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Powell testimony (3/7) suggests he wants financial conditions to tighten. But data remains key. Curious divergence of JOLTS vs LinkUp implies Feb “payback”. Per LinkUp, 90% industries see notable declines in openings MoM

Tom Lee
Tom Lee AC
Head of Research
Powell testimony (3/7) suggests he wants financial conditions to tighten. But data remains key. Curious divergence of JOLTS vs LinkUp implies Feb “payback”. Per LinkUp, 90% industries see notable declines in openings MoM
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Powell was a bit more "hawkish" than expected in his first day of testimony to Congress (Wed is House). Specifically:

  • Powell indicated Fed is prepared to raise rates at a faster pace if warranted. His statement "As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
  • In short, the Fed is making two changes that impacted markets. First, it is saying it is swayed by the Jan "hot" data and the prior revisions to inflation. Second, Fed also implying the "bar" is raised for how Fed sees slowing the pace.
  • The reaction in markets was a jump in March and May hike expectations. An additional +15bp of higher rates, or 0.4 hikes, was priced in as shown in the first chart below. The YE Fed Funds moved by a similar amount while the 2-yr yields rose +12bp to >5%.
  • In a sense, Powell's comments sort of imply the Fed would like to see Financial Conditions tighten. And this higher level of hikes is the market's attempt to reflect this.
  • But while this had an effect of causing a rise in the VIX (+6% to 19.6) and hurting equity prices (down -1.5%), the reaction in longer term rates was muted as the 10Y and 30Y yields fell slightly.
  • Hence, this adds to the near-term turbulence, but actually, this testimony is not really changing anything as the Fed actual path is a function of what happens with inflation.
  • The forward path of inflation, of course, is not yet known but the leading indicators show future progress is in the works.
  • Jan JOLTS (job openings) is released 3/8 at 10am ET and this will impact markets. As will Feb NFP (jobs) on 3/10 at 8:30am ET. We have a small JOLTS preview below. There is some Jan seasonal distortion (JOLTS always stronger in Jan), this looks to us as an aberration.
  • Linkup and Indeed data show a sizable ~1.0 million undershoot vs JOLTS currently, a gap never seen before. And as the Linkup industry data shows, many "core services" jobs are seeing decline in openings in February. JOLTS is Jan data, so Linkup and Indeed are already showing softer Feb numbers as well.
  • Does this turbulence hurt our view for the next 8 weeks? It is a setback but we think it is important to respect the calendar. Stocks are entering what could be the best 8 weeks of 2023.
  • The calendar based on "rule of 1st 5 days" (post-negative years) remains useful in 2023. This suggests an 8 week rally leading to +7% gains thru end of April.
  • Recall, this is based on the 7 precedent instances of similar conditions.
    - this called Jan rally . HAPPENED
    - "payback" 2/16 to 3/7, HAPPENED
    - today is 3/8, TODAY
    - And now a rally thru end of April?
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Tom Lee
Tom Lee AC
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