Happy Thanksgiving...
Given how sleepy markets were this week with the holiday, there's just an abbreviated newsletter this week.
Welcome back to Market Making, your weekly dose of sell-side research and insight.
⏱️ Estimated Read Time: ~7min
✍️ Word Count: ~1,480
📚 This week’s Reading List has been updated
Part 1: A Sleepy Week in Markets
As I wrote in last week’s newsletter, the week of Thanksgiving is usually a quiet one for markets with many taking advantage of the holiday to carve out a nice long weekend.
This week was no different. While liquidity reached near year-to-date lows on many days across equities and rates, there was limited market-moving news to spur any real volatility and the few pieces of economic data we got came largely inline with expectations.
After a tumultuous year, many market participants were no doubt thankful to have at least one week in which markets weren’t roiled by some Fed statement, piece of economic data, or idiosyncratic shock of some kind.
Given the holiday and how quiet this week was, there will be no full length newsletter this week. There may not be next week either, as I’ll be off to London and may not have the time to put the full newsletter together.
Part 2: The Week Ahead
Next week may prove nearly as quiet as this week was. However, this could change depending on two factors: Chair Powell speaking on Wednesday about the general economic outlook and nonfarm payrolls being released on Friday.
Last week I discussed how some members of the Fed reacted to the cooler-than-expected CPI print from a few weeks ago that unleashed a loosening of financial conditions that had been seen just a few times before this century.
This included the colorful comments of Waller, who had the following to say (before you ask: no, I didn’t add these a’s to his quote — this is the way it was transcribed!).
The market seemed to get waaaa-aaaay out in front... I just cannot stress this is one data point. We've still got a ways to go.
This is exactly the situation we had gotten into in July… [Back then, there was] a loosening of financial conditions that we were trying not to do.
In his last press conference, which I wrote extensively about at the time, Powell made every effort to make it crystal clear to markets that a step-down in the pace of hikes shouldn’t be construed as a signal of an imminent pause or pivot happening. In other words, he wasn’t providing permission for the market to begin to ease financial conditions.
However, the market appears to be betting that the softer-than-expected inflation print we got a few weeks ago changed this calculus: if inflation is fluttering down then the Fed will be less preoccupied with trying to tighten financial conditions by talking down the markets at every opportunity.
The question isn’t really whether Powell is fine with financial conditions easing as much as they have over the past few weeks — all else being equal, he’d rather they be tighter for longer as that does some of the work of restraining economic growth without the Fed needing to take additional actions (i.e., continue to talk up the terminal rate).
The real question is how forcefully he pushes back on this easing. It struck me as obvious that he’d push back strongly against the market rally he knew would ensue after communicating a step-down in the pace of hikes at the last FOMC meeting — and that’s exactly what he did without leaving any room for ambiguity.
But, with the backdrop of potentially softer inflation, things are a bit more complicated now — if he simply runs through a few generic platitudes about the importance of keeping rates higher for longer, ensuring financial conditions don’t unwind the hikes that have already taken place, etc. then market participants will likely exhale and the permission structure will be laid to keep rallying.
(Although there’s not the vol structure or impetus for a large risk-on rally right now — so I’d be surprised to see multi-percent upside moves on Wednesday).
But if Powell decides to do a redux of Jackson Hole or his last press conference, then it’ll be a test of his credibility: if markets don’t move much, that’ll be a signal that they are calling his bluff that in the face of a slowing economy and declining inflation, he won’t really try to raise the terminal rate above current market expectations.
In the end, it’s my expectation that there won’t be fireworks in either direction: the usual rhetoric will be trotted out about there still being much work to do and that a premature pause can’t be contemplated, and markets will react with a shrug as they’ve heard that script many times before.
The most watched piece of data to drop this week will be on Friday in the form of non-farm payrolls. Expectations are for a small gain of 200k, which would be down from the upside surprise of 261k we got in October. However, with such a tight labor market having 200K again would show remarkable economic resiliency.
Since we are most assuredly still in a “bad news is good news” environment, a below consensus payroll print is the most likely upside catalyst for equities and rates this week (as it’d be taken as a signal that the Fed will be pausing even sooner than anticipated, perhaps even after the December meeting).
While there have been many headlines as of late about the tech layoffs that have been occurring seemingly daily, it’s important to remember that tech jobs account for a small fraction of the total jobs in the US economy.
As Goldman put it in a recent note, tech job losses are given more attention due to how tech-heavy the major equity indices now are, but overall they barely register…
…information technology companies account for 26% of the S&P 500 market cap, but employment among “internet publishing and broadcasting and web search portals ”companies—the sub-industry of most major tech companies—accounts for less than 0.3% of total payrolls employment, meaning that the unemployment rate would rise by less than 0.3pp even in the inconceivable event that all workers employed in this industry were immediately laid off.
Here’s a little graph that estimates the total amount of “tech” workers that exist, using as generous of a definition as possible…
Layered on top of all of this is that tech job openings are still above pre-pandemic levels, even with all the high-profile hiring freezes that have taken place within the largest tech companies.
What we appear to be seeing in tech is really a rotation: there are still plenty of tech jobs available, they just are generally residing within more non-tech or tech-adjacent companies (i.e., the tech divisions of telecoms, retailers, etc.).
In other words, there are still tech jobs out there — they just might not come along with hundreds of thousands in annual equity options and free kombucha on tap.