The Fed Hit Pause—Now It’s Up to Inflation and Jobs Data to Move Market

Confused about the Fed's next move? The latest FOMC minutes suggest rate cuts are off the table-unless inflation or jobs data changes the narrative.

Wishing well. The Fed has said in not so many words, "I am out… for now." Starting with Powell's lackluster performance after the last FOMC meeting, followed by plenty of hinting by Fed speakers, and ultimately culminating in Wednesday's FOMC minutes release, the Fed has signaled very clearly that we are just going to have to wait for any more gifts in the form of rate cuts. Don't get too excited, the markets were pretty much predicting this for some time now. That, of course, doesn't mean that many, if not most, traders are secretly hoping for a Fed lifeline to rescue the half-asleep bull market in equities.

Let's just start with the FOMC minutes which gave us a glimpse into what the warrior bankers discussed at their December meeting. To be clear, anyone who has been paying attention certainly expected descent on further rate cuts, not to mention a more conservative forecast. The minutes are just another tool that the Fed uses to send messages to the market as part of its "forward guidance" campaign. You see, the Fed began its "transparency" drive under former Head Ben Bernanke as a form of monetary tool. Tell the markets that rates are going higher, and those rates that are ostensibly controlled by the markets would magically make it a reality. It is also a way of lessening the blow for any actual policy changes, especially the more extreme ones. Markets have become accustomed to this interesting communication mechanism. However, over the past few months, though the lines of communication are certainly active, the message has been less than clear. Inflation is not a problem, inflation is a problem, employment is a problem, employment is strong, GDP is strong, we don't care about President Trump's proposed policies, we kind-of care about them… yeah, that has been the stream of forward "guidance" we have had recently. But the minutes really took the cake. In it, FOMC members are sending a message of confusion. Confusion? Aren't they the smartest banker-economists in the world? Don't they have their fingers on the pulse of the economy in order to inform their feet, which are on the neck of the economy? Ok, so maybe "confusion" is a strong word, but there was certainly a lack of direction.

With all that, we find ourselves on our own to decide what comes next. It is clear that further rate cuts, if any, will be farther on down the line and will only come in response to events. Events? Yes, either good or bad. A good event would be a resumption of disinflation, and a bad event would mean a meltdown in the economy, or more specifically, a weakening of the labor market. If you are counting on the latter, you should pay close attention to this morning's monthly employment figures from the Bureau of Labor Statistics. The last monthly reading showed a hiring surge after a weaker month. Now, there were some distortions in the numbers in Q4 of last year due to labor strikes and natural disasters, but all in all, there does not appear to be a markable decay in labor market health as feared earlier in the year. If we observe the timelier weekly numbers, however, we note that there is a slightly declining near-term trend which is within a longer-term range. Weaker in this case means stronger for the labor market; you know less people filing for first time unemployment. Earlier in the week, we learned that there was a marked increase in job openings from the JOLTS report, which portends labor market strength, though the numbers were from November. That all said, this morning's unemployment rate is expected to come in at 4.2%, same as last month. Now, that would not be a terrible print, but it is certainly higher than the sub 4% numbers we had from January 2021 through May of last year. How do I know that it is "not terrible?" I don't, but the Fed wasn't worried about it last month, so I suppose that it is fair to assume that another 4.2% print would be OK. If you are hoping for a rate cut sooner than June, you would have to see some ugly numbers this morning.

Now briefly moving onto inflation. We will get some reads of that when we get CPI and PPI next week. The latter has been bubbling higher, and it is considered to be a leading indicator of consumer inflation. Oh, and to be super clear, the former, Consumer Price Index / CPI has been bubbling higher as well. So that disinflation that we would like to see has not only stalled in the last three readings, but rather, inflation has inched higher. This reality has certainly played a big role in the Fed's icing its rate-cutting campaign, and it undoubtedly played a big role in the, let's call it, "uncertainty" voiced by FOMC members in their last meeting.

Ok one final thing on inflation. In less than two weeks, President-elect Trump will become President Trump. In fact, his Treasury Secretary nominee will begin his confirmation hearings next week. That all means that we are on the eve of learning which, what, and how much of Trump's campaign rhetoric might become reality, and you would be kidding yourself if you assumed that the markets AND THE FED are not a bit nervous about what comes next. I know that there is a big debate on whether Trump's trade policies might be inflationary or not. I can only offer you this. If you look at the CPI from Trump's first presidency, you will note that it spent much of the time printing above the 2.0% target, compared to his predecessor's term which saw the inflation gauge mostly at or below the target. I know that there are many, many external factors involved in those numbers, so it might be a bit questionable to attribute the rise to Trump's policies, but unfortunately, at the moment, that is all we have.

What does all this mean? Well, as I said earlier, if you are hoping for lower rates sooner, your opportunity for something bad will come today. Similarly, your opportunity for something good may come next week. If neither of these occurs, we can expect more of what we have been having: UNCERTAINTY. But don't worry this upcoming earnings season, which starts next Wednesday, will give us plenty of information on what to expect going forward. That is, of course, if we stop obsessing on whether the Fed will cut interest rates in June or July.

WEDNESDAY'S MARKETS

Stocks clamored for oxygen on Wednesday barely making it into the green with a mixed close as bond yields pricked at stock investor sentiment and economic numbers added a splash of acidic vinegar. Jobless Claims hit a weekly low while ADP Employment Change offered a weak picture of monthly hiring. That leaves us with today's monthly employment figures to be the tie breaker.

NEXT UP

• Change in Nonfarm Payrolls (December) may have slowed to 165k from November's 227k new hires.
• Unemployment Rate (December) is expected to have remained unchanged at 4.2% from a month earlier.
• University of Michigan Sentiment (January) probably didn't change from December's 74.0 level.
• Chicago Fed President Austan Goolsbee will speak on CNBC this morning. Expect him to address the big rate-cut path question.
• Next week: inflation numbers, Retail Sales, housing numbers, Fed Beige Book, and earnings season begins. Check in on Monday to download economic and earnings calendars so you can get ahead of the pack.

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