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The Data Is Continuing To Exceed Expectations

The data is continuing to exceed expectations suggesting the economy is still accelerating even after the most aggressive Fed in several generations.  This view was acknowledged by the Fed’s Beige Book which stated “Overall economic activity increased in 2023.”  The prior edition utilized at the January meeting characterized growth as “relatively unchanged.”

The private sector ADP Employment Survey indicated private sector payrolls rose by 242,000 last month.  The median forecast was calling for a 200,000 advance.  Moreover, the prior month was revised higher.

Additionally, the Labor Department’s Job Openings and Turnover Survey, or JOLTS, indicated  10.8 million open job positions.  The median estimate in a Bloomberg survey called for 10.5 million openings.  The prior month was also revised higher.  The number of vacancies did drop however from the start of the year but remain very elevated on a historical basis.

Tomorrow is the release of February’s BLS Employment report.  Bloomberg stated payroll growth has topped estimates for 10 consecutive months, the longest streak in “decades.”

Bloomberg reports that beginning in April last year, the median forecast in each survey fell short of the government’s initial estimate of payroll growth by an average of 100,000 a month—the most going back on record since the 1998 inception of this statistic.  Ahead of tomorrow’s February’s jobs report, the projection is for a 224,00 increase.

Swaps are now suggesting a terminal fed funds rate of 5.64% to be reached by September.  The current rate is around 4.5%.  Thirty days ago and before the January job’s report the market had suggested a peak fed funds rate would be achieved by March and reduction would then occur in June and ending the year around 4.0%.

The market is finally accepting the Fed’s version of tomorrow’s reality; the overnight rate will be over 5%, remaining there until well into 2024.  Any thought of a Fed pivot in the intermediacy is nothing other than wishful thinking.

Most market participants expect a recession to occur “sometime” in 2023 because of Fed policy. This sentiment has been present for almost a year, only the timeline has changed.  Again referencing the Beige Book, this statistical compilation utilized at the upcoming Fed meeting stated “ the economic outlook going forward is less optimistic amid heightened uncertainty and economic conditions are not expected to improve much in the months ahead.”

I ask a different question.  For almost 12 years interest rates were around zero percent.  Because of monetary policy, many—including the Federal Reserve via its “Central Tendencies” publication—had projected a 4.0% growth from 2010-2015.  In reality the growth rate was under 2.0% during this era and remained at this level until 2017ish.

Is consensus [and the Fed] again wrong?  Will growth [and inflation] continue to surprise on the upside given the implosion of the multipolar and interdependent world where trade has been weaponized and economic and cyber warfare is globally occurring?  The west has weaponized the global payment system and the east has weaponized the delivery of goods.

The methods of production are now rapidly moving to more “friendly shores” where availability has replaced efficiency as the primary factor.

Changing topics, according to Bloomberg, earning estimates are being cut at the fastest pace since 2010.  Analysts have reduced their 2023 EPS estimates by 12%, the sharpest decline in full year outlooks since 2010.  Earnings are now expected to be negative for 2023, the second consecutive year of decline.

Have higher rates and lower profits been fully discounted in the markets?  Many think not, hence the proliferation of bearish outlooks.

Commenting on yesterday’s market activity, equity markets gained little traction even with Powell’s reassurance that no decision has been made on the pace of tightening and the central bank is not seeking to a cause a recession.  After a moderately volatile day, prices ended essentially flat.  Treasuries were also flat.

Last night the foreign markets were down.  London was down 0.61%, Paris down 0.39% and Frankfurt down 0.49%.  China was down 0.22%, Japan up 0.63%  and Hang Seng down 0.63%.

Dow and NASDAQ futures are down 0.2% and 0.6%, respectively as higher long term Treasury yields. The 10-year is off 2/32 to yield 4.0%.

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Kent 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.