U.S. Job Openings Data Shows Growing Demand for Workers
There were 9 million job openings in December, a rise from 8.9 million in November. This result shows a resilient job market despite the challenges of higher interest rates. The U.S. economy and job market have withstood the effects of higher interest rates with the Federal Reserve raising rates eleven times between March 2022 and July 2023 to about 5.4%, the highest in 23 years. The Federal Reserve aims to cool the job market from its extremely active state in 2021 and 2022. This policy is intended to make it easier for businesses to attract and retain employees without increasing wages. High wages are inflationary because businesses often pass on such costs to consumers via increased prices for goods and services. This week’s report signaled potential for a shift in what has, to this point, been a strong job market. Layoffs rose in December, and the number of Americans quitting their jobs decreased to the lowest level since January 2021. These changes could indicate a shift in workforce confidence to the downside.
U.S. Federal Reserve Maintains Policy Rate; Disappoints Markets on Rate Cut Timing
The Federal Reserve indicated that while they are no longer looking to raise interest rates, they are also not planning to reduce them soon, particularly not at their March meeting. This decision supports an effort to push inflation sustainably towards 2%. During their recent meeting, the Federal Open Market Committee adjusted their statement to remove language suggesting further rate increases, but they also did not commit to rate cuts, citing ongoing concerns about inflation above their desired level. Fed Chair Jerome Powell emphasized the need for more data to confirm current trends before considering rate reductions. The market reaction to these developments was initially neutral but turned negative after Powell's comments about the unlikelihood of a March rate cut, leading to a drop in equity markets and Treasury yields.
United States ISM Purchasing Managers Index Improves in January
The Institute for Supply Management published the January PMI at 49.1 beating forecasts at 47. The December PMI was 47.1. PMI trend fell below 50 in November 2022 and has not recovered back to expansion territory since that time. The latest January data indicates continued mild contraction.
United States Payrolls Register Robust Increase
The U.S. economy added an astounding 353,000 jobs in January; this entry is a strong signal that the labor market is still tight. Furthermore, the December increase was upwardly revised to 333,000 additions. Expectations were only penciled in at a January increase of 180,000. The unemployment rate remains steady at 3.7%.
Earnings are Improving
The S&P 500's performance against earnings forecasts remains lackluster at the earnings season midpoint. A lower-than-average proportion of companies within the S&P 500 are surpassing earnings expectations, with the extent of these earnings surprises also falling short of the norm. However, the narrative has shifted positively over the last two weeks. With a broader range of companies from all ten sectors disclosing their financials, there has been a notable improvement in earnings data. Consequently, the index now showcases an uplift in fourth quarter earnings compared to both the previous week and the quarter's end.
U.S. Strikes Back at Iranian Proxies in Iraq and Syria
On Friday, the U.S. military struck targets associated with Iranian proxy forces in Iraq and Syria. The strikes addressed eighty-five targets at seven locations using precision guided weapons. Three locations were in Iraq; four locations were in Syria. The drone attack that killed three U.S. service members was launched from Iraq. The national government in Iraq has expressed criticism of prior use of military force by the the U.S. government within its borders, and an ongoing diplomatic effort to remove the roughly 2,500 U.S. personnel stationed in Iraq is ongoing.
The military action was coupled with diplomatic and economic pressure directed against Iranian assets and interests throughout the Middle East region. Interestingly, the action was announced days in advance giving time for Iran to adjust its personnel so as to minimize human casualties. This step was likely a calculated move by the Biden administration designed to prevent a larger military confrontation. Both Washington and Tehran have signaled they do not seek a wider war. Rather than military conquest, Iran’s provocative support of anti-western militant groups throughout the region stems from a desire to antagonize the U.S.
Tehran’s policy of needling the U.S. likely draws attention away from local economic and social woes and instead focuses the public’s ire on an external threat, the West and specifically the United States. While Tehran pursues its policy of destabilization, the Biden administration is focused on easing tensions and avoiding wider military conflict. To this point, the markets have mostly shrugged off Middle East tensions. Not even the price of oil has reacted to the more than 165 rocket, missile, mortar, and drone attacks throughout Iraq and Syria not to mention the ongoing Houthi offensive against Red Sea shipping.
Despite stoic market sentiment related to the Middle East, market participants should monitor developments in the region. Further loss of life on either side, miscalculated actions, or damage to U.S. assets including navy vessels could lead to a serious increase in hostilities accompanied by new market forces.
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