CPI and Jobless Claims
Let’s start with the easy part, labor. Seasonally adjusted initial jobless claims remain dormant with a print this morning of only 202k claims. The labor market remains historically strong. We have seen plenty of leading indicators of labor that suggest that labor should be weakening, but it isn’t. Non-manufacturing ISM’s labor subcomponent fell hard last week. Temp labor demand has been very weak. Job openings have fallen hard, though still remain higher than previous peaks, Quits have fallen precipitously. I could go on, but the fact is layoffs aren’t picking up and small businesses are telling us that they are raising wages. Yesterday, the Atlanta Fed Wage Tracker posted another reading above 5%. Labor remains secularly tight and until we see a sharp turn lower in corporate profitability and/or meaningful weakness in housing demand, that isn’t going to change.
What to make of inflation. The market bulls will argue credibly that this morning’s hotter CPI and Core CPI readings are backwards looking. Much of the reason for the higher print was from the shelter component and yet we know that the trend in rents are now falling consistently with more supply on the way. Bears will argue that the “last mile” of overcoming inflation was predictably going to be difficult as y/y comparisons get more difficult and we get well past the transitory aspects of 30% stimulus driven demand growth and pandemic supply chain issues. We can let the market decide as today’s numbers led to equity futures slightly lower (barely), the ten-year yield higher and the dollar stronger as the odds of a Fed cut in March becomes more remote.
Our longer-term view remains unchanged. While we appreciate the likely disinflationary tailwind from falling rents, our incessantly repeated thesis on wage pressures are being borne out. Higher wages mean more demand and they mean higher prices as employers pass those costs onto the consumer. We continue to see an inarguably resilient economy slowly slowing, but hardly presaging a recession. We see an environment of slow growth, some continued margin pressure on corporations driven by cost of capital and labor costs while further pricing levers receive more pushback.
The risk to equity markets is that the Ten-year has bottomed above 4% and the near-term trend is higher. (We have a 30yr auction at 1pm this afternoon that will be closely watched by those like me who worry that there is problematic demand for duration). Additionally, there is risk that we see a narrative shift. The current bullish narrative that growth remains resilient while inflation is on a glide path lower could quickly give way to a narrative that sees resilient inflationary pressures as demand growth takes a step lower.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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