Weekly Newsletter: December 9, 2024
Looking for data in all the wrong places. From the jobs report to the various surveys of manufacturing and services, the markets continue to chug higher, ignoring some of the early (maybe?) signs of complacency. Analysts are pulling apart the data looking for signs the economy or financial markets are heading for a fall. Whether hanging around malls to determine the Christmas selling season or at the airports checking out the number of travelers, the search for traces of economic truth continues. The jobs data provided the markets with reasons to believe the Fed will cut rates in two weeks. A good headline figure plus revisions higher to prior months calmed some jitters. This week, the nerves will get tested again as inflation data is released. Without much improvement in inflation, it will be difficult for the Fed to justify additional rate cuts which in turn could undermine stocks. For now, the data is exactly what the markets are dreaming of.
The major report for the week was employment, which remains strong. There are a few things to watch below the surface that could be early warning signs of problems. First up are wage gains, which remain at the high end of their historical range. High wage growth allows the consumer to keep on spending, but it does play into the “sticky inflation” narrative. Second is the time it takes for out-of-work workers to find a job. That figure has been rising from a low of eight weeks two years ago to ten and a half weeks today. Historically, rising times of unemployment have occurred ahead of recessions. The inflation reports due this week should provide a bit more color on the “shape” of inflation. The headline figures have been coming down, due in large part to energy prices. However, measures of core and median inflation remain stuck near 3%, well above the Fed’s target.
The bond market is not buying what good news the stock market is selling. Yields have been rising since the Fed began its rate-cutting program. The yield curve inversion, where short rates are above long-term rates has unwound a bit, although two-year yields are still roughly equal to tenyear yields. For all the talk of lower inflation, commodity prices are picking up ever so gradually. Still down from summer levels, they are up over 7% vs. a year ago, after being negative as recently as Halloween. It is data that is floating below the surface that does not get the attention of the various headline figures.
More from the underside of the markets. The SP500 put in the third consecutive up week, although this week saw more stock falling than rising. Save for Wednesday’s modestly more advancing than declining stocks, each day also saw more declining stocks than rising. Volume piled into the few stocks that were rising, read technology issues. For the first time since early in the year, only eight of the eleven sectors within (and including) the SP500 are below their longterm average price. Finally, speculative activity is on the rise, if cryptocurrency is considered a speculative asset. Bitcoin’s rise to over $100k, more than doubling from a year ago, is seen as a sign of speculation. Combined with investors’ overall bullishness, using reading from individual investor surveys to money managers, it seems as if everyone is in the pool. If so, where does the “fresh money” come from to push stocks higher still?
Inflation data will be front and center this week as the last major data point ahead of the Fed meeting the following week. Then, everyone will likely take the rest of the year off. More than the headline reading, the various core and median readings of inflation should be watched for signs of cooling.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.