The Path from 9 to 4, uh 3, uh…
It’s never different this time, but it is also generally not the same as the last time. This week increased our confidence that the 10-month 25% S&P 500 decline was not recession related, rather the second largest Fed policy correction since WWII. Prior to the QE era, Fed related corrections generally occurred once a business cycle, however in the ‘10s we had 8 and the size was proportional to the change in stimulus. Without an associated economic or earnings recession, a full retracement of the 2022 drop, like the Fed corrections in the ‘10s, is increasingly probable in 2023. Chairman Powell’s balanced press conference returned his policy-making approach to one of risk management, with guidance from the ‘celestial stars’ he detailed in his first Jackson Hole speech as Chair in 2018. The inflation model he outlined in his November 30 speech, Inflation and the Labor Market, has been overtaken by cooler than expected services less rent of shelter inflation and more importantly, slowing wage growth, despite significant tightening measures of labor market slack. Our view on immaculate wage disinflation evolved this week: aggregate labor market demand seems less likely to explain slowing wage growth, instead we believe the 2021 Great Reallocation appears to have created a wage shock that raised the aggregate level but may not have altered trend growth. We wrote last week that Friday’s report was more significant than the press conference for our 25 and done Fed forecast, and though there are serious questions about the data due to statistical adjustments, that call is on life support. We might have been willing to look past the curious employment report had the ISM services purchasing managers index not rebounded to 55.2 from 49.2, led by new orders surging from 45.2 to 60.4. On balance the strong economic data (add vehicle sales to the list), along with softer technology earnings but acceptable guidance, are not offsets to the increasingly certain path for inflation from 9 to 3. While there is no change to our view of underlying inflation running above the 2002-2019 1.5%-2% globalization era disinflation trend through the ‘20s, it may take until 2023 for the new trend to materialize.