Tuesday's Market Update (31 Jan 2023)
Tuesday's stock markets reacted positively to selective corporate earnings reports (notably, McDonald's 2.59 earnings per share (EPS), which was higher than the expected 2.45, and General Motors' 2.12 EPS, exceeding expectations of 1.68). The NASDAQ rose from 11,398 to 11,594 (+1.7 percent) during the day session. At the same time, cryptocurrency traders acted more rationally, keeping the value of Bitcoin (BTC) at its previous levels (O: 23,126, C: 23,095). It appears that whales procrastinated ahead of the FOMC's decision. Some of them might have even been paying closer attention than usual to the latest macroeconomic data released by a number of government and quasi-government agencies.
Compensation costs for both civilian and private industry workers increased 1.0 percent in Q4 compared to 1.2 percent in the previous quarter (source: Employment Cost Index by the Bureau of Labor). However, in December, private sector salaries rose faster (+4.4 percent) compared to government salaries (+4.0 percent) over the year. This is another reason for the FOMC to have a less favorable view of entrepreneurs compared to bureaucrats
What is more important, however, is that among private industry occupational groups, compensation costs increased by 4.2 percent (year-over-year) for natural resources, construction, and maintenance workers, but rose to 6.9 percent for service occupations. The FOMC might pay attention to the 2.7 percent difference.
The Shiller Home Price Index continues its gentle downward slope that began in July 2022, with a decrease of another 0.8 percent in November. This is slower than the expected decrease of 1.0 percent. This trend is confirmed by the Federal Housing Finance Agency's (FHFA) House Price Index, which monitors the average price of single-family houses for mortgages guaranteed by Fannie Mae and Freddie Mac. It fell 0.1 percent nationwide in November, while a decrease of 0.4 percent was expected. However, it is unlikely that the slight decrease in home prices has much influence on the FOMC members' decision.
The Chicago Purchasing Managers' Index (PMI), produced by the Institute of Supply Management, dropped by 0.8 points to 44.3 in January, after sharply rising to 44.9 in December. Notably, the prices paid for materials, including steel, increased, accelerating by 7.4 points to 72.5, breaking a five-month streak of declining prices. This is a result of the new upward trend in commodities started by China getting back on track after its self-imposed nationwide lockdown. This favors the hawkish stance of the FED.
The Consumer Confidence Index produced by the Conference Board decreased in January, contrary to expectations of no change. It now stands at 107.1 (1985=100), down from 109.0 in December. However, the FOMC is likely to pay more attention to the Dallas Federal Reserve's Services Revenues Index. This index showed that growth in the Texas service sector activity resumed in January, rising six points to 4.9, recovering sharply from -0.6 in December. From the FOMC's perspective, this could be another argument for the continuation of the Federal Reserve's restrictive monetary policy.
The Federal Open Market Committee (FOMC) already has all the recommendations from its advisors at hand while making a decision on the interest rate, not to mention that this decision has most likely already been informally discussed among the voting members. However, the fact that Tuesday's macroeconomic data does not align with a 0.25-point increase may hint at what the decision might be.