Bottom Line: The Atlanta Fed Wage Growth Tracker fell from 5.2% to 5% for January, and the Atlanta Fed GDPNowcast declined from 4.2% last Friday to 3.4% on Wednesday. So, over the past few weeks the risk that the Fed needs to keep rates at a much higher level for longer has declined. Less upward pressure on the USD and 10yr yields should be expected in the near term.
Relevant News: CPI revisions were not an outlier event (like they were last year) and emphasize the direction of travel remains lower rates. The timing of rate cuts rests on how quickly economic data increases the Feds confidence.
Things to Watch [Consensus]:
Economics: Wage Growth Update
22V’s economist noted the decline in the Atlanta Fed Wage Tracker “is fully consistent with the Fed claim that the trend and outlook for wage growth is moderating”. Benign CPI revisions and the headline decline in the Atlanta Fed wage tracker does increase the odds of a broadening out of winners. SMID cap names, ex financials, have had a strong 4 days as 10yr yields have stabilized.
Source: Federal Reserve Banks of Atlanta and St. Louis (FRED), FH calculations. ECI is actual to December. Wage Tracker is actual to January. All data are monthly but expressed (and in the case of the ECI reported) at a quarterly frequency.
Portfolio Strategy & Technical Analysis: Russell 2000
There is a gap between nominal GDP and Russell sales expectations. That is a very odd gap relative to history. If GDP growth continues around its current pace, a meaningful catch-up in Russell sales estimates should be expected. Some investors believe a more permanent shift to services vs goods is the driver of this divergence. We disagree, but monitoring Russell sales expectations vs Nominal GDP will be a way to track the validity of that thesis.
From a technical perspective, 22V’s technician would like to call attention to the breakout yesterday for the Russell 2000 Tech Sector as it gained 2% and broke out of a 22-Month BASE.
Russell 2000 Tech Sector – Wkly w/ 40-Week MA and MACD. Technical Score = 4
Below is a list of ten stocks in the Russell 2000 Tech Sector that (a) have strong Technical Scores and (b) are in good “buy spots.”
Washington Policy: War and Border Legislation
The Senate’s decision (67-32) yesterday to begin the debate on the $95 billion national security FY24 supplemental bill is notable progress in what remains a chaotic process. As the team has previously written, their high conviction call remains that Israel and Ukraine receive US war funding assistance this quarter, possibly this month. For additional context, see our note (HERE).
If money expresses priorities, the most important item of the bill replenishes US war materiel stocks. For example, 83% of Ukraine’s proposed $60 billion military assistance falls to XAR constituents. Top five items include:
- $60 billion Ukraine military aid
- $14 billion Israel military aid
- $10 billion humanitarian assistance for both war theaters (Gaza, West Bank, Ukraine)
- $5 billion support for Indo-Pacific partners to “deter aggression by the Chinese government.”
- $2 billion support for displaced Ukrainians
