The New Year May Begin With Big Market Bang Amid Data Deluge

After a sleepy end to 2023, the market should return to full speed this week with a slew of data that will likely help determine whether the more than six rate cuts priced in for 2024 will be fantasy or reality.

Right now, six rate cuts in 2024 seem more like fantasy than reality, especially given the excellent job the “market” (as in stocks, bonds, FX, and options) has done in easing financial conditions since the December FOMC meeting.

The Fed signaled the potential for three rate cuts in 2024, and the market took that to mean six, and this has been nothing new. The market tends to have the mindset of a child, and when given an inch, it takes a mile. However, the economic data and the Fed minutes will likely push back on the idea of six rate cuts in 2024.

The View

Now, generally, I have been bearish on the stock market because I have believed that inflation would stay stickier and that the economy would remain stronger than expected, creating a higher for longer policy path, with the higher rate environment leading to multiple contraction and keeping a lid on stock prices. After correctly seeing the peak in the July rally, things seemed to go as expected through the end of October, as the index returned to 4,100. But then, things suddenly and unexpectedly changed in November following the Treasury Refunding Announcement. Then, the Fed threw gasoline onto the fire when it failed to push back against the recent easing of financial conditions. It sent markets even higher, making for a painful end-of-year rally to the analysis that took months to assemble. However, a chance for repetition comes this week.

The Data May Push Back

On Tuesday, the JOLTS data is expected to show that the number of job openings will rise to 8.86 million in November from 8.733 million in October. Generally speaking, the JOLTS number is one of the hardest numbers for analysts to get right and is often subject to big revisions, but the trend has clearly been lower.

The Indeed job posting data shows that the number of job postings has been steadily falling but, for the most part, has stabilized in recent months. The data shows that since Dec. 1, 2021, the JOLTS and Indeed data have generally been trending together when indexed to 100. But more recently, the JOLTS data has separated some, which could be why analysts are looking for a move higher in the JOLTS data in November. It could even suggest positive revisions to October’s data.

The Fed has often cited the ratio of the number of job openings to the number of unemployed workers as one indicator of the labor market. This ratio has fallen dramatically recently, suggesting more labor balance between workers and openings.

The hope is that as balance returns to the labor market, wage growth will slow, helping to cool inflation, and for the most part, that has worked, with wage growth steadily declining in recent months on many metrics.

Average hourly earnings have been coming down and are currently around 4%. However, that remains above the per-pandemic average of about 2.55%. Additionally, the Atlanta Fed Wage Growth tracker remains very elevated at 5.2% and well above its average of 3%.

The jobs data on Friday is likely to suggest the economy remains healthy, with analysts median forecast for 170,000 new jobs to be created in December, down from 199,000 in the prior month, while the unemployment rate rose to 3.8% from 3.7%. Meanwhile, average hourly earnings are expected to rise by 0.3% m/m, down from 0.4% m/m, and rise by 3.9% y/y, down from 4.0% in November.

Despite trending in the right direction, the wage numbers would be inconsistent with a 2% inflation rate. They would suggest that real wages are likely continuing to rise, which is a very good thing for the consumer and could provide them with extra spending power, especially as inflation begins to stabilize around this 3% region. Wages, generally speaking, would need to fall to around 3% to be consistent with a 2% inflation rate, assuming a 1% productivity rate.

Fed Minutes

On top of the employment numbers will be the release of the December FOMC minutes, which may also pour some cold water on the six rate cuts priced in for 2024. Since the Fed meeting, a few Fed officials have come out and pushed back against the market pricing of Fed rate cuts.

Some of the most vocal against rate cuts will now be voting members this year and were not voters in 2023. The new voting members for 2024 will be the Atlanta Fed President Raphael Bostic, The San Francisco Fed President Mary Daly, Richmond Fed President Thomas Barkin, and Cleveland Fed President Loretta Mester.

Raphael Bostic has recently noted that the Fed can start reducing rates sometime in the third quarter of 2024 if inflation continues to fall as expected. Loretta Mester recently said that markets have jumped too far ahead, with the market thinking the Fed will normalize rates quickly, and she doesn’t see that. Mary Daly recently noted that even if the Fed cuts the rate thrice in 2024, the policy will still be quite restrictive. Finally, even Thomas Barkin commented on the difference between the summary of economic projections and the markets but noted looking back over the last year and seeing what seems to have paid out.

All four new voting members for 2024 seemed to be pushing back against the market assessment, which is likely to be reflected in the minutes when they do come out this week.

Too Far?

If the data supports the idea that the market has gotten too far out in front of the Fed, the Fed minutes also strongly reflect a lack of urgency to cut rates. Then, it seems more likely that rates will rise across the yield curve, possibly leading to further steepening, and the market will get caught offside again.

That could shock markets overall, especially given the big drop in rates, the size of the stock market rally, and the dollar’s weakness. It could unwind much, if not all, of the moves in all three over the past several weeks. However, the odds seem to favor the Fed pushing backing against the market at the December FOMC, which failed miserably.