Private Wealth

Weekly Research Briefing: There Is No Pivot

November 08, 2022

Any thoughts that the Federal Reserve would see 300 basis points of tightening as an excuse to slow future rate hikes were quickly dashed by Jerome Powell on Wednesday. While the text of the FOMC release suggested that the economy should slow due to the lag of rate increases, Fed Chair Powell made it clear that he would prefer to overtighten to fight inflation and then use other tools to reaccelerate the economy if it began to crash. In other words, there will be no pivot. But someday in the future the rate increases will eventually end, and they will probably do so at a higher terminal rate than we have been thinking. The markets did not like the news as they were firmly set up in the pivot and launch higher mode. Interest rates lifted to new highs, and long duration stocks sold off.

Outside of the Fed, the economy gave us plenty of good jobs data to chew on. JOLTs were much better, ADP employment was strong and Friday's non-farm payrolls came in above expectations while the household survey weakened. In the world of micro datapoints, the final wave of earnings season came in with continued mixed results and stock volatility. The biggest disappointments remained in technology companies where earnings releases continued to be accompanied with notes of spending cuts and layoffs.

Market movements remain active as risk assets reposition rather than leave. Declines in technology and internet stocks were met with gains in industrial, energy and material names. And international stocks woke up with their biggest week of outperformance since the GFC. Thanks to the Bank of England's softer central bank language and a possible move by China to ease its zero COVID policies.

Another big week ahead with the CPI figures set to drop on Thursday. And don't forget Election Day is Tuesday so your home phone should stop ringing on Wednesday, unless of course you live in Georgia in which case you have two more months of robo-spam advertising and polling hitting your house. Have a great week.

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J. Powell prefers to bounce the landing gear off the approaching runway...

@lopezlinette: Powell is telling us he'd rather keep hiking rates and overshoot than go doveish too soon.

Wall Street, your pivot is not coming.

Expect a very slow dialing down of future interest rate hikes...

Chairman Jerome Powell suggested officials could consider raising rates at a slightly slower pace beginning in December, by potentially approving an increase of 0.5 percentage point after four consecutive increases of 0.75 percentage point. Mr. Powell implied the decision didn’t necessarily hinge on immediate improvement in inflation data when he said that a series of softer inflation readings was “never … the appropriate test for slowing the pace of increases.”

But even if they go somewhat slower, he said officials would strongly consider raising rates to a higher end point, or “terminal” rate, than officials had projected at their September meeting. Back then, most officials thought the Fed would need to raise interest rates to around 4.75% next year.

Mr. Powell’s willingness to disclose this last piece of information is especially noteworthy because he hasn’t usually done so. After the Fed’s July meeting, for example, I asked him whether his estimate of the terminal rate had moved up, and he punted. “I don’t talk about my own personal estimate of what the terminal rate would be,” he said.

Compare that with Wednesday’s press conference. Mr. Powell volunteered his personal view—without any prompting—that inflation and other data since September “suggest that the ultimate level of interest rates will be higher than previously expected.”


‘‘It’s very premature to think about a pause in our interest rate hiking cycle’’. (FOMC Chair Powell)...

Almost 40 basis points of terminal rate bet swings on Wednesday between the dovish press release and Powell's Q&A. In other words, Powell doesn't want stocks to go up.

The Macro Compass

We are well above 5% now for the terminal rate which should last for much of 2023...

@SoberLook: The expected fed funds rate peak (the terminal rate) keeps moving higher (now above 5%) and further out in time (now in May). How far will the Fed take its “cumulative tightening”?

One more big FOMC take...

Friday's jobs data was decent even as the U.S. economy slows...

The U.S. labor market remains strong but is showing more signs of cooling following the Federal Reserve’s aggressive interest-rate increases aimed at combating high inflation.

Employers added a seasonally adjusted 261,000 jobs in October, a robust number but the fewest since December 2020, and the unemployment rate rose to 3.7%, the Labor Department said Friday. Wage gains in October ticked up from the previous month. On an annual basis, however, wage increases have eased, a possible sign of loosening in the labor market.

The report points to an economy that is gradually losing momentum following a torrid stretch of growth last year and earlier this year. Over the past three months, employers added an average 289,000 jobs a month, down from 539,000 during the same period a year ago. But that is still far more than before the pandemic. In 2019, job gains averaged 164,000 a month.


The earlier ADP employment data confirmed U.S. payroll strength...

@LizAnnSonders: October payrolls from @ADP stronger at +239k vs. +185k est. & +192k in prior month (rev down from +208k) … strongest gain since July, driven by leisure/hospitality (+210k); manufacturing sector lost 20k jobs.

Job openings continue to be more than plentiful...

Although tech companies are about to flood the economy with job seekers...

Meta Platforms Inc. is planning to begin large-scale layoffs this week, according to people familiar with the matter, in what could be the largest round in a recent spate of tech job cuts after the industry’s rapid growth during the pandemic.

The layoffs are expected to affect many thousands of employees and an announcement is planned to come as soon as Wednesday, according to the people. Meta reported more than 87,000 employees at the end of September. Company officials already told employees to cancel nonessential travel beginning this week, the people said.

The planned layoffs would be the first broad head-count reductions to occur in the company’s 18-year history. While smaller on a percentage basis than the cuts at Twitter Inc. this past week, which hit about half of that company’s staff, the number of Meta employees expected to lose their jobs could be the largest to date at a major technology corporation in a year that has seen a tech-industry retrenchment.


Facebook and Twitter employees should be calling Uber this week...

“Right now frankly we’re not seeing any signs of consumer weakness,” Chief Executive Officer Dara Khosrowshahi said in a conference call with analysts Tuesday. He added that strong ridership was driven by cities reopening, travel booming and a continued shift of consumer spending from retail to services. “October is tracking to be our best month ever for mobility and total company gross bookings,” he said.


With the bulk of earnings now behind us, a look at the numbers...

3Q 2022 reporting season was disappointing. S&P 500 EPS rose by 3% year/year and posted the smallest aggregate beat since 1Q 2020 driven entirely by Energy. 85% of firms have now reported. On an equal-weighted basis, results appeared relatively resilient: 46% of stocks beat EPS by at least a standard deviation of consensus estimates, compared with the 47% long-term average. However, notable misses from some of the largest stocks weighed on aggregate results. Consensus expected S&P 500 EPS to grow by +3% at the start of earnings season, a low bar that companies largely met. But excluding the +140% EPS growth of Energy, S&P 500 EPS fell by 4%, slightly worse than the 3% decline expected at the start of the season.

Goldman Sachs

A great earnings season if one were to exclude Growth stocks...

@TheIdeaFarm: Great chart from SocGen that shows the decline in earnings estimates this year has been applied to growth stocks, NOT value stocks.

But according to the Qualcomm CEO, the pain in tech will continue...


A glance at the market's 52-week lows confirms that the pain is concentrated in the technology sector...

The largest technology mega caps have now lost $5 trillion in market value...

@bespokeinvest: The six mega-caps that have at one point had trillion $ market caps have now lost more than $5 trillion in market cap from their peaks. $MSFT and $AMZN have each nearly lost a trillion! Staggering declines.

Among style factors, Growth is breaking down versus Value...

Goldman Sachs

Looking at the new all-time-high listings also illustrate the current strength in Energy, Healthcare and Financial stocks...

Joining Health Care, Financials and Energy is the Industrial sector which has put on an amazing relative move versus the big index...

Goldman Sachs

Quite the notable move in industrials as demand for equipment and services continues and operating margins outperform expectations...

@sstrazza: Industrials $XLI completing a relative trend reversal

One would have thought that the negative underperformance of the mega-cap technology names would have created an environment for long only portfolio managers to outperform...

But that hasn't been the case at all. Blame index hugging and an under exposure to the energy sector.

Goldman Sachs

If you didn't own energy stocks in 2022, you were fighting with both hands tied behind your back...

Small-cap value looks like it is set to drop the elbow on big-cap tech...

Interesting to see the similarities in sector/asset performances today versus 1973/74 when the market also waited for a Fed pivot...

The Great Pivot of 1974: many similarities…big, fat trading ranges, co-dependency of Wall St & Fed, stop-go economic policies, Fed emphasis on core not headline inflation, political instability, war, oil shocks, food shocks, fiscal excess, industrial unrest and so on; but of greatest interest to investors in Q4’22 was the Great Fed Pivot of Q4’74...

Fed policy had tightened through 1973/74 in response to inflation, oil shocks…Fed funds 5.5% to 13%

Fed first cut July 1974 as GDP turned negative

Fed sustained pivot began Dec’74 as Fed funds dropped from 9.25% to 4.75% despite inflation being 12% as a. GDP turned deeply negative, b. stock market losses from high reached 40%, c. crucially the unemployment rate leaped from 5.6% to 6.6% in month of Dec’74; following 12-months S&P500 rose 31%; lesson is job losses catalyst for 2023 pivot.

BofA Global

One of the most surprising moves last week was the spike in international developed stocks...

@murphycharts: MSCI ACWI ex. US Index with its best week relative to $SPX since December 2008.

Maybe stock investors are looking for more friendly central banks to invest with. Like the UK...

The Bank of England delivered its biggest interest rate increase in 33 years but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession.

The Monetary Policy Committee voted 7-2 to lift rates by 75 basis points to 3%, the highest level in 14 years. But in an unusually blunt comment on investors’ outlook for future hikes, it stressed the peak in rates will be “lower than priced into financial markets.”

Staying on the market path used in the forecasts, which peaks at around 5.25% next year, would knock 3% off GDP and ultimately push inflation to zero, the BOE said. An outlook based on rates staying at their current 3% level implies a shorter, shallower recession and sees inflation fall close to target in two years’ time.


Emerging Markets are also perking up. Could future rate cuts in Brazil send their market higher?

@thedailyshot: Brazil seems poised to begin cutting rates amid lowering inflation.

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