The Equity Markets will Meander

In the week of February 2023, equity markets were highly volatile. Chair Powell's use of "disinflation" during the Press Conference of February 1, 2023, and then by the unexpected strength in the employment report issued by the Department of Labour on Friday, 03, 2023, caught the markets offguard. In both instances, the markets got what they wanted, albeit not necessarily in an optimal fashion. Capital markets would have loved it if Powell was more dovish, although algorithms and perpetual bulls construed his realism as dovish. Subsequently, on Friday, to the chagrin of equity bulls, the Bureau of Labor Statistics ("BLS") announced the creation of 517,000 non-farm payrolls for January 2023. Unrelenting, equity bulls would have preferred a number below 200,000.

In ANTYA's view, BLS data provides an opportunity and additional challenges for equity investors. For all those paying attention to gleeful recession prognosticators, it is another data point highlighting the futility of banking on consensus – more likely than not, it is wrong - and that groupthink is pervasive on Wall Street. Forecasters, bullish and bearish alike, were caught flat-footed by BLS data, and unless revised downwards due to errors or otherwise, the U.S. economy is creating jobs at a robust pace, and it will continue to power ahead against all odds.

That also implies that the currently inverted downward-sloping yield curve should change its trajectory as we move forward, meaning it needs to bounce back in shape.

The inversion of the yield curve is a recent phenomenon brought about by successive and aggressive rate hikes that increased the FED funds rate to 4.5% from 0.25% within a year. An entire generation of investors that has been softened via the "FED-Put" bailout mechanism and continues to believe in a similar outcome this time also expects the FED to lower rates pronto; hence the inversion. We believe that if BLS data is left unrevised, it is the emergence of the oft-quoted Black Swan for bullish equity investors & bond investors and that capital markets are in for a shock.

BLS data reaffirms that the U.S. unemployment rate ("UR") is at a historic low of 3.6% and that slowly but surely, any slack that might have existed in the labour market due to COVID-19 disruptions has all but dissipated. The participation rate in the U.S. labour market is back at 62.4%. It peaked at around 63.3% in February 2020, before COVID-19 lockdowns. The UR for 25 and over, at 2.8%, is lower than the pre-COVID-19 level of 2.9%. Therefore, the U.S. labour market is strong as can be.

Why was the market excited at Powell's Press Conference

In his press conference, Chair Powell referenced disinflation a few times. As is often the case, algorithms paid attention to half the story while running away with that phrase. Powell said, "But I think there is -- there's ongoing disinflation and we don't yet see weakening in the labor market. So, we'll have to see".

Market participants assumed that the deceleration of inflation narrative implies that the FED has won and that by the end of 2023, the cheaper money spigot will flow once again. However, we belive that data from BLS should nullify that notion.

Where Do Go From Here

Handicapping the market for the next quarter or two is a moot point. However, going back to basics, one can argue that the FED is succeeding at creating a soft landing, which means that the economy will slow down enough to engender demand softness but not cause a recession. U.S. labour markets are now balanced in favour of the labour force, which indicates that the core services – ex-housing inflation that the FED?is looking to rein in are unlikely to occur in short order.

It follows that rates go higher than the market is anticipating and will likely stay higher longer than the bond market is pricing. The yield curve has nowhere to go but on a course correction. We do not forecast or foresee a recession on the horizon or in the offing. So equity markets should meander.