If you think that's Jerome playing Santa Claus ...

It’s probably just some local guy in a costume with a fake beard. The most important thing to keep in mind is that Chair Powell absolutely, positively, 100% did not say anything new on Wednesday. Indeed, the market has rallied after each press conference this year, almost no matter what Powell said, with the partial exception of the very last one. The word “inflation” appeared 63 times in the speech; the word “pivot” 0 times. Note that the December FOMC blackout period starts tomorrow, so realistically the next opportunity for the Fed to correct market perception, again if needed, is the FOMC statement and press conference on Dec. 14. Also note that Powell expressed frustration over two structural forces, sticky wages due to worker shortages and sticky rents due the run-up in home prices, both of which are preventing the effects of the Fed’s aggressive hiking from being felt. On cue, hourly earnings unexpectedly jumped in November (more below), a cold shower for pause-and-pivot talk, and the recent declines in home prices have moderated and even ticked up by one measure (more below). Home prices are still well off their March peak, and rents, which follow with a significant lag and account for nearly 40% of core CPI, should follow eventually. In fact, market rents last month fell the most in the five years Apartment List has conducted its survey. But again, these effects take time, which is why the Fed will likely take its time, too.

December has a well-earned reputation for seasonal strength. But over 24 observations since 1950, Strategas Research says negative year-to-date (YTD) performance into the final month has been accompanied by more muted December performance—up 0.9% on average vs. +1.6% overall. While the S&P 500 did trade above its 200-day moving average for a few days this week, typically a good momentum sign if it holds, it was back below that 4,062 level at this writing. A pile of contrarian negatives suggests more struggles ahead. November’s 5.6% total return rally, which marked the first two straight months of gains since August 2021, pushed the S&P up 14.1% since September (a 98th percentile two-month return going back to 1936). In bond land, credit markets have been exceptionally strong the past few weeks, particularly high yield and investment grade. High-yield spreads are close to the bottom of their six-month range and historical averages, even as recession risks are rising (more below). Trading this year has seen bear-market rallies give way to lower lows. Do you believe in Santa Claus?  There’s yet to be a sustained move above trendline resistance at the 200-day and 65-day moving averages. Perhaps FOMO (fear of missing out) is behind recent market behavior. Technicals and insiders have yet to confirm a new bull. So, for now, still a tactical play.

Whether slowly or quickly, even if inflation and interest rates moderate, the bigger issue for markets next year almost certainly will be earnings. Analysts, who tend to be optimistic, have been reducing their consensus estimates for the coming two years, something they typically don’t do without recession warnings from the companies they follow. And ex-energy, it seems many of the mega-cap stocks (notably Tech) will continue to struggle with slowing sales. This has been reflected in the price-weighted Dow, which is down less than 6% YTD vs. 15% for the S&P—the third-largest spread over 94 years of data (and largest in any post-WWII period). If the current environment persists (i.e., Tech underperforms), then the Dow’s overweight to Energy and Health Care names should carry this trend into 2023. There is a fun Xmas SNL bit where Dad gets a telescope, the son a bike, the daughter some jewelry and Mom … oven mitts. I’m happy being the mom—Santa’s just a guy in a suit with a fake beard anyway. Yield is the market’s “oven mitt,” an ideal gift for 2023—bonds and dividend stocks love a recession. Later in that SNL skit, Mom gets a practical robe—like kissing your fourth choice under the mistletoe. Look at the bright side! Losses are for tax-loss harvesting and the beta rally is a gift to lighten up on growth stocks. Powell, aka Santa, promised me “transitory inflation’’ last year. Bah! This year, he’s granting me a 2023 “softish landing” and I’m about to yank at that beard!

Positives

• Fed unfriendly November job growth surprised (up 263K vs 200K consensus), October gains were revised up, the jobless rate held steady at 3.7%, labor force participation shrank and average hourly earnings rose at their fastest pace since August. All reasons for the Fed to take its time. The report belied other signs this week of cracks in a tight labor market (continuing claims rose the most in a year to a 9-month high; ADP payroll growth slowed the most in almost two years; October job openings reversed September’s surprise jump; the quits rate fell again; and Challenger job cuts doubled consensus).
• Consumers just want to have fun Consumer spending accelerated in October, up the most since January on a real basis and 8.8% on an annualized nominal basis over the last three months. Spending’s strength is falling outside of typical areas, with holiday goods underperforming (in part due to inventory-laden discounts) and more spending on necessities, autos and travel, restaurants and other leisure services. A cautionary note: they’re using more credit and dipping into savings to binge, dropping the savings rate to a 17-year low (offset by $1 trillion+ of excess savings from Covid stimulus).
• Fed friendly October core PCE inflation modestly surprised at just below 5% year-over-year (y/y). Excluding rents (which severely lag market rents that are slowing solidly), the 3-month change is now 4.2%—down markedly from a peak increase of 7.4% in June of last year (but in line with recent months). Also, manufacturing ISM prices fell again and now stand at May 2020 pandemic lows.

Negatives

• Flashing red The manufacturing ISM dropped below 50 for the first time since May 2020, and the final S&P Global PMI for November fell even deeper into contraction. Manufacturing weakness and a worsening trade gap (more below) caused the Atlanta Fed’s Q4 GDP forecast to plunge from above 4% to 2.8% in less than a week. Also, the Fed’s Senior Loan Officer survey said the net percent willing to lend turned negative. In eight of nine times this happened, a recession ensued.
• Peak housing decline? Pending home sales fell a fifth straight month, pushing the YTD y/y decline to 37%, its lowest ever. Case-Shiller home prices also fell, although at a more moderate pace and, in the FHFA survey, home prices actually ticked up. A positive sign: while down sharply y/y, mortgage purchase loan applications rose a fourth straight week, bolstered by a drop in the 30-year mortgage rate to a 3-month low under 6.5%, more than half a percentage point under October’s peak.
• What trade giveth An improving trade deficit that was a big factor in Q3 GDP growth is rapidly reversing, widening significantly in October to a five-month high on falling exports and a slight increase in imports, offsetting a string of narrower readings through August.

What else

Be careful what you wish for The market on average declines by 23.5% over 195 days following the first rate cut, and it’s not until after a tightening cycle ends that unemployment starts to rise. Strategas says its work shows the jobless rate on average rises almost two percentage points 18 months after the Fed stops hiking.

Team U.S.A. Almost 350K jobs will be created this year in the U.S. as companies move their manufacturing facilities back to the U.S. or foreign companies decide to start operations here, according to a Reshoring Initiative report based on first-half trends. The jobs created due to reshoring or foreign direct investment have increased to 260K in 2021 from 181K in 2020 and only 6K in 2010.

Hey Powell, take off that ugly red outfit and read this Evercore ISI’s first survey this season shows Christmas Tree sales up roughly 6% y/y and down 10% in real terms. The last time sales were so modest, in 2018, the economy slowed significantly and the Fed subsequently stopped hiking rates.

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