ECB & Feb Jobs Report Says NO to Fed
Greetings from 36,000 feet as I am heading from Florida to LA.
There were two major non-financial market news items from last week which I think warrant serious attention. The first was the European Central Bank (ECB) which downgraded their view of the European economy from 1.7% growth to 1.1% growth. That may not seem like “stop the presses” news, but with growth teetering around 1%, the ECB has to be very concerned about recession across Europe and not just in Germany. With that, a more restrictive monetary policy is dead on arrival.
The other piece of news was the February jobs report which came in at an anemic 20,000 new jobs, much, much less than expected. While this number is very volatile month to month and can be revised by 50,000 or even 100,000, the February report coupled with the ECB tells us that Jay Powell and the Fed is now definitively on hold for at least the next four to six months, if not the entire year. By the way, I absolutely believe that the Feb jobs report will be revised higher by at least 50,000, but that won’t change anything in my mind.
With Europe in trouble and China fading, there is no way our Fed is going buck the trend and push the envelope to normalize rates anymore. Just look below at the yield on the 10 year Treasury Note. In good economic times that are getting stronger, long-term interest rates would be rising, like we saw into October. Since then, 10 year yields have dropped from 3.25% to 2.65%, a clear sign that the bond market is worried about economic growth.
Why does this all matter?
Conventional wisdom says that stocks like lower rates as competition for money decreases. So if the Fed is done hiking rates, stocks should like that and go up. While that premise doesn’t exactly stand up to scrutiny, it’s worth noting.