Month-In-Review: February 2023

Despite reducing the size of rate hikes for the second time in three months to a more historically normal 25bps, the market has seemingly embraced the more uncomfortable scenario of a potentially?higher level of rates for longer. With the labor market and the consumer proving stronger than expected at the start of the year and inflation slowing its rate of improvement,?the Fed has been clear ongoing rate hikes – plural – are not only appropriate, but also necessary to ensure price stability.

The 10-year UST yield year jumped 54bps from a recent low on January 18 to a high of 3.92% on February 28. Furthermore, the futures market shows investors now predict a terminal rate as high as 5.46% relative to an expected 4.97% at of the end of Q4 2022.

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Market Activity and Commodities

·??????Equities – Stocks ended February with losses after finishing higher at the start of 2023. Beginning at 4,074.71, the S&P 500 declined 2.6% in February, closing at 3,970.15. The Dow, meanwhile, shed 4.2%, declining from 34,086.04 to 32,656.70. Additionally, the Nasdaq fell 1.1% in the second month of the year, closing at 11,455.54.

·??????Treasuries – Treasury yields ended higher in February after finishing lower in January. The 10-year Treasury yield gained 41bps from 3.51% to 3.92%. The 2-year Treasury yield, meanwhile, ended February up 62bps at 4.82%, a sixteen-year high.

·??????Oil & Gas????????????

o??(Feb 10) – Energy price uncertainty remains a sizable upside risk to inflation as the Fed and central banks across the world fight to reinstate price stability. While an unusually warm winter and government price caps abroad have resulted in near-term price relief, low stable prices are not a forgone conclusion for the remainder of 2023. According to Russian officials, in response to sanctions, such as price caps on crude and oil products, Moscow will be curtailing production by 500k barrels a day next month, which accounts for roughly 5% of the country’s production. Crude prices jumped 2.5% in response, overtaking the $80 threshold for the first time since January 29.

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National Growth and Outlook

• NFIB Small Business Optimism (Feb 14) – The NFIB Small Business Optimism Index rose from 89.9 to a reading of 90.3, less than the expected rise 91.0, according to Bloomberg and a two-month high.

·??????Leading Index (Feb 17) – The Leading Index declined 0.3% in January, as expected and following a 0.8% decline the month prior.

·??????GDP (Feb 23) – GDP was unexpectedly revised lower two-tenths of a percentage point to a 2.7% increase an annualized basis in the second-round Q4 report. According to the median estimate on Bloomberg, activity in the final three months of 2022 was expected to be unrevised at a 2.9% gain. In the details of the report, personal consumption was revised down from a 2.1% gain to a 1.4% increase in the second-round Q4 report, down from a 2.3% rise in Q3. Goods consumption, meanwhile, was revised lower from a 1.1% gain to a 0.5% decline in the second-round Q4 report, marking the third consecutive quarter of decline due to a downward revision to durable goods consumption from a 0.5% rise to a 1.8% to drop, and a downward revision to nondurables consumption from +1.5% to +0.2%. Services consumption was revised down two-tenths of a percentage point to a 2.4% increase in the second-round Q4 report, following a 3.7% rise in Q3. Gross private investment, a gauge of business spending, however, was revised up from a 1.4% gain to a 3.7% rise in the second-round Q4 report following two consecutive quarters of decline. Fixed investment was revised higher from a 6.7% drop to a lesser 4.6% decline in the second-round Q4 report following a 3.5% decline in Q3. Nonresidential investment, including office buildings and factories, was revised up from +0.7% to +3.3%, due to an upward revision to structures investment from a 0.4% rise to an 8.5% gain, an upward gain in intellectual property investment from a 5.3% gain to a 7.4% increase, and an upward revision to equipment investment from a 3.7% drop to a lesser 3.2% decline in the second-round Q4 report. Additionally, residential investment was revised slightly higher from a 26.7% decline to a lesser 25.9% decrease, marking the seventh consecutive quarter of decline. On the trade side, exports were revised down three-tenths of a percentage point to -1.6%, while imports were revised higher from -4.6% to -4.2%. Finally, government consumption was revised down a tenth of a percentage point to a 3.6% gain. Nondefense spending was revised lower from an 11.2% rise to a 10.8% increase, federal spending was revised down from a 6.2% rise to a 5.9% increase, and national defense spending was revised down from a 2.4% gain to a lesser 2.2% increase. State and local spending, meanwhile, was unrevised at a 2.3% increase in the second-round Q4 report.

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Employment

• JOLTS (Feb 2 – The number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – rose from 10.4M to 11.0M in December, a five-month high. According to the median estimate on Bloomberg, the number of job openings was expected to fall to 10.3M.
• Jobless Claims
• (Feb 2) – Initial jobless claims fell 3k from 186k to 183k in the week ending January 28, the lowest level since April and the third consecutive weekly decline. According to Bloomberg, jobless claims were expected to rise to 195k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, declined from 1.666M to 1.655M in the week ending January 21, a two-week low.
• (Feb 9) – Initial jobless claims rose 13k from 183k to 196k in the week ending February 4, the first rise in six weeks and a four-week high. According to Bloomberg, jobless claims were expected to rise to 190k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.650M to 1.688M in the week ending January 28, a five-week high.
• (Feb 16) – Initial jobless claims unexpectedly fell 1k from 195k to 194k in the week ending February 11, a two-week low. According to Bloomberg, jobless claims were expected to rise to 200k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.680M to 1.696M in the week ending February 4, a six-week high.
• (Feb 23) – Initial jobless claims unexpectedly fell 3k from 195k to 192k in the week ending February 18, a three-week low. According to Bloomberg, jobless claims were expected to rise to 200k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, declined from 1.69M to 1.65M in the week ending February 11, also a three-week low.
• Nonfarm Payrolls (Feb 3) – Nonfarm payrolls rose by 517k in January, far surpassing the 188k gain expected, according to Bloomberg, and the strongest monthly increase since July. December payrolls, meanwhile, were revised higher from a 223k gain to a 260k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (January data + net revisions) was 588k. In the details, private payrolls rose by 443k in January, following a 269k gain in December. Goods-producing payrolls, meanwhile, rose 46k due to a 25k gain in construction payrolls and a 19k rise in manufacturing payrolls. Private service producing payrolls rose by 397k in January, following a 226k gain in December. Leisure and hospitality led the gain in service payrolls in January, rising 128k following a 64k rise the month prior. Education and health payrolls rose 105k, business services payrolls gained 82k, due to a 26k rise in temporary help payrolls, and financial payrolls rose 6k. Also, trade and transport payrolls increased 63k, due to a 30k rise in retail trade payrolls. On the other hand, information payrolls dropped 5k in January, the second consecutive month of decline. Additionally, government payrolls rose by 74k in January, following a 9k decline in December.
• Participation Rate (Feb 3) – The civilian labor force increased by 866k following a 439k rise in December. As a result, the labor force participation rate unexpectedly ticked up from 62.3% to 62.4% in January, a ten-month high, albeit still below the pre-pandemic rate of?63.3%. According to Bloomberg, the participation rate was expected to remain at 62.3% for the second consecutive month.
• Unemployment Rate (Feb 3) – Household employment rose by 894k in January following a 717k rise the month prior. With an 866k rise in the labor force, the unemployment rate unexpectedly fell from 3.5% to 3.4% in January, the lowest level since 1969. According to Bloomberg, the unemployment rate was expected to rise to 3.6% at the start of the year.
• Average Hourly Earnings (Feb 3) – Average hourly earnings rose 0.3% in January, as expected and following a 0.4% increase in December. Year-over-year, wages rose 4.4% at the start of the year, down from the 4.8% gain in December and the fourth consecutive month of slower wage growth.
• Average Weekly Hours (Feb 3) – The average workweek ticked up from 34.4 hours to 34.7 hours in January, the highest since March.

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Consumer Activity and Confidence

• Vehicle Sales (Feb 1) – Total vehicle sales rose from 13.31m to a 15.74m unit pace in January, more than the expected rise to 15.50m and the highest since May 2021. Over the past 12 months, vehicle sales rose 4.1%, down from a 5.2% gain the month prior and the weakest annual growth rate since August.
• Consumer Credit (Feb 6) – Consumer credit rose by $11.57b in December, the smallest increase since January 2021. According to Bloomberg, consumer credit was expected to increase by $25.00b.
• Retail Sales (Feb 15) – Retail sales jumped 3.0% in January, more than the 2.0% rise expected, according to Bloomberg, and the largest monthly gain since March 2021. Year-over-year, retail sales rose 6.4% in January, following a 5.9% rise in November. Car sales rose 5.9% in January following a 1.8% drop the month prior, while gasoline stations sales were flat following a 4.8% drop the month prior. Excluding autos, retail sales rose 2.3% in January, but climbed 7.3% over the past 12 months. Excluding autos and gasoline, retail sales increased 2.6% but increased 7.4% year-over-year. In the details of the report, eating and drinking sales climbed 7.2%, furniture sales gained 4.4%, general merchandise sales jumped 3.2% in January, due to a 17.5% gain in department store sales, miscellaneous sales increased 2.8%, and clothing sales rose 2.5% at the start of the year. Also, non-store retailer sales rose 1.3%, health and personal care sales gained 1.9%, and building materials sales increased 0.3% in January. Additionally, food and beverage sales rose 0.1%, and sporting goods sales rose 0.2% at the start of the year.
• University of Michigan Consumer Sentiment
• (Feb 10) – The University of Michigan Consumer Sentiment rose from 64.9 to 66.4 in February, surpassing the increase to 65.0 expected, and the highest reading since January of last year. In the details of the report, the gauge of current conditions rose from 68.4 to 72.6, while the gauge of future expectations dropped from 62.7 to 62.3 in February, a two-month low.
• (Feb 24) – The University of Michigan Consumer Sentiment Index was revised higher from 66.4 to 67.0 in the final February print, the highest reading since January 2022. In the details of the report, a gauge of current conditions was revised down from 72.6 to a reading of 70.7, while a gauge of future expectations increased from 62.3 to a reading of 64.7 in the final February print, the highest reading since December 2021.
• Consumer Spending and Income (Feb 24) – Consumer spending rose 1.8% in January, more than the 1.4% gain expected according to Bloomberg, and following a 0.1% decline in December. Personal income, meanwhile, rose 0.6% in January, falling short of the 1.0% gain expected and following a 0.3% rise in December. Year-over-year, consumer spending increased 7.9% and personal income rose 6.4%. Adjusting for inflation, real consumer spending increased 1.1% in January, and real income jumped 1.4% at the start of the year, following a 0.2% gain in December. Over the past 12 months, real spending rose 2.4%, an eight-month high, and real disposable personal income gained 2.8%, the largest annual increase since March 2021.
• Consumer Confidence (Feb 28) – Consumer confidence, according to the Conference Board, unexpectedly fell from 106.0 to 102.9 in February, a three-month low. According to the median estimate on Bloomberg, confidence was expected to rise to a reading of 108.5 in the second month of the year. In the details of the report, a gauge of current conditions rose from 151.1 to 152.8, while a gauge of future conditions dropped from 76.0 to 69.7 in February, a seven-month low.

Inflation

• CPI (Feb 14) – The CPI rose 0.5% in January, as expected and the largest gain in three months. Year-over-year, consumer prices rose 6.4%, more than the 6.2% gain expected, albeit down from the 6.5% pace reported the month prior. Food prices rose 0.5%, while energy prices increased 2.0% in January, following a 3.1% decline in December. Excluding food and energy costs, the core CPI rose 0.4%, also as expected and following a similar increase in December. Year-over-year, the core CPI increased 5.6%, more than the 5.5% rise expected, albeit down from the 5.7% gain the month prior. In the details of the report, housing prices increased 0.8%, thanks to a 0.7% rise in the OER, and apparel prices also increased 0.8% at the start of the year. Also, other goods and services costs gained 0.6%, recreation prices rose 0.5%, and education and communication prices increased 0.4% in January. Additionally, commodities prices rose 0.4%, and transportation prices gained 0.4%, due to a 0.2% rise in new vehicle prices and despite a 1.9% drop in used cars and truck prices. On the other hand, medical care prices fell 0.4%, and airline fares dropped 2.1% in January, the fourth consecutive month of decline.
• PPI (Feb 16) – The PPI rose 0.7% in January, more than the 0.4% increase expected and the largest monthly gain since June. Year-over-year, producer prices rose 6.0% in January, more than the 5.4% gain expected, albeit down from the 6.5% increase in December. Food prices fell 1.0% following a 0.9% decline the month prior, while energy prices rose 5.0% in January following a 6.7% drop the month prior. Excluding food and energy costs, the core PPI rose 0.5%, more than the 0.3% gain expected and following a 0.3% increase in December. Year-over-year, the core PPI increased 5.4% in January, more than the 4.9% increase expected, albeit down from the 5.8% gain in December. Additionally, services costs rose 0.4%, due to a 0.2% rise in trade costs, as well as a 0.2% increase in transportation and warehousing costs.
• PCE (Feb 24) – The PCE rose 0.6% in January, a tenth of a percentage point more than the 0.5% gain expected. Year-over-year, headline inflation increased 5.4%, surpassing the 5.0% annual increase expected and following a 5.3% rise in December. Excluding food and energy, the core PCE rose 0.6% in January, surpassing the 0.4% gain expected. Year-over-year, core inflation increased 4.7%, up from the 4.6% annual increase last month.

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Manufacturing and Production Activity

• ISM Manufacturing (Feb 2) – The ISM Manufacturing Index fell from 48.4 to 47.4 in January, more than the expected decline to 48.0 and the lowest reading since May 2020. In the details of the report, prices paid rose from 39.4 to 44.5, and supplier deliveries ticked up from 45.1 to 45. Also, exports increased from 46.2 to 49.4 and imports rose from 45.1 to 47.8. On the other hand, production slipped -0.6 points to a reading of 48.0, new orders dropped 2.6 points to 42.5, and employment fell from 50.8 to 50.6 at the start of the year, a two-month low.
• ISM Services (Feb 3) – The ISM Services Index jumped six points from 49.2 to 55.2 in January, surpassing the expected rise to 50.5 and a two-month high. In the details of the report, employment rose from 49.4 to 50.0, supplier deliveries increased from 48.5 to 50.0, and backlog of orders gained from 51.5 to 52.9. Additionally, new orders jumped 15.2 points to 60.4 in January, the highest since August. On the other hand, prices paid declined from 68.1 to 67.8, the lowest reading since January 2021.
• Empire Manufacturing (Feb 15) – The Empire Manufacturing Index rose from -32.9 to -5.8 in February, more than the expected gain to a reading of -18.0, albeit the third consecutive monthly decline. In the details of the report, prices paid rose from 33.0 to 45.0, new orders increased from -31.1 to -7.8, and the six-month ahead outlook rose from 8.0 to 14.7 in the second month of the year, the highest reading since May.
• Industrial Production (Feb 15) – Industrial production was flat (0.0%) in January, falling short of the 0.5% gain expected and following a 1.0% decline the month prior.
• Capacity Utilization (Feb 15) – Capacity utilization declined from 78.4% to 78.3% at the start of the year. According to the median estimate on Bloomberg, capacity utilization was expected to rise to 79.1%.
• Philly Fed Business Outlook Survey (Feb 19) – The Philly Fed Index unexpectedly dropped -8.9 to -24.3in February, the sixth consecutive month of a negative print and the lowest reading since May 2020. According to the median estimate on Bloomberg, the index was expected to rise to -7.5 in the second month of the year. In the details of the report, prices paid rose from 24.5 to 26.5 in February, a two-month high. On the other hand, employment declined from 10.9 to 5.1, new orders dropped from a reading of -10.9 to -13.6, delivery time decreased from -5.6 to -13.6, and prices received fell from 29.9 to 14.9 in February. The six-month outlook index, meanwhile, declined from 4.9 to 1.7 in February, a two-month low.
• Kansas City Fed Manufacturing (Feb 23) – The Kansas City Fed Index unexpectedly rose one point to a reading of zero in February, the highest reading since September. According to the median estimate on Bloomberg, the index was expected decline one point to -2. In the details of the report, the volume of new orders rose from -8 to -6, prices paid gained from 20 to 26, and employment increased from 4 to a reading of 11. On the other hand, production dropped five points to -9, order backlogs fell from -17 to -22, and shipments declined from a reading 1 to -13 in February.
• Durable Goods (Feb 27) – Durable goods durable goods orders dropped 4.5% in January, more than the 4.0% decline expected and the largest monthly decline since April 2020. Year-over-year, headline orders rose 3.0% in January, down from the 11.2% annual increase the month prior. Transportation orders fell 13.3%, following a 15.8% jump the month prior, due to 54.6 % decline in civilian aircraft orders. Vehicle and parts orders, however, rose 0.2% at the start of the year. Excluding transportation, durable goods orders rose 0.7% in January and increased 1.6% over the past 12 months. In other details, machinery orders increased 1.6%, electrical equipment orders gained 0.6%, and primary metals orders rose 0.5%, following four consecutive months of decline. Also, fabricated metals orders gained 0.1%, and computers and electronics orders rose 0.5% at the start of the year.
• Capital Goods (Feb 27) – Capital goods orders fell 12.8% in January. Nondefense capital goods orders, meanwhile, declined 15.3%, following a 17.5% rise in December. However, capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.8% in January, the largest monthly increase since August. Year-over-year, business investment increased 4.3%.
• Dallas Fed Index (Feb 27) – The Dallas Fed Manufacturing Activity Index declined from -8.4 to -13.5 in February, more than the expected decline to -9.3 and the tenth consecutive month of decline. In the details of the report, new orders fell from -4.0 to -13.2, averaging -11.5 over the past six months, and employment plunged from 17.6 to -1.0 in February. Additionally, production declined from 0.2 to -2.8, and capacity utilization decreased from 6.0 to -4.1. On the other hand, the six-month general business outlook index rose from -9.1 to -2.9 in February.
• Richmond Fed Manufacturing (Feb 28) – The Richmond Fed Index unexpectedly dropped five points to a reading of -16 in February, the lowest reading since May 2020. According to Bloomberg, the regional index was expected to rise to a reading of -5. In the details of the report, new order volume remained at -24, while order backlogs ticked up slightly from -31 to -29 in February. On the other hand, shipments declined from -3 to -15, the number of employees fell from -3 to -7, and capacity utilization dropped ten points to -17, as did wages from 41 to 31 in February.
• Chicago PMI (Feb 28) – The Chicago PMI unexpectedly declined from 44.3 to 43.6 in February, a three-month low. According to Bloomberg, the index was expected to rise to 45.5 at the start of the year. In the details of the report, supplier deliveries rose, signaling expansion, while new orders, employment, and production fell, signaling contraction.

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Housing Market Activity

• Construction Spending (Feb 2) – Construction spending rose from 10.4M to 11.0M in December, a five-month high. According to the median estimate on Bloomberg, the number of job openings was expected to fall to 10.3M.
• NAHB Housing Market Index (Feb 15) – The NAHB Housing Market Index rose from 35 to a reading of 42 in February, surpassing the expected rise to 37 and a five-month high.
• Building Permits (Feb 16) – Building permits rose 0.1% in January, pulling the annual pace up from 1.337m to 1.339m, a two-month high. Building permits were expected to rise 1.0%, according to Bloomberg. Single-family permits dropped 1.8%, while multi-family permits rose 2.5%. Year-over-year, building permits rose 27.3% in January following a 29.5% drop in December, and marking the sixth consecutive month of decline.
• Housing Starts (Feb 16) – Housing starts ?fell 4.5% in January, pulling the annual pace down from 1.371m to 1.309m, the fifth consecutive month of decline and the lowest level since June 2020. Starts were expected to fall 1.9 %, according to the median forecast on Bloomberg. Single-family starts declined 4.3%, while multi-family starts plunged 4.9%. Year-over-year, housing starts fell 21.4% in January, the ninth consecutive month of decline. On a regional basis, starts fell in two of the four regions of the country in January. Starts dropped 42.2% in the Northeast and 25.9% in the Midwest. On the other hand, starts rose 7.3% in the South and 5.5% in the West.
• Existing Home Sales (Feb 21) – Existing home sales unexpectedly fell 0.7% in January from 4.03m to an annualized pace of 4.00m, the lowest level since May 2020 and the 12th consecutive month of decline. According to Bloomberg, existing home sales were expected to rise 2.0% in at the start of the year. Year-over-year, existing home sales declined 36.9% in January, the 18th consecutive month of decline. Despite a decline in sales, the months’ supply of existing homes remained at 2.9 months for the second consecutive month, averaging 3.0 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 1.3% in January from a year earlier to $359k, a one-year low.
• New Home Sales (Feb 24) – New home sales unexpectedly jumped 7.2% in January from 625k to 670k, a ten-month high. According to the median estimate on Bloomberg, new home sales were expected to rise 0.7% at the start of the year. Over the past 12 months, however, sales fell 19.4%, the eleventh consecutive month decline. Due to a rise in sales, the months’ supply of new homes declined from 8.7 months to 7.9 months. From a price standpoint, the median cost of a newly constructed home declined 8.2% from the month prior to $428k. Year-over-year, new home prices declined 0.7%.
• Pending Home Sales (Feb 27) – Pending home sales jumped 8.1% in January, surpassing the 1.0% gain expected and the largest monthly gain since June 2020. Over the past 12 months, however, pending home sales dropped 22.4%, the fourteenth consecutive month of decline.
• S&P/CS 20 City Index (Feb 28) – The S&P Case-Shiller 20 City Home Price Index dropped 0.51% in December, more than the 0.40% decline expected and the sixth consecutive month of decline. Over the past 12 months, however, the 20-city index rose 4.65%, the smallest gain since July 2020 and down from the 6.76% increase the month prior. On a national level, home prices fell 0.35% in December, but improved 5.76% over the past 12 months, albeit the smallest gain since July 2020 and down from the 7.62% rise in November

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Trade and Currency

• U.S. Dollar
• (Feb 28) – The U.S. dollar index appreciated in the month of February following four consecutive months of decline as inflation moderated from peak levels. The U.S. dollar index increased 2.8% against a basket of currencies to $104.92 in February.
• Trade Balance (Feb 6) – The U.S. trade widened by 10.5% from $61.0b to $67.4b, the widest in two months. According to the median estimate on Bloomberg, however, the balance was expected to widen even more to $68.5b at the end of the year. In the details of the report, imports rose 1.3% from $313.37b to $317.57b, while exports fell 0.9% from $252.35b to $250.15b. Trade with China specifically, widened by 8% to $382.9b, the largest on record following 2018’s $419.4b.?
• Import & Export Prices (Feb 17) – Import prices fell 0.2% in January, a tenth of a percentage point more than expected and following a 0.1% decline the month prior. Export prices, meanwhile, increased 0.8%, falling short of the 1.4% gain expected. Over the past 12 months, import prices rose 0.8% and export prices increased 2.3% at the start of the year.

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Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast

o??(Feb 24) – Following an only slightly weaker-than-expected Q4 GDP report, along with a jump new home sales, the Atlanta Fed’s GDPNow initial forecast for Q1 was revised higher from 2.5% to 2.7%, up significantly from the initial forecast of 0.7%.

• Fed Speak/News
• (Feb 3) – Responding to the growing disconnect in the labor market on the heels of a stronger-than-expected employment report, Fed Chairman Jerome Powell seemed less concerned than some had expected.?“But so far, we don't see that,” Powell said referring to the market’s anticipated retreat in prices. “And I think until we do, we see ourselves as having a lot of work left to do.” While acknowledging differing opinions,?he stopped short of issuing alarm over the growing divergence between the central bank and investors’ expectations for policy.?
• (Feb 3) – Speaking to Fox Business, San Francisco Fed President Mary Daly said January’s job gain was a “wow” number and that she is "prepared to do more" hikes than what is currently indicated in the latest December Summary of Economic Projections, “if needed.”
• (Feb 6) – Speaking to Bloomberg News, Atlanta Fed President Raphael Bostic said, “It’ll probably mean we have to do a little more work…And I would expect that that would translate into us raising interest rates more than I have projected right now.”
• (Feb 7) – Speaking to CNBC, Minneapolis Fed President Neel Kashkari said he was surprised by the January jobs number, which suggests earlier policy action has had a more muted impact than expected. He also reaffirmed his expectations for a terminal rate nearer 5.5%. “I too was surprised by the big jobs number. It tells me that so far we’re not seeing much of an imprint of our tightening to date on the labor market. There’s some evidence it’s having some effect but it’s pretty muted so far. I haven’t seen anything yet to lower my rate path,” he said.
• (Feb 9) – Speaking to the WSJ, New York Fed President John Williams was clear the indications of a tight labor market span well beyond one data point – referring to the outsized January increase – and include a multi-decade low in the unemployment rate,?low jobless claims, millions of job vacancies, as well as a low level of people leaving or quitting jobs. Thus, with at least half of the Fed’s dual mandate – full employment – seemingly satisfied, the Fed can entirely focus on taming inflation.
• (Feb 14) – Dallas Fed President Lorie Logan suggested rates may need to push higher in order to ensure inflation falls. Speaking at Prairie View A&M University in Texas, Logan said, "We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions."
• (Feb 16) – According to Cleveland Fed President Loretta Mester, there was a compelling case for a larger 50bp increase in February. Speaking at an event organized by the Global Interdependence Center and the University of South Florida Sarasota-Manatee, she said, “At our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50 basis-point increase, which would have brought the top of the target range to 5%.” She went on to say,?“At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time.”
• (Feb 17) – St. Louis Fed President James Bullard spoke to reporters in Jackson, Tennessee emphasizing the lengthy struggle the Fed is likely to face in controlling inflation. "My overall judgment is it will be a long battle against inflation," Bullard said. He added it’s essential the Committee continues to take more action in order to “lock in” slowing inflation with the range for the terminal rate likely between 5.0-5.5%.
• (Feb 17) – Former Treasury Secretary Lawrence Summers spoke regarding the Fed’s fight against inflation. Speaking on Bloomberg Television, Summers insisted that the Fed’s earlier policy initiatives – 425bps of tightening – has yet to have a meaningful effect on the economy or inflation. Thus, in his opinion policy makers have a lot more work to do to get inflation under control. “The Fed’s been trying to put the brakes on, and it doesn’t look like the brakes are getting much traction…The risk is that we’re going to hit the brakes very, very hard,” he said.??

·??????February 1 FOMC Rate Decision

o??As expected, the Fed opted to raise rates for the eighth time in a year, albeit at a reduced pace of 25bps, taking the upper bound of the target range from 4.50% to 4.75%. But while the ascent to the terminal rate has slowed back to a more historically normal pace, the level of the terminal rate is still likely to be well beyond current expectations as inflation remains still too high. While acknowledging inflation has come off peak levels, monetary policy makers remain committed to a further rise in rates in order to reinstate price stability. Inflation “has eased somewhat but remains elevated,” the statement read. Therefore, “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” Of course, the “extent of future increases” in interest rates will depend on the incoming data, particularly the inflation data. Should inflation remain above the Fed’s expectations, the Committee is likely to not only push the terminal rate higher, but also maintain an elevated level of rates beyond current forecasts, a potentially uncomfortable realization for many market participants. The decision was unanimous.

·??????February 1 FOMC Meeting Minutes (Feb 22)

o??The FOMC meeting minutes affirmed Federal Reserve Chairman Jerome Powell’s broader message presented during the February press conference. Given the still elevated nature of inflation and the solid level of activity in the economy, more rate hikes are not only appropriate, but also necessary to reinstate price stability. That being said, while the topline thesis was as expected, there were also some notable, perhaps less anticipated points, worth mentioning:

§?1. Most but certainly not all Committee members favored a slower pace of ascent at the February meeting. Of course, there were no descents, thus those in favor of a larger 50bp increase either were nonvoters or opted to shelf their opposition for the record.

§?2. Policy makers are increasingly concerned regarding the shenanigans in Washington over the debt limit, potentially resulting in unnecessary uncertainty, which could disrupt both markets and the broader economy. “Participants noted that sources of such risks included the prospect of unexpected negative shocks tipping the economy into a recession in an environment of subdued growth, the effects of synchronous policy firming by major central banks, and disruptions in the financial system and broader economy associated with concerns that the statutory debt limit might not be raised in a timely manner,” the minutes stated.

§?3. Participants highlighted the slower levels of growth overseas which could help assist in reducing global inflation, however, officials also specifically noted a rollback of COVID safety policies in China which would expectedly result in stronger growth – eventually –potentially fueling price pressures.

§?4. While acknowledging the potential for a lagged effect of earlier policy initiatives, members noted a level of concern in reaching a sufficiently restrictive level of policy: “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period, and pose a risk of inflation expectations becoming unanchored.”

Domestic News and Activity?

• Politics and the Biden Administration
• (Feb 14) –Federal Reserve Vice Chair Lael Brainard is poised to become President Joe Biden's top economic adviser, as director of the National Economic Council. Brainard?took office as the Vice Chair of the Board of Governors of the Federal Reserve System in May 2022 and has been on the Board of the Federal Reserve since 2014. Prior to her role on the Fed, Brainard served as Under Secretary of the U.S. Department of the Treasury and counselor to the Secretary of the Treasury from 2009 to 2013. Brainard?has been seen as somewhat of a moderate regarding the Fed’s approach to policy tightening, advocating for a relatively slow approach in order to assess the impact of earlier policy initiatives as the Committee seeks to tame inflation. Federal Reserve Board of Governors are nominated by the President and confirmed by the Senate.
• (Feb 16) – According to at least one report, President Biden is considering Austan Goolsbee for the position of Vice Chair of the Federal Reserve. Goolsbee was recently seated as the President of the Chicago Fed, replacing Charles Evans who served as the Chicago Fed head from September 2007 to January 2023. The report suggests Goolsbee is well acquainted with the Biden administration having been one of President Obama’s Council of Economic Advisors (CEA) from 2009 to 2011. Prior to his role on the CEA, Goolsbee also worked in the Obama administration for years in a variety of rolls. A classically trained economist with a Ph.D. from the Massachusetts Institute of Technology (MIT) and a long career of experience, Goolsbee is seemingly more than qualified for the role. However, at least some question the political connectedness between the potential Vice Chair of the Fed and the Biden administration. Against the backdrop of the recent nomination of FOMC Vice Chair Lael Brainard to Director of the National Economic Council, and earlier the transition of Fed Chair Yellen to now Treasury Secretary Yellen, there appears to be somewhat of a revolving door between the Fed and the federal government.

o??(Feb 23) – With Federal Reserve Governor Lael Brainard tapped for Director of the National Economic Council, investors are wondering who will be the Fed’s next vice chair? According to reports, the “short list” of nominees by President Biden includes a number of former Obama administration officials. While no doubt qualified candidates, political alignment will pose a barrier for Senate Republican support. For example, among the names being floated is newly appointed Chicago Fed President Austan Goolsbee. Already, however, some on the right have suggested Goolsbee is “too political.”?

International News and Activity?

·??????European Union

o??(Feb 2) – The European Central Bank (ECB) announced its latest policy decision. While the Fed decreased the size of its rate hike from 50bps to 25bps, the ECB raised rates 50bps.?Of course, while the Fed has increased the lending rate 450bps, the ECB has only implemented 300bps of tightening.

o??(Feb 10) – In the Eurozone, GDP rose 0.1% in Q4 following a 0.3% gain in Q3. Inflation, meanwhile continues to remain elevated, up 8.5% in the Eurozone as of January.

o??(Feb 21) – The latest Eurozone Composite PMI showed activity overseas continues to benefit from warmer weather, resulting in 1) additional spending power for consumers as a result of lower cost energy, and 2) diverted supply to businesses with a relatively reduced demand for energy supplies by households.?The Eurozone composite rose from 50.3 to 52.3 in February, a nine-month high.

o??(Feb 28) – Inflation in the EU rose CPI rose 8.6% in January following a 9.2% gain in December. In Spain, inflation is up 6.1%, while in France, prices jumped a record 7.2% from a year ago. Given the elevated nature of price pressures across the bloc, the European Central Bank (ECB) is anticipated to ramp up policy tightening with investors now anticipating the terminal rate to hit 4%.?

·??????U.K.

o??(Feb 2) – The Bank of England (BOE) announced a 50bp rate hike, bringing its policy rate up from 3.50% to 4.0% for a total of 390bps in tightening.

o??(Feb 10) – The latest growth figures for the U.K. showed the region narrowly avoided a technical recession with zero percent growth in Q4 following a 0.2% decline in Q3.

o??(Feb 28) – Inflation in the U.K. rose 10.1% at the start of the year, down only slightly from the 10.5% gain in December.

·??????Russia

o??(Feb 21) – Following a “surprise” visit by President Biden to Kyiv where he?announced an additional half-billion dollars in U.S. assistance (on top of the more than $48 billion already provided over the past year), Russia announced it will no longer abide by its nuclear treaties with the U.S.??Speaking in his first State of the Union in two years, Russian President Vladimir Putin said, "The U.S. and NATO openly say their goal is to see Russia's strategic defeat. And then, as if nothing happened, they say they're prepared to visit our military bases, including our newest.” ?Putin went on to say he is prepared to continue the conflict to regain Russia’s “historic territory.”?

-Lindsey Piegza, Ph.D., Chief Economist