Had a heavy post for today planned …. about a pretty complicated event occurring in the Capital Markets…just moved it to Wednesday with a bit of travels this week and continued Capital Market movement from a Friday Economic report… wanted to move the later to the front today as it is a bit simpler, but super important as well…
Hang on, both posts this week a bit heavy, but will keep today’s short!
Hot Jobs Numbers Puts Pressure on FED, Rates (short end) and Capital Markets
When GOOD news is bad … it happens in this part of the cycle!
On Friday February 3, 2023 the BLS (Bureau of Labor Statistics) released the “Employment Report” for January 2023…. all about expectations versus actual….
Anyone extrapolating that downward sloping chart – Far Right below. would have certainly NOT EXPECTED that huge January 23 bar… anyone would include all of Wall Street and the FOMC – (Very lagging reading, likely revised, BUT much different from expectations)
New Jobs Expected 190k ACTUAL 571K — Ya ya will be revised, but for now is what Wall Street has…
The good news is from this report lots of jobs and more than expected…. Bad News… Fed may continue to be aggressive in slowing the economy… aka Higher short term rates…
Big move in the 2 Year Treasury, one of the most in sync with Fed rate moves…
Ok… all caught up from last week…be sure to have your coffee before reading Wednesday’s post!
All about expectations versus actual, “for the moment” …. Last months was 7.7% year over year and the expectation this time is for 7.3% …
Above the 7.3% will likely lead to disappointment and below or well below a short term applause …
On Wednesday Jerome Powell and his buddies at the FOMC (Federal Open Market Committee) will in all likelihood raise rate the much expected .50% to the 4.25% – 4.50% level….
While it is not super obvious from the chart above, the longer term 10 year treasury (blue) is much lower and trending lower than the shorter term 2 year treasury …. this is an inverted yield curve….
With Powell pushing short term rates higher with a .50% increase, the interesting observation will be what the 10 year does, as the 2 year is captive to Powell’s movements, being so near in time frame!
Sorry for the heavy start to the week… we promise an easier rest of the week… but wanted to let you behind the curtains of our watch this week….
In our final fun “Back to Basics” review we discuss Tax PLANNING….
From the post:
Coincidentally, the most important part of Tax Planning is the second word in the subject, Planning!
As we individual or corporate tax payers traverse the tax year, it’s important to take note of unusual events that may be occurring. We’re certainly not saying you have to worry about this every minute of the day, but should you have an unusual increase in income, or decrease in income, this should be thought about before the end of the year for your tax planning.
Later in the post we discuss the key items in reviewing your return as well….. in step by step format!
Legacy Health Coverages
After running into several situations of legacy health care options for long time former employees… Here in this post we outline the possibilities of bridge Health Coverage from legacy companies and how fantastic of an option this can be…
In almost every situation, the key is these plans are not easily discovered. In order to find out if you have an option, it’s best to dig out contact information from HR of your old employer and reach out to them directly.
This is an expense to your former employer, so it would be expected not to receive multiple information regarding such a plan, but if available it could greatly help in bridging the gap for Medicare should we be in the situation of needing coverage before age 65.
Capital Market Comments
Bond Market turns Upside Down – The R Word
After the second negative GDP print … see next note of Fed’s Pickle…. the bond market really began to price in the R Word…. Here in this post we discuss the inversion of long bonds to short and their meaning…
The Fed’s Pickle
In this post, BEFORE the actual GDP announcement, we discussed the Fed’s pickle, with a hot economy (CPI inflation holding tight) BUT an economy that is slowing …..even qualifying as the R Word now – Recession!
From the BLS release after our post :
Q2 2022 (Adv)
Q1 2022 (3rd)
Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter. The smaller decrease in the second quarter primarily reflected an upturn in exports and a smaller decrease in federal government spending.
The definition of recession is negative two quarters GDP….
Have a Great Day, Talk to You at the End of August!
For the record we called a possible top here, and while the increase of the CPI was only .4% than the prior month, it was NOT a deceleration YET…
Bottom Line Result
Cutting to the chase for those with little time – This hotter report will give the FOMC (Federal Open Market Committee) led by Jerome Powell a green light for further tightening faster – creating a faster slowing of the economy…
Quick FOMC Fed Funds Analysis – The Rate Increase Measure
(Take note once again, the first rate hikes on far left of chart took three years…. the next rate hike cycle ..one in middle right, took almost FOUR years… this one MAY be literally months… again this fits our thesis of headwinds came fast and are behind us (Look Forward not Back)– had to put that plug in while we were on the topic…)
CPI Analysis – What’s the Hold Up
With Owners Equivalent Rent/shelter being a very large portion of the CPI component…. its fast turn around is holding the CPI Up along with food inflation as well….
Note that far right movement up….
Oh and oil prices moving higher did not help either…..
Bottom line, continued FOMC rate increases, faster slowing of the economy, eventually… lower interest rates faster …..
Sorry for the heavy Monday, but wanted to get it out there to you guys as it helps us clarify as well!
We don’t want to get too heavy and pound you with market thoughts, we know you’re getting enough of that from the “Market in Turmoil” like headlines, but we did want to give some explanations and let you know we are watching carefully as we have been on notice since December for a possible slowdown.
Look forward, not back
Economic reports such as today’s CPI (consumer price index) report is very much rearview looking, as such it’s sometime easy to forget that what’s most important is looking forward to what is going to happen next rather than backwards to what has happened. Yes it is much harder, and you do not know exactly what is going to happen … but you sure do not drive a vehicle looking continually in the rear view mirror – some humor on a dry subject… stay with me!
This is even more evident at the recent quick rise in interest rates, creating the headwinds to bonds. As noted here and again here in our posts (the second with even a special video) it’s highly likely and the probability is most that the headwinds for our fixed income investments are behind us. Once again looking forward, a slow down usually garners lower interest rates, exactly opposite to our slightly current and mostly rearview looking higher rates.
FOMC chaired by Powell gave and now takes
Over the past 18 months to two years the FOMC (Federal Open Market Committee) headed by Jerome Powell have taken very aggressive measures to stimulate the economy. Much of a stimulation, once the book is written may have over stimulated not only the economy but various asset prices. Their goal at this time is to slow inflation thereby doing a complete turnaround from their prior stance and taking away stimulus. This most likely will continue until they see evidence of slower inflation or lower employment.
Higher rates are their main instrument of choice:
The FOMC waits for the reports such as the CPI to confirm their decisions, making for a lag in decision making and possibly longer decision-making, but they will eventually get there….
Finally, capital markets are certainly looking forward hence the sluggishness as they begin to price in a slowdown in full force. Eventually it’s very likely the FOMC will begin to see these clues as well!
With a tremendous amount of attention being paid to the Bureau of Labor Statistics CPI Report (Consumer Price Index), we set off as part of our research to find an easy explanation of the breakdown of the index.
As a reminder the CPI index is a measure of inflation, hence the increase rhetoric not only in the public domain, but here as well, as we have spoken about it multiple times via analysis.
Back to the analysis, we found tons of information about the make up of the aforementioned CPI index, and a 100 plus items that make it up, but oddly it took us some time to find the true easy breakdown in larger macro elements of the CPI index.
Great news, a new approved non-copyright use from a fantastic new research service called Pew Research has been discovered. With approval from their public relations folks, we are happy to finally show you this wonderful graph that breaks the CPI index down into very easy and visually friendly context.
We will be referring back to this graph frequently, as some of our future commentary will be about this CPI index, and what it may look like in the future and what it means from a Federal Reserve/FOMC standpoint.
With the report actually quadrupling employment hire expectations and large revisions upward to several prior reports, the FOMC (Federal Open Market Committee) is all but forced to begin raising rates soon!
BREAK IN – Interesting Weekend Research Findings – In two different areas of the financial world, this last weekend of researching this post a reminder that HUGE population adjustments occurred in this report. Here is an accidental finding from the St Louis research site showing the effects of the revisions in 2021…
From the report:
Total nonfarm payroll employment rose by 467,000 in January, and the unemployment
rate was little changed at 4.0 percent, the U.S. Bureau of Labor Statistics reported
today. Employment growth continued in leisure and hospitality, in professional and
business services, in retail trade, and in transportation and warehousing.
Hot Report Puts FOMC on Go For Raising Rates
This HOT report, of 467k gains in employment, with expectations less than half of this number surprised market participants and the FOMC (Federal Open Market Committee) too, most certainly.
Adds in employment continue to help the Unemployment rate, once again giving the FOMC a green light of urgency to raise interest rates.
Market participant digestion of the rate raises will be interesting. Recall just a month or so ago, FOMC officials saw only one raise in 2022.
Also, recall our review of a large conference on March 24 of 2021 — yes 2021 almost one year ago…
Views: Number One From the Conference – Go Away FOMC – You Have Stayed Too Long
View number one and shared by every market related expert, the federal reserve is overstaying their welcome and should immediately stop asset purchases and begin talking about increasing rates. The main reason for these shared views are because asset levels have become inflated across almost all assets according to the experts and be continued purchases are no longer necessary given that capital markets are orderly.
Has the FOMC waited too long?
Next up, interest rates front run the FOMC!
Have a Great “Hot Unemployment Report Review” Day!
Last week the FOMC (Federal Open Market Committee) led by chair Jerome Powell at a regularly scheduled meeting and post meeting Video Interview, aggressively commented that they are going to wind down the monthly purchase of fixed instruments and plan on raising short term interest rates to thwart the inflationary pressures, mainly the backward looking CPI (Consumer Price Index) readings reported by the BLS (Bureau of Labor Statics) …. On a side note, ever notice how darn many acronyms are used in Economics….OK digressing…
We can debate the source of the inflationary pressures, supply chain, wages, oil or other matters…
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.