Models fail to predict job market on fire
The government reported that the economy added 517,000 jobs in December, a number that blew away all expectations, which averaged 187,000. The unemployment rate came in at 3.4%, the lowest rate since the late 1960s. Earlier in the week, the JOLTS report, which shows job openings, surged by 700k to over 11,000,000. In contrast to other weakening economic data, the job market continues to surprise to the upside, catching all the prognosticators by surprise. Economists have normally had a hard time making accurate predictions, but the post-COVID period has proven to be even more challenging. In our view, shutting down and restarting the economy has created structural changes, leaving many predictive models worthless. We believe the same applies to markets going forward.
Did Powell finally pivot?
The Federal Reserve announced a widely anticipated 0.25% interest rate increase this week to a target range of 4.5-4.75%. More interesting, during his press conference, the Chairman, Jay Powell, sounded less hawkish for the first time since interest rate hikes began. We have discussed the bond market being at odds with the Fed for a few months now. This was the first time Powell mentioned disinflation in his assessment of the environment. The market rallied strongly, emboldened by better chances of an easing in rates later in the year. Those still concerned about inflation pointed to this being Powell’s Arthur Burns moment, the Fed Chair in the 1970s who eased too early and allowed inflation to continue to spiral higher.
Israel attacks Iran
Last weekend, there were reports of drone attacks on strategic Iranian sites, most attributed to having come from Israel. This is the first such attack under Premier Netanyahu’s new leadership and during a period of violence in the West Bank. This also comes as Iran is reported to have supplied Russia with weapons. Meanwhile, Tehran reported progress in linking its banking system to Russia’s to avoid sanctions by the West. Geopolitical risks are the largest macro risks in the market currently. Tensions between West and East continue to grow daily and are realigning the pre-COVID global balance.