The past two weeks have been busy for the US economy, filled with several important economic data points.
- Fed Funds rate: 4.75% vs 4.75% est
- Nonfarm Payrolls for Jan: +517k vs. +188k est
- Unemployment Rate for Jan: 3.4% vs. 3.6% est
- ISM Services Index for Jan: 55.2 vs. 50.5 est
- Average Hourly Earnings for Jan: +0.3% vs. +0.3% est
- Consumer Confidence for Dec: 107.1 vs. 108.1 est
The increase in Nonfarm payrolls may have shocked the market into believing that the Federal Reserve could raise interest rates by +0.50% in Feb. However, we have seen a less aggressive rate hike of 25 basis points as inflation data last month came in less than expected and is projected to decline further. Nonfarm payrolls exceeded expectations by almost threefold, totaling +517,000, making it the largest monthly growth since July 2022. The unemployment rate declined to 3.4%, a level that was also witnessed in 1969 (see figure 1 below).
Figure 1: Unemployment rate and YoY Wage Growth based on BLS, FactSet, J.P. Morgan Asset Management
Looking at the equity market, around half of the S&P500 reported their earnings so far. JPMorgan estimates an average operating EPS at $50.48, representing an 11% YoY decline due to increasing labor costs, declining consumer confidence, a stronger US Dollar, restricted supply chains, and geopolitical uncertainties. Despite the many challenges, overall margins have remained consistent at 11.2%, and strong nominal growth has continued to drive up revenues. The consumer discretionary sector is in for a challenging quarter of earnings, but the auto sector still remains its best performer. Gains in stocks and higher prices were mostly responsible for the favorable results, but industry-wide margins did significantly contract, suggesting that demand has started to stabilize. The information technology sector, in contrast to consumer discretionary, is now tracking a strong YoY earnings rise. However, reported results within the sector at the industry level have varied. For instance, despite a dramatic decline in demand for PCs and gaming consoles, management teams have noted that software earnings have remained far more resilient than those in hardware.
Finally, the communication services industry experienced a challenging quarter due to its heavy reliance on discretionary sources of spending, much like many of the hardware tech names. Although margins have remained robust, the outlook for the coming year suggests that things could get worse before they get better, especially as inflation continues to slow and sales growth weakens. As a result, 2023 has already seen a flurry of job cut announcements, especially in industries that grew quickly and unsustainably during the pandemic, ramping up their employees to meet the short-term surge in demand.
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