The Economy Continues To Defy Pessimistic Market Narrative

The dovish Fed pivot narrative that has been prevalent in financial markets during the past few months took another hit with a blowout January jobs report. Although there were seasonal factors and benchmark revisions at play, as is typical for January employment data, the U.S. labor market and the overall economy remain far more robust than market pricing has suggested.

As it relates to Fed policy, the Jan. 31 FOMC meeting effectively closed the door on any last hopes of a March rate cut, but fed funds futures continue to price a greater than 50% probability of a rate cut at the following meeting in May. The official statement from the January meeting shifted further to a more balanced/neutral assessment of growth and inflation risks, implying the rate hike cycle is indeed now behind us.

At the press conference, Fed chair Jerome Powell acknowledged the recent declines in inflation but said the committee is not yet confident the United States is on a path of sustainable 2% inflation, at least not confident enough to begin a cycle of rate cuts. All of this preceded the release of the January jobs report, which likely did little to dissuade a more cautious approach from policymakers.

Household Balance Sheets Still Appear Strong

As has been highlighted several times the past couple of years, robust household liquidity and, consequently, robust consumption has fueled above-trend growth and inflation in the post-Covid era. As noted in ALM’s December commentary, much of this excess liquidity appeared to have eroded for most income brackets thanks to heavy spending and inflation effects.

However, measures of household net worth remain above pre-Covid levels across the income spectrum. In fact, on a percentage growth basis, the bottom three income tiers have experienced the largest increase in net worth since the end of 2019, according to Fed data.

This is largely attributable to rising home values, which is the largest asset for these households by a wide margin. Despite sharply higher mortgage rates, the lack of supply has continued to fuel price appreciation in the national housing sector. This positive equity provides a solid credit buffer in the event of lost or reduced income.

Visit ALM First to read about the latest economic data and overall market trends in the February 2024 Market Commentary.

Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.