The Fed doesn’t like to surprise the Street coming out of FOMC meetings and they were as predictable as ever on Wednesday.  They raised 25bps and said they would be entirely data dependent going forward, while removing language about “further tightening.”  The first meaningful piece of data they will use to guide their future decisions came yesterday and today in the form of Weekly Jobless Claims and today’s Non-Farm Payrolls. 

Jobless claims came in at 242k, which is still historically low but importantly the trend is moving higher.  Today’s Payroll data came in stronger than expected at 253k, but again, what matters is the trend and we are seeing moderate slowing as the three-month average of job growth has decelerated from 345k to 225k.  The unemployment rate ticked lower to 3.4%.  The bottom-line on employment is that, while slowing, the labor market is way too tight and wage growth is way too strong for the Fed.  “Data-dependent” doesn’t mean there will be no more hikes.  The ADP wage data as well as the Atlanta Fed Wage Growth Tracker are both telling us that the Fed has made very little progress in curbing what feels like entrenched wage growth.  That is consistent of course with our core long-term thesis that we have a secular inflationary problem in the form of labor supply.

As you may have noticed, there has been a skosh of volatility in the regional banks.  After falling more than 50% yesterday, PacWest is looking up 30% this morning.  It is fair to say at this point that the equity markets have become the tail wagging the dog in this sector.  In other words, huge drops in the underlying equities beget the panic that leads to accelerating deposit outflows that beget FDIC / Fed intervention.  Our view on this has been consistent that the issue for the economy from the problems at the banks will manifest itself more in the falling availability of credit than a systemic crisis in the banking system.

Given the strength of the equity indexes (driven entirely by megacap tech) one might be a bit surprised to learn that Q1 earnings have actually been quite weak on an absolute basis.  Nasdaq earnings are tracking down roughly 7% while S&P earnings are tracking down about 1%.  I have written a good bit about the intellectually vacuous nature of beats versus expectations and never has that been more apparent than in the current environment where earnings are down year over year but all you see on CNBC is that Q1 earnings have been strong and “better than expectations”.  Perhaps the market is right and investors are wisely looking through an “earnings trough”, but for me, it is way too cloudy to see anything on the other side of the earnings valley.  It may just be a plateau followed by a further descent. 

Ultimately, it comes down to credit.  Credit leads. Most of the data discussed above are coincident and lagging indicators.  If the availability of credit falls materially and the cost of capital rises materially for consumers and commercial borrowers, we will finally get the recession that has been so long awaited and predicted.  All eyes will be on the Fed’s Senior Loan Officer Survey coming out on Monday next week.

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