Profit from Uncertainty: Navigating March's Economic Data
Abraham George Macro Musings
After six long months, I am finally back in Sydney, and able to sleep in my own bed. March is an important month, one that could set the tone for the rest of the year. Unfortunately, recent economic trends have caused a fair amount of worry in the markets. However, as I will explain below, I believe the risk is more to the upside than downside.
First, let's look at some key US economic figures that are expected to be released this month. On March 8th, we will receive the Job Openings and Labour Turnover Survey (JOLTS) report conducted by the Bureau of Labor Statistics (BLS). We want to see this number decrease, indicating that the number of available jobs is coming back in line with the number of workers seeking employment. This would suggest calmer inflation ahead. In December, the JOLTS figure unexpectedly rose, which caused some concern. Another upside surprise would likely hurt stocks as the Fed could become more hawkish.
On March 10th, we will get the jobs report. A good jobs report will show around 200,000 new jobs created in January, with the unemployment rate rising slightly. In January, there was an increase of 517,000 new jobs, which was a huge surprise. A further rise in this figure could send the markets lower, and anything more than a .3% monthly gain in hourly earnings would bring renewed concerns about wage inflation.
March 14th is CPI day. Core inflation (year over year) has been falling since September. We want this figure to be anywhere close to 5.4%. Any rise above 5.7% would likely tank the markets.
On March 15th, we will receive the retail sales data for February. For January, we had a surprise increase of 3%, indicating ongoing consumer health. What we are looking for is a Goldilocks number of around 2%, neither too weak nor too strong.
March 22nd will be the FOMC meeting conclusion, and Fed Chairman Jerome Powell's press conference that follows a fully discounted .25% increase in rates is to be closely watched. It should give us a good indication of how hawkish or dovish the Fed will be going forward.
Finally, on March 31st, the Fed's most preferred measure of inflation, the Personal Consumption Expenditures (PCE), will be published. Like the CPI, this inflation measure has been slowing overall in recent months, though it showed unexpected strength last month. Any rise above 4.3% for February could spook the markets.
Now that we have discussed the economic releases and their possible impacts, let's look at the markets. Last year, we saw two consecutive quarters of negative GDP growth in the first half of the year. We were in the midst of a fierce Fed tightening cycle, but the recession already happened and is not looming. Moreover, we have growth catalysts coming from China, after they finally scrapped the zero COVID policies.
Just a month ago, the yield on the 10-year government bond was around 3.3%, which was about 1.25% lower than the effective Fed Funds rate, creating a yield inversion. This occurred after the Fed's last rate hike. However, since then, the 10-year yield has exploded higher on the back of the hotter inflation data from last month. If the Fed is serious about hiking rates more aggressively, the bond market should be pricing in an even uglier recession, creating a further inversion in the yield curve, but that's not what is happening. Instead, we are seeing a flattening of the yield curve. The 10-year yield at 4% is the highest we have seen since last November. The bond market is actually pricing out the recession expectations.
On the back of all this, what have the stocks done? As we discussed earlier, the market broke through major technical levels - the 200-day moving average and the downward-sloping long-term trend line. Both of these levels became major supports. Stocks ran into these supports and even broke them briefly, but have since reversed sharply, creating further technical confirmations.
All of this tells me that the October lows of last year are intact, and the markets should grind higher in the coming months.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.