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Economic Monitor – Weekly Commentary
by Eugenio Alemán

Back to the drawing board

February 3, 2023

The January nonfarm payroll number was a blockbuster employment number while the revisions to 2022 numbers added more strength to the labor market than what had been reported previously. Furthermore, the 3.4% rate of unemployment matched the rate of unemployment in May of 1969.

This report will send many economists, including us, back to the drawing board as we digest this January employment report and try to incorporate it into our GDP forecast, a forecast that we will have ready for next week.

What we can definitely conclude today is that Federal Reserve (Fed) Chairman Jerome Powell’s “a couple of more times” comment during the press conference after the Federal Open Market Committee decision on Wednesday of this week probably makes much more sense. Thus, we are changing our forecast for the federal funds rate terminal rate for this cycle from 4.75% to 5.00% to 5.00% to 5.25% because of the need to continue to put downward pressure on the U.S. labor market and slow service sector employment.

Furthermore, today’s Services PMI rebounded considerably compared to December’s print and continued to show a very strong U.S. service economy, in tune with today’s payroll employment number as well as with the initial unemployment claims number reported on Thursday. Thus, Chairman Powell’s concerns about upward inflationary pressures remaining worrisome for “core services excluding shelter” will remain top of mind for Fed officials going forward.

Having said this, we still believe that the upcoming slowdown in shelter cost that has been built into the pipeline and will start being felt later this year, will be enough to keep the Fed from overtightening too much and could give a bit more credence to current market expectations. However, we have to caution that in the current fight between the Fed and markets we still have the Fed winning this time around because of the characteristics of this inflationary cycle and because it remains very risk averse today compared to the recent past.

The Federal Reserve Delivers, Markets Rejoice… But Probably Not for Long

On Wednesday of this week the Fed delivered another 25 basis point increase in the federal funds rate to take the rate to 4.50% to 4.75% and while the statement from the Fed didn’t have a lot to hang on to, the press conference by Fed Chairman Powell seems to have gotten an A+ from markets as investors erased a very large drop in the stock market and ended the day close to even.

It is arguably very difficult to understand the reaction of markets after the Fed statement and the press conference, but what we know is that markets just don’t like uncertainty and hearing the Chairman of the Fed say that the institution may go at it again “a couple of more times” gave markets some certainty of a near-term end to this tightening cycle.

What was clear from the press conference was that Fed members and economists, while upbeat due to the disinflation they have observed since mid-2022, are still seeing sectors that are not following a disinflationary path. One such sector is ‘core services’ excluding shelter, which is still on an upward trend, and the Fed would like to see it trending down. To this end, the Fed feels that it has to continue to tighten or give what it calls ‘forward guidance’ that it is serious about those prices also coming down. This means that the Fed still has some work to do to convince the service side of the economy that it is on a mission.

Furthermore, the picture for monthly inflation in the first quarter of the year is still not pretty, as we will probably see January’s and perhaps February’s monthly inflation rates be much higher than what we have seen during the last several months and this may disappoint markets even as year-over-year rates will continue to disinflationary.

The IMF Updates Its World Economic Outlook: Slightly More Upbeat for 2023, Not so Much for 2024

The updated International Monetary Fund (IMF) World Economic Outlook (WEO) for January 2023 provides a slightly better picture for the global economy compared to the institution’s October 2022 forecast. Although the IMF WEO forecast is not very accurate because it is normally a lagging forecast, it gets lots of publicity in the media due to the importance of the institution and the fact that it gives a very comprehensive view of what is happening in the global economy. Furthermore, the WEO is free, and everybody has access to it, which makes it a good report, overall.

The January WEO update contains forecasts for 30 world economies, representing 83% of the global economic output. Perhaps the most salient aspect of the report is that most of the largest economies of the world, that is, the U.S., China, Germany, Brazil, Italy, Japan, Mexico, and Russia, received an improved forecast for 2023. But, of course, there is always a cost to the better news in 2023 and that is that 2024 growth rates for almost all of these large economies came down. That is, the IMF WEO forecast is expecting that the slowdown in global economic activity will be delayed somewhat in 2023 and will probably shift a bit to include a slightly weaker prospect for economic growth in 2024.


Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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