by Bryan Perry

February 8, 2022

Friday’s unexpectedly high non-farm payrolls report of 467,000 net new jobs being added raised a lot of eyebrows, considering that the White House Head Economic Advisor Brian Deese previewed the report with a public warning that some tough employment data was about to cross the tape. This was a credible warning following the Wednesday ADP report that showed U.S. companies unexpectedly losing 310,000 jobs in January within the private sector – the first job loss since December of 2020 and the biggest loss of jobs since April 2020, the month COVID shut down major sectors of the U.S. economy. Here’s a chart of the net gain (or loss) of jobs (in thousands) in the ADP jobs report, by month, in the last 12 months:

ADP Report of Jobs Added or Lost Per Month Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It is very hard to know what the current jobs situation is if the numbers continue to be so conflicting and confusing. One report surprised on the downside and the other surprised on the upside. Chalk up all these contradictions to revisions and data shuffling, if you will, but the market was expecting something different last Friday. What is known is that the market took its cue from the surface data and did not wait for any further explanation. The market repriced its interest rates expectations, giving a clear signal that the Fed is behind the curve and will have to act quickly, more quickly than they have telegraphed so far.

After Friday’s session, the consensus among Wall Street economists is now that there could be up to five rate hikes this year – two more than just a week ago There is clearly a price to pay for calling rampant inflation “transitory.” While the Fed has finally changed its language, it hasn’t changed much else and in fact will be pumping $60 billon of funds into the system this month and another $30 billion in March before its first Fed Funds Rate cut.

The Fed could change course and step on the stimulus gas pedal intra-meeting and halt QE immediately, before the next set of inflation numbers is released on February 10 (CPI) and February 15 (PPI), which would have sent, in my view, a strong message to the market that they are more than a sleepy meeting-to-meeting body. The market wants to see a proactive, not reactive Fed. There is now a growing perception that the Fed, after delaying addressing inflation, then and now, must do more than just tap the brakes.

Federal Funds Effective Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The notion of five to seven rate hikes this year seems very aggressive, at least for now, since there are improving signs in some industries regarding smoother supply chain operations. A string of this many Fed rate hikes would likely make for a stiff headwind until the cycle is complete, even though the Fed Funds Rate would be no higher than 2.0%, even if seven rate hikes took place. Prior to the pandemic, the Fed Funds Rate was near 2.0%, and the market rally was very much intact. Again, this is the price to pay when the Fed politicizes its policies for the sake of bad optics, or renomination, or just getting it wrong.

Standard and Poor's 500 Exchange Traded Fund - SPY Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The market is now having to deal with fiscal policy uncertainty: It is asking what are the associated costs that will be incurred as the Fed works to catch up. This situation calls into question a future economic slowdown if the Fed doesn’t thread the needle just right to orchestrate a soft landing where the economy can do a touch and go takeoff again, with inflation under control. This is the most optimistic bullish case scenario one can paint, but it depends on the Fed doing better at delivering on its job performance.

Even with the January inflation numbers expected to be high, we probably haven’t seen peak inflation yet when factoring all the increasing commodity prices, service prices and wage gains from existing and new jobs created. Maybe February will mark the top. Even Jerome Powell telegraphed a “few more tenths” higher in the Fed’s preferred PCE inflation indicator. Higher prices in a consumer-based economy translates to less purchasing power and more insecurity about whether employment income is sufficient.

The way through this inflationary period is for the Fed to act accordingly going forward in its actions. It would have been unthinkable that at the end of the 2008-2009 Great Recession that the Fed’s balance sheet would be at $3 trillion. It is even more unthinkable that after the pandemic, the Fed’s balance sheet now stands at $9 trillion and is still growing with the cost of interest now bigger than the Department of Defense budget, to where the government is supporting the economy to the tune of 15% of GDP.

The desired solution is high, sustainable and inclusive economic growth, and that is where the challenge remains right now. Ideally, the Fed wants to engineer growth at a steady and high rate, sustaining our living standards, while paying off its debt gradually. That is the growth solution, but that implies a gradual approach to rate hikes, and the market is now betting otherwise. Austerity works for a while but it is not a long-term solution as people get tired of tightening their belts for a problem they didn’t create.

The most likely scenario to unfold this year is more of the same inflation trap – or “financial repression,” which Wikipedia defines as “policies that result in savers earning returns below the rate of inflation,” which in turn allows banks to “provide cheap loans to companies and governments, reducing the burden of repayments.” This is particularly effective at liquidating debt denominated in the home currency.

The Fed maintains interest rates at very low levels so that creditors end up subsidizing debtors. These overall policy actions result in the government being able to borrow at extremely low rates, obtaining low-cost funding for government expenditures – like interest on the debt. This was all working to their favor when inflation was tracking under 2%. At 7% and rising, Jerome Powell & Co. should forget about summer vacations, roll up their sleeves and figure it out, because ‘better late than never’ is not a strategy.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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