interest rate and earnings clarity.”

Historically retail options traders are disastrously wrong.  It is also generally accepted the retail buyer is typically “late” to the proverbial party.

Will the next two months resemble 2001?  The VIX—or a measure of risk and complacency– is at uncomfortably low levels where significant reversals occur.  Unfortunately, only history will answer the above question.

After the close, AMZN, GOOG and AAPL posted results.  Bloomberg writes “The FOMO rally deflates with disappointments from the three leviathans.”   I also ask is the proverbial buy on rumor and sell on fact occurring?

Last night the foreign markets were down.  London was up 0.24%, Paris down 0.28% and Frankfurt down 0.64%.  China was down 0.68%, Japan up 0.39% and Hang Seng down 1.36%.

Dow and NASDAQ futures are down 0.25% and 1.85%, respectively as the results from the “tech trio” are disappointing and ahead of the jobs data.  The 10-year is up 2/32 to yield 3.39%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.