U.S. Job Openings Fall, Layoffs Rise There were 10.8 million job openings in January, down from December’s 11.2 million, a sign that demand for workers could be cooling a little. 

January’s total was down from a record 12 million last March, according to revised 2022 data, but still well above 7 million openings in February 2020 ahead of the pandemic. January openings exceeded 5.7 million unemployed workers looking for work, a ratio of nearly two to one.

Openings fell sharply in the information, construction and real-estate sectors in January from the prior month, while leisure-and-hospitality and retail openings grew. (…)

Layoffs increased to a seasonally adjusted 1.7 million in January from 1.5 million in December. January layoffs increased about 20% compared with a year earlier, but they remained below prepandemic levels.

The revised figures showed that layoffs were higher than previously reported last year, which began to slightly increase in the second half of 2022, Nick Bunker, an economist at jobs site Indeed, said in a note.

Meanwhile, the revisions showed that quitting was slightly lower than previously reported in 2022, he added. (…)

• The number of construction job openings plunged by 240,000, or nearly 50%, to 248,000 in January compared to December, according to government data out yesterday. It was the largest-ever monthly decline in construction job openings in the data series that stretches back roughly 20 years.

The sudden sharp drop in construction job openings in January — combined with the recent downturn in investment in residential construction and other measures of housing activity — suggests that the economy is still adjusting to the big rate hikes of last year, even as the Fed considers doing a lot more. That could set the stage for the Fed to accidentally over-hike, generating the hard economic landing many had been hoping to avoid. (Axios)

Plunging construction job openings heralds tougher times for the 7.9M construction workers as units under construction near completion while starts and permits have dropped 25% in the past year.

Here’s a clearer view of the gap, almost 1M workers, and we’re not even in recession:

• ADP Data Show US Private Payrolls Rose 242,000 in Feb.

The Beige Book

Overall economic activity increased slightly in early 2023. Six Districts reported little or no change in economic activity since the last report, while six indicated economic activity expanded at a modest pace.

Several Districts indicated that high inflation and higher interest rates continued to reduce consumers’ discretionary income and purchasing power, and some concern was expressed about rising credit card debt.

On balance, loan demand declined, credit standards tightened, and delinquency rates edged up.

Travel and tourism activity remained fairly strong in most Districts.

Manufacturing activity stabilized following a period of contraction.

Labor market conditions remained solid. Employment continued to increase at a modest to moderate pace in most Districts despite hiring freezes by some firms and scattered reports of layoffs.

Wages generally increased at a moderate pace, though some Districts noted that wage pressures had eased somewhat. Wage increases are expected to moderate further in the coming year.

Inflationary pressures remained widespread, though price increases moderated in many Districts. Some Districts noted that firms were finding it more difficult to pass on cost increases to their consumers. Selling prices increased moderately in most Districts, with several Districts noting a deceleration.

Rents were reported to be steady or higher.

But it’s only words…

Bank of Canada Holds Rates at 4.5% Even as Fed Pushes Higher

The Bank of Canada kept interest rates unchanged for the first time in nine meetings, saying it’s prepared to hike again if the economy veers off its forecast course.

Policymakers led by Governor Tiff Macklem made good on a January pledge to hold the benchmark overnight rate at 4.5% on Wednesday, the first pause among major central banks that was expected by both markets and economists. Officials kept the door open to further rate increases, however, reiterating that they’re willing to raise borrowing costs again if necessary.

The stay-the-course message suggests officials are confident their aggressive tightening over the past year will keep dragging on economic growth and bring inflation to heel. That’s at odds with the US Federal Reserve, which is signaling further hikes to come. (…)

The Bank of Canada’s communications also highlighted a “very tight” labor market, and said inflation expectations still “need to come down further” for inflation to get back to 2%.

But taken as a whole, Macklem and his officials see the economy evolving as expected in their January forecasts, an important condition to holding steady.

The latest data remain “in line with the bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said in the statement. (…)

China’s Inflation Rate Slows to One-Year Low, Casting Doubt on Recovery The data raise new questions about whether the scrapping of Covid controls alone would be enough to put growth back on Beijing’s desired trajectory.

Consumer prices gained 1% in February compared with a year earlier, slower than the 2.1% increase recorded in January, led by a deceleration in food-price increases, China’s National Bureau of Statistics said Thursday. (…)

The drop in consumer-price growth was driven by “a pullback in demand after the holiday as well as ample market supply,” said Dong Lijuan, a senior statistician with the statistics bureau. (…)

Food prices rose 2.6% from a year earlier in February, slowing from January’s 6.2% growth. Prices of pork, a Chinese staple that has a large weighting in the country’s consumer-price index, decelerated to 3.9% growth, down sharply from the 11.8% increase in January.

Stripping out food and energy prices, consumer prices rose 0.6% from a year earlier in February, compared with January’s 1.0% increase. (…)

The producer-price index dropped deeper into deflationary territory in February by falling 1.4% from a year earlier, compared with January’s 0.8% decline, the statistics bureau said. That was lower than the 1.2% decline expected by surveyed economists. (…)

China Property Sector Left in Limbo by Stalled Debt-Restructuring Talks Many debt negotiations are moving slowly, creating an overhang for a housing sector that is trying to recover

Dozens of the country’s developers defaulted on their dollar bonds last year, amid a sharp slowdown in China’s property sector. That has led to a series of difficult—and protracted—negotiations with overseas fund managers.

(…) Chinese real-estate firms  missed payments on more than $30 billion of international bonds last year.

In February, new home sales by China’s largest developers rose on an annual basis for the first time since mid-2021, according to a private industry data provider. That was seen by some analysts as a sign that the market is bottoming out.

A recovery in nationwide home sales increases the chance that defaulted developers can remain in business and generate cash to repay investors. But it also adds a hurdle to negotiations between property executives and bondholders, since they may have dramatically different views on how long the sector will take to return to health. (…)

The need to keep businesses running also means foreign creditors are restricted from taking one obvious option in a debt workout: forcing equity holders to take heavy losses. Many Chinese property companies are tightly controlled by their founders, whose personal relationships are crucial to the company’s success. (…)

Chinese local governments are pushing them to spend money to finish projects, while some local creditors want them to shore up their finances at home instead of repaying foreign investors. (…)

More than 78% of attendees at a recent bond conference hosted by S&P Global Ratings said they thought it would take at least two years for most Chinese property companies to reach the end of negotiations with investors. Around 80% thought the amount investors got back would be 30 cents on the dollar or less. (…)

TINA Is Still the Only Wall Street Acronym That Matters

(…) Everyone knows that stocks do better than bonds on average, with the total return – price gains plus dividends – for the S&P 500 Index beating the total return for 10-year Treasuries in 62% of one-year periods and averaging 8.6% per year above inflation versus 2.9% for 10-year Treasuries. Stocks have considerably more volatility, 19.3% versus 8.8% for bonds, but still provide a better risk-adjusted return.

TINA-bashers only come out when equity prices are down, and bond yields and equity valuations are up. So, what if we only look at times when inflation-adjusted total returns for stocks are more than 10% below their prior peak, and bond yields and equity cyclically adjusted price-earnings ratios are above their averages over the prior 10 years?

In the 21 times before 2022 that all three happened together, stocks averaged 24.7% above inflation over the next year, versus 2.0% for the 10-year Treasury. Stock volatility was low, 10.6%, and not much above bonds at 8.2%. Only once, in 1893, did stocks lose to inflation or to bonds over the subsequent year. (…)

Over a year or two stocks can decline without taking everything else with them, but essentially all investments require robust long-term growth in corporate profits to provide good inflation-adjusted total returns. Sure, stocks can punch investors in the gut with 40% or larger declines, but either they come back (as they have in the past) or everything else goes too.

The best investors can hope for is to share in general prosperity, no piece of paper will help investors thrive while everyone else is suffering. This economic story, plus long-term history, underlies the “stocks for the long run” case. (…)

Two-year Treasuries are yielding 5%, highest since 2007…but so is inflation, negating any real return unless inflation falls rapidly. The Great Financial Repression continues but it is no longer Fed-induced. Something important needs to happen. Unless inflation declines, yields will rise even more, eventually causing the necessary slowdown.

• The 2-year Treasury yield has been following the Citi Economic Surprise Index. (The Daily Shot)

Source: Truist Advisory Services

• US Yields Show Ominous Signs for Investors Betting on Rate Cuts

If history is any guide the surge in US two-year yields back above the fed funds upper boundary this week is an ominous sign for any investors looking for the Federal Reserve to cut rates in 2023.

(…) since 1990 Fed rate cuts have only come after two-year yields fell below the rates upper boundary and remained there for at least several months.

• Recession Risk Looms Large as Bond Markets Price in Steeper Rate Hikes Globally

(…) Powell, in two days of testimony before the US Congress this week, warned that robust US data makes it likely the Fed’s peak rate will be higher than officials had penciled in in December. He also said he and his team may need to re-accelerate the pace of rate hikes at the March 21-22 meeting, to a 50 basis-point clip.

Economists reacted swiftly, with Goldman Sachs Group Inc. adding a quarter percentage point to its Fed peak-rate forecast, taking it to a 5.5% to 5.75% range — a percentage point higher than officials’ current target. Citigroup Inc. flipped its March call to a half-point move, and pushed the terminal-rate prediction to the same as Goldman’s.

Investors have also ramped up bets for how far the European Central Bank will have to raise borrowing costs. Initially driven by hawkish comments from key officials, the trade got another boost from unexpectedly strong recent readings for underlying inflation — a measure that strips out volatile components.

An increasing number of economists now sees the ECB deposit rate reaching 4%, from the current 2.5%. ECB Governing Council member Robert Holzmann, perhaps the panel’s most hawkish member, even suggested four more half-point hikes are in the pipeline, which would take the peak to 4.5%.

German two-year note yields on Wednesday hit their highest level since 2008. In the Treasuries market, the yield curve inverted to an extent unseen since a ruinous US recession of the early 1980s — with two-year yields exceeding those on 10-year Treasuries by well over a percentage point. That evokes the era of Paul Volcker’s draconian tightening. (…)

• Recession probability model from @Economics (based on 10y2y yield spread) has risen to an all-time high (@LizAnnSonders)

Biden to Urge 25% Billionaire Tax, Levies on Rich Investors

Biden’s budget request to Congress, which is slated to be released Thursday, calls for a 25% minimum tax on billionaires, according to a White House official familiar with the proposal who declined to be named because the plan is not yet public. The plan would also nearly double the capital gains tax rate for investment to 39.6% from 20% and raise income levies on corporations and wealthy Americans.

The proposal, which is largely a reprise of Biden’s multi-trillion dollar Build Back Better economic package, has little chance of passing Congress, particularly now that Republicans control the House of Representatives. Biden was unable to pass similar tax increases when Democrats enjoyed control of both chambers of Congress, instead settling for slimmed down legislation focusing on energy and health policy known as the Inflation Reduction Act.

But the White House’s proposal foreshadows both Democrats’ strategy ahead of high-stakes negotiations over the debt ceiling and government spending later this year, as well as the economic platform underpinning an expected Biden reelection campaign. (…)

Powell Says Fed Is Prepared to Speed Up Rate Increases Federal Reserve Chair Jerome Powell opened the door to a larger half-point rate increase this month and said officials are likely to lift rates higher than they previously expected to combat inflation in a stronger economy.

(…) “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” (…)

“The Fed is getting closer to accepting that they aren’t returning inflation to 2% within any reasonable time frame without inducing a hard landing,” said Tim Duy, chief U.S. economist at research firm SGH Macro Advisors. (…)

Mr. Powell wouldn’t have entertained the option of a half-point increase “without intending to follow through with that outcome” at the coming meeting, said Mr. Duy. “Only surprisingly weak data will prevent that outcome now.” (…)

“We’re looking at a reversal, really, of what we thought we were seeing to some extent,” said Mr. Powell. Last month, he said moving more slowly would better ensure the Fed didn’t raise rates too much. On Tuesday, he said, “nothing about the data suggests to me that we’ve tightened too much.”

(…) the breadth of the reversal, together with revisions to previous data, “suggests that inflationary pressures are running higher than expected at the time of our previous [rate-setting] meeting,” he added. (…)

Mr. Powell’s emphasis on the revisions acknowledged that the economy’s recent strength likely wasn’t limited to just one month (…).

By the end of Mr. Powell’s testimony, investors anticipated the fed-funds rate would rise to between 5.5% and 5.75% this year, and the probability of a half-point hike this month rose to around 63%, from 32% before the hearing.

• Full Steam Ahead for Jerome Powell The markets tremble, but the Fed Chair knows he can’t let up now.
• How Seasonality Affects Our View of Inflation, Jobs, as Explained With Hot Dogs Routine adjustments based on time of year can dramatically change how economic figures are perceived.

(…) Government statistical agencies use complex models developed over decades to account for these patterns to make month-to-month comparisons possible.

That arcane process received more attention recently as some economists questioned if strong seasonally adjusted hiring, price and spending data to start the year accurately reflect what’s going on in the economy.

On Tuesday, Federal Reserve Chair Jerome Powell told Congress that “some of this reversal likely reflects the unseasonably warm weather in January in much of the country.”

Pandemic-caused swings in the economy also have complicated recent seasonal adjustments, and figures at the start of the year can be hard to predict, economists say, because seasonality plays a big role. (…)

The pandemic and related lockdowns led to big changes in activity that didn’t follow normal patterns. Statistical agencies made manual changes to separate seasonal fluctuations from pandemic changes. New York Federal Reserve research noticed a similar trend after the 2007-09 recession. “For the subsequent few years, an ‘echo’ of the Great Recession took place as economic data kept exceeding the artificially low expectations for that time of year.”

Every year, in February, the Labor Department releases a new estimate of the seasonality of its consumer-price index. The most recent adjustment for the inflation measure was particularly large. Jonathan Wright, an economics professor at Johns Hopkins University who studies seasonality, estimated that the most recent seasonal adjustments had an impact on the inflation numbers that was nearly double what had been seen in the previous four years.

Those changes resulted in revised readings showing monthly price increases in the first half of the year were less than previously estimated, and price changes later in the year were larger than prior estimates.

“Typically they move barely enough to matter,” Mr. Wright said. “They are actually changing what we think happened in the year of 2022.”

• John Authers: Ka-Powell: The Fed Reset Continues

(…) Ed Yardeni of Yardeni Research raked through the Powell press conference from the beginning of last month to show that at the time he appeared to buy the case for a gradual “disinflation:”

The word ‘disinflation’ was uttered 11 times at Powell’s press conference on February 1. He was the only one who mentioned the word at his presser. He repeatedly acknowledged that inflation was moderating but still had a ways to go before reaching the Fed’s 2.0% target. Nevertheless, Powell sounded much less hawkish than during his previous presser on December 14, 2022, when the word was mentioned only twice, both times by reporters. In his congressional testimony today, Powell mentioned the word just once in his short prepared remarks with a hawkish spin

(…) Here’s Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, on risks that might pose:

The question that I have now is: Is the economy reaccelerating? Basically we saw some weakness in November and December, but now it looks like growth is picking up. If that continues in February then that’s a real risk to the Fed because if the economy is able to reaccelerate in January and February, that means even though they have higher interest rates by March — that’s still not restrictive enough to stop the momentum in the economy — and that means the fed funds rate can go much higher than we thought. Maybe go to 6% and stay there for a while. So that’s the risk to the market at this point.

(…)

Data dependent, huh? But the data itself is not dependable!

How about being words dependent?

From the recent S&P Global’s Services PMI (we all know the “goods” economy is in recession):

• S&P Global’s Services PMI rose from 46.8 to 50.6, signalling “only a marginal uptick in business activity, but an end to a seven-month sequence of contraction.”
• New business across the service sector continued to decrease during February. New export orders declined for the ninth month running midway through the first quarter, the pace of contraction was solid overall.
• The rate of job creation was the quickest since September 2022, despite being only marginal overall. Some companies noted that greater availability of candidates supported the upturn.
• Despite a softer increase in cost burdens, service providers raised their selling prices at a sharper pace in February. The rate of charge inflation was the quickest since October 2022 and strong overall. Survey respondents commonly noted that higher output charges were due to the pass-through of greater costs to clients.

My take:

• Demand is ok but not strong, and not strengthening.
• The labor market is ok but not strong and labor supply is improving.
• Upstream inflation is softening but downstream prices are not.

In all, a words-dependent Fed would conclude that its policies are having the desired effect on demand, the lags will keep biting for a while, but perhaps a few more rate hikes would finish the job on demand which would put an end to the easy pass-throughs.

There’s also “soft data”:

  

• The Paychex Small Business Wage data show that hourly earnings growth slowed further to 4.5% in February from +4.7% in January and its May 2022 peak of 5.2%. The one-month annualized growth (+3.7%) remained below four percent for the third consecutive month. Last 3 months a.r.: +3.5%.

I can insert some soft/hard data here:

Business sales and sales expectations have converged to nominal GDP’s final sales to private domestic purchasers (solid black) which slowed from 12.5% YoY growth in Q4’21 to 7.2% in Q4’22, likely on its way to the 4.5% range indicated by February’s business expectations.

But growth in real demand has slowed to less than 1.0% in Q4’22, its weakest reading (ex-pandemic) since 2007…

… Actually, since 1968, real domestic demand has never been below 1.0% YoY other than in a recession.

Trying to focus:

• Bloomberg’s Joe Weisenthal:

(…) the second part of the Warren question didn’t get as much attention, but it was something that should be top of mind for investors actually. Go to the 3:15 mark of the video. Basically the question was, once the Fed gets unemployment up to 4.6%, would it really stop there? As Warren put it: “Once the economy starts shedding jobs, it’s kind of like a runaway train.”

And she is right. As Alex Williams at Employ America noted in a blog post earlier this year, since WWII there have been 12 times that the unemployment rate rose by at least 1% in a year. And 11 out of 12 times, the unemployment rate increased by at least 1 percentage point more. So even setting aside what you think of asking the Fed chair about the employment costs of the tightening, it’s definitely a good question to ask about whether the Fed can stop the layoffs when they really gather steam.

It’s also a timely discussion to be having in a big week for labor market data. Today we get ADP and JOLTS. Tomorrow, we get initial claims, and then Friday is the non-farm payrolls report. It’s worth noting that while the market still seems tight and strong, some of the private sector measures are starting to turn. Yesterday, Nick Bunker at Indeed noted that job postings to the site continued to drop notably. Meanwhile the rate of hiring is also slowing per LinkedIn.

Who knows what this batch of data will bring. But if/when the labor market begins to turn at some point, then you should take heed of Elizabeth Warren’s question, and the momentum of unemployment once it gets going.

Meanwhile, the curve inversion is getting wild. At roughly negative 106, the 2-10 spread is now the most inverted since September 1981, implying that at some point out there, we’re gonna be seeing some pretty fast rate cuts whenever things turns around.

Wholesale sales rose 1.0% MoM in January; ex-petroleum: +0.6% MoM. Total YoY: +6.5%

South Korea Says U.S. Chips Act Subsidies Have Too Many Requirements Seoul’s Trade Ministry says there are too many strings attached for chip makers such as Samsung and SK Hynix to apply for federal funding intended to boost domestic production.