Puzzled

The good news is (or it would be in normal times when markets were not hoping for Fed rate cuts as they most recently were) that jobless claims continued to decline. Of course, strong jobs strip the Fed-pivot hopes down to nothing, as the labor market continues to leave the Fed with no excuse for going to lazier interest policies. As Zero Hedge comments, noting some of the peculiarities:

As mass corporate layoffs continue to mount … why should we be shocked that expectations were for a very small rise in initial jobless claims (from 218k to 220k) last week…. Instead, the number of Americans filing for jobless claims for the first time decline to 212k (of course it f**king did!)... However, Continuing Claims ticked up….

As a reminder, here's what Richmond Fed governor Tom Barkin warned last week:

"I am cautious about accuracy of numbers around the turn of the year."

Cautious all year round more like...

Yes. More like. But these are the numbers the Fed has to work with, and continuing claims did not poke up enough to create a visible rise in continuously and extremely low unemployment, so the Fed will be held hard to the task of getting inflation down the rest of the way, especially now that some articles are finally admitting inflation is rising again—an admission that initially stomped down the stock market and bond market (prices down, yields up) in a tizzy, but the stock market has apparently found new ways to be happy again without the Fed’s help while the bond market now looks puzzled as to which way to go:

The S&P busted a new record, and the Dow put in a good climb, too:

The S&P 500 closed at a new record high, as all three major indexes ended Thursday’s trading session in positive territory, after clawing back the steep losses suffered earlier in the week. This marks the 11th record high that the 500-stock benchmark has cinched so far this year.

The broad stock index climbed 0.58%, settling at 5,029.73, while the Nasdaq Composite added 0.30% to close at 15,906.17. The Dow Jones Industrial Average traded 348.85 points higher, or 0.91%, to end at 38,773.12.

So, stocks were happy in spite of the fact that everyone now says a March rate cut is off the table, and hopes for June may be stretching things, too. Bond yields held almost perfectly flat after soaring on Tuesday then falling fairly hard on Wednesday. They don’t seem to know which way to go.

Even the huge recessionary drop in retail sales didn’t phase stocks:

Retail sales tumbled 0.8% in January, much more than expected

Consumer spending fell sharply in January, presenting a potential early danger sign for the economy, the Commerce Department reported Thursday.

Advance retail sales declined 0.8% for the month following a downwardly revised 0.4% gain in December, according to the Census Bureau. Economists surveyed by Dow Jones were looking for a drop of 0.3%, in part to make up for seasonal distortions that probably boosted December’s number.

However, the pullback was considerably more than anticipated.

The sales report is adjusted for seasonal factors but not for inflation, so the release showed spending lagging the pace of price increases.

In other words, if you adjusted inflation out of sales (which are reported in dollars), sales would have looked even worse because the money being used for the measure would be worth less. (Or just plain worthless.)

No big deal, though, because we’ve all been told “the economy is strong and resilient, and so is the consumer.” In fact, the latest article almost couldn’t resist leaning into that line again here:

Consumer strength has been at the center of a U.S. growth picture that has proven far more durable than most policymakers and economists had expected. Spending accelerated by 2.8% in the fourth quarter of 2023, finishing out a year in which gross domestic product rose 2.5% despite widespread predictions for a recession.

“It’s a weak report, but not a fundamental shift in consumer spending,” said Robert Frick, corporate economist for Navy Federal Credit Union. “December was high due to holiday shopping, and January saw drops in those spending categories, plus frigid weather plus an unfavorable seasonal adjustment. Consumer spending likely won’t be great this year, but with real wage gains and increasing employment it should be plenty to help keep the economy expanding.”

Well, then I guess, (based on all of that) you could probably put that first Fed rate cut off to next year because why would you cut rates at all when inflation is clearly still rising and the economy already has “plenty to help keep the economy expanding?” Are we supposed to simulate an expanding economy with extraordinarily low unemployment by cutting rates that are already historically normal?

From all of that, I’d have to conclude the soaring market has apparently come to believe that no rate cuts in the near future due to both rising inflation and the flint-like endurance of low unemployment numbers, accompanied by plunging retail sales that speak of “recession” all add up in the market’s mind to a feather-soft landing.

Maybe stocks aren’t puzzled. Drunken investors just finally decided that all things mean “UP.” It’s the old KISS formula of investing—just in time for Valentine’s Day—Keep It Simple, Stupid.