Back Shoot Around

22V Afternoon Shoot Around: Post Fed and ECI Wrap Up

Published on January 31, 2024

Dennis DeBusschere

Bottom Line: Powell stated he does not “think it is likely that the Committee will reach a level of confidence by the time of the March meeting.” And that was that for risk assets on the day. Today we learned that under the FOMC base case forecast of 2-2.5% GDP growth and inflation trending lower we can expect 3 maybe 4 cuts. 6+ off the table unless data is really bad (do we really want 6+ cuts then?). They are still going to cut. Buy risk on factor and sector weakness if that weakness is Fed related, because the direction of travel (easing) is the same.

Relevant News: Our base case was that chair Powell wouldn’t pre commit to a rate cut in March. That is why we thought today’s press conference reaction would be benign. But if we assume baseline data (so extrapolate what we have gotten on inflation/economic growth indicators), Powell said a cut is very unlikely in March. This is not a terrible thing at all. It shouldn’t shift FCI much, but it’s clearly more hawkish than what many thought coming in.

Things to Watch [Consensus]:

Mon 1/29	Tues 1/30	Wed 1/31	Thu 2/1	Fri 2/2
	JOLTs [8700K]	ECI [1.0% QoQ] & FOMC		Payroll w/ revisions & AHE [180k, 0.3% MoM]
Mon 2/5	Tues 2/6	Wed 2/7	Thu 2/8	Fri 2/9
ISM Service Index [52.4]				CPI Revisions

Source: 22V Research

Economics: Post Fed ECI Wrap Up

The ECI measures total compensation for employees and therefore is the Fed’s preferred indicator for underlying wage growth. After a punchy Q3, q/q wages and salaries growth decelerated from 4.9% to 3.8%. year-on-year growth is running at 4.3%. This is likely to slowly trend down over time, although the q/q path will be somewhat bouncy and I don’t wage growth to decelerate, if at all this cycle, back to 2018-19 levels as quickly as inflation has.

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ECI wages and salaries ex incentive paid occupations which is analogous to core wage growth, stripping out more volatile compensation patterns around benefits and bonuses, came in at ~3.6% q/q saar and 4.3% y/y. This is likely to slowly trend down over time, although the q/q path will be somewhat bouncy and don’t expect wage growth to decelerate, if at all this cycle, back to 2018-19 levels as quickly as inflation has. With the ECI being only quarterly though, we have to return monitoring the noisier average hourly earnings data and the Atlanta Fed wage growth tracker. Fridays Payroll report is very important for incremental data on wage growth.

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