January jobs came in nicely at 467,000. In keeping with its standard annual practice, BLS restated numbers from its original tabulations for the prior year (2021). The result is essentially a reshuffling of numbers netting an increase of 217,000 jobs—2021 was a rather strong year for the labor market. We seem to be picking up right where we left off last year! To start 2022, the official unemployment rate ticked slightly higher to 4% and labor force participation also climbed to 62.2%. Meanwhile, U6 actually declined to 7.1%. The highlight of today’s report was in the wages category. Average hourly earnings for American workers increased 0.7% MoM. This was particularly impressive given that majority of January hires were at the lower end of the income spectrum. Typically, this sort of hiring activity biases hourly earnings to the downside. The labor market is clearly on strong footing to start 2022.
Taking a quick pulse on where things stand elsewhere in financial markets, we note that spreads for investment grade debt remain extremely tight by historical standards. In fact, OAS (option adjusted spreads) for American corporations is currently 108 bps, which puts us essentially back to where we were before the pandemic (February 3, 2020 to be exact). Moreover, the mean spread for US investment grade debt over US treasuries is 159 bps (127 bps Aaa, 191 bps Baa). We monitor these closely for any dissonance between what we are seeing “fundamentally” and what is being priced into the marketplace. As of now, US businesses are getting a clean bill of health from debt markets and that’s quite something for a pandemic ridden world!
It's almost impossible to use the word “pandemic” without mentioning the Federal Reserve these days—the two seem somewhat intertwined and we suspect Mr. Powell would have it any other way. Of course, inflationary pressures have been building within the domestic economy for the better part of the last 12 months. The Powell Fed has pivoted in a rather hawkish manner since the fall months, roiling certain areas of the financial markets in the process. It also does not help that we are in the throes of a midterm year and a very important one at that. Powell must toe the line carefully so as not to disrupt the recovery that he has helped foster while managing expectations on Capitol Hill. Speaking of DC, Secretary Yellen of the US Treasury (and former Chairman of the Federal Reserve) suspects inflation will moderate over the course of the year back to ~2%; however, that is IF covid remains “under control.” Viruses tend to be hard things to “control,” so forgive our skepticism on that point, but inflationary pressures should abate over time as the economy normalizes. As for market expectations, we seem to be pricing in ~5 rate hikes for 2022, which could be a tall order if other areas of the economy do not pick up the pace. We would note here that we saw a large uptick in Q4 productivity, which is certainly a welcome sign to anyone keeping a close eye on the inflationary backdrop.
Another earnings season will draw to a close in the coming days and we must note the lack of conviction among C-suite executives with respect to the year ahead. Earnings have been solid no doubt but on the guidance front… what guidance? This rendition of results seems more marred by its misses (GS, NFLX, FB, etc…) than its beats. It seems we are looking at a muddle through year for equities. While it is unlikely that the Fed’s hawkish turn will trigger a recession, we are certainly cognizant of the challenges ahead for the US economy. We still expect earnings growth of ~8% YoY at the operating level with revenue remaining strong throughout the year. To be sure, the start of 2022 has been a sloppy one as markets have struggled to recalibrate for significant changes in monetary policy (ECB and BOE included)-- and our expectation is that this process will continue through the first quarter. However, we feel that fundamentally speaking markets can handle the risk of 3 or 4 rate hikes this year and the prospect of 5350 is still in the cards for the back half of 2022.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- January 2022)