Control Panel: What is the data saying?

As your humble METAR weather reporter, I try to sift the data to separate signal from noise.

The two big data points last week were the Federal Reserve raising the fed funds rate by 0.25% and the stunning news that total nonfarm payroll employment rose by 517,000 in January.

The stock market celebrated as I predicted in last week’s Control Panel. At least two METARs pointed out that the “mungofitch 99 day rule” has been passed on the upside, a signal of a possible beginning of a durable bull market in stocks.

Let’s look a little deeper into what the data say.

“The [Federal Open Market] Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time…In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”

Notice the plural in the ongoing increases of the fed funds rate. Notice the continued reductions of longer-term AAA debt securities held by the Fed. Notice the strong commitment to the 2% inflation target.

The markets simply don’t believe the Fed will do what it has stated repeatedly. Both the bond and stock markets would be priced lower if they did.

The great news from the employment report needs further analysis. There are two sections: the Establishment Survey (from employers) and the Household Survey (phoning households). The Establishment Survey counts employment whenever an employee is on the payroll, so workers with multiple part-time jobs can be counted more than once.

The reporters for both the N.Y. Times and Wall Street Journal simply reported the first line of the establishment survey from the Labor Department – wow, great! – but they didn’t dig any deeper into the data. Pretty darn lazy for professional reporters.

Further down in the fine print of the actual report is this notification:
"Effective with data for January 2023, updated population estimates were incorporated into the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau…

The adjustments increased the estimated size of the civilian noninstitutional
population in December by 954,000, the civilian labor force by 871,000, employment by 810,000, and unemployment by 60,000."

Holy Toledo!

Table C shows the effect of the introduction of new population estimates on the change in selected labor force measures between December 2022 and January 2023.

Dec.-Jan. change, as published 894
2023 population control effect 810
Dec.-Jan. change, after removing the population control effect 84

Yikes! Over 90% of the employment change reported in the Household Survey was actually a once-a-year adjustment due to Census numbers! The actual Dec.-Jan change, after removing the population control effect was only 84,000 new jobs!

That is a stunning difference! Nobody would get excited about adding only 84,000 jobs. Instead, the number is far lower than the expectation of over 150,000 new jobs.

This is how the WSJ spun the news.

Upbeat Economic Data Keep Investors on Edge About Fed

After a strong jobs report, traders are betting the Fed might raise interest rates two more times this year

By Akane Otani, The Wall Street Journal, Feb. 5, 2023

The U.S. labor market remains incredibly strong. Investors can’t decide if that is a good or bad thing.

At first glance, Friday’s jobs report seemed to have very little for money managers to dislike. The U.S. economy added a whopping 517,000 jobs in January, while the unemployment rate fell to its lowest level since 1969, according to Labor Department data…

Following the release of the report, traders increased bets that the Fed will raise interest rates two more times this year, instead of just once more, according to data from CME Group. Traders also bet the Fed will push interest rates higher than they had thought before the jobs report, according to FactSet, something that could ultimately put more pressure on markets…[end quote]

The Fed has been very clear. They will keep raising the fed funds rate until inflation has reached their target. Then they will hold the fed funds rate at that level for an extended period of time until they are sure that inflation will not reignite. They expect “pain” in the economy. They will not cave in even if a recession results.

The market’s expectation that the Fed will begin to drop the fed funds rate in 2023 is contrary to the Fed’s own “dot plots” of the fed funds rate.

The Fed will only cut rates if they are firmly convinced that inflation has met their target for the forseeable future AND if there is a severe recession. If inflation has met their target there is no reason to change the equilibrium and cut the fed funds rate. Doing so would only trigger the imbalances that caused the bubble in the first place, such as negative real yields.

The Control Panel shows that the stock indexes popped as predicted when the Fed slowed its fed funds rate raise to 0.25%. Stock market internals have been getting stronger.

The trade is risk-on as stocks and junk bonds rose relative to the 10 year Treasury bond and USD. The Fear and Greed Index is in Extreme Greed.

The USD, which has been falling for months, popped a little. Gold, which has been rising, fell suddenly. Copper has been falling for several weeks. Oil has been falling for a few weeks. Natgas has been falling since late December.

The Treasury yield curve may have bottomed after falling for several weeks. The 10 year Treasury seems to be in a stable channel of around 3.5%. This is still a negative real yield until inflation actually falls substantially.

The CPI-U index has dropped for the past couple of months, important for owners of TIPS and I-Bonds since that is used to calculate the interest.

DATE CPIAUCNS Monthly change
2021-12-01 278.802
2022-01-01 281.148 0.84%
2022-02-01 283.716 0.91%
2022-03-01 287.504 1.34%
2022-04-01 289.109 0.56%
2022-05-01 292.296 1.10%
2022-06-01 296.311 1.37%
2022-07-01 296.276 -0.01%
2022-08-01 296.171 -0.04%
2022-09-01 296.808 0.22%
2022-10-01 298.012 0.41%
2022-11-01 297.711 -0.10%
2022-12-01 296.797 -0.31%

The 10 year TIPS is currently yielding 2.22% less than the 10 Year Treasury. This has been gradually declining since April 2021 when the Fed began its anti-inflation actions.

The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.8 percent in December 2022 to 110.7 (2016=100), following a decline of 0.8 percent in November. The LEI is now down 3.8 percent over the six-month period between June and December 2022—a much steeper rate of decline than its 2.3 percent contraction over the previous six-month period (December 2021–June 2022).

Stocks are still richly valued. Even with the 2022 drop, the SPX Cyclically Adjusted P/E Ratio (CAPE Ratio) is about equal to the value in 1929, about double the historic median.

So…what is the data saying? Is this a good time to buy stocks? Is this a good time to extend the duration of bond holdings?

The stock market is betting on a soft landing or no recession. The top-line employment report appears to indicate a very strong job market but the top-line number is mostly an artifact of an annual adjustment. The actual number is weak but the market doesn’t recognize that. The Treasury yield curve and LEI signal recession.

The 99-day rule says that this is a good time to buy stocks. But that is based on the stock market, which could be blindsided when their over-optimistic assumptions turn out to be false.

I think the data are saying that there will be a recession and a better buying opportunity for stocks later. This may be a good opportunity to extend the duration of bonds since bond yields typically fall during recessions (raising the prices) and the Fed is working on suppressing long-term inflation.

The METAR for next week is sunny. But it could change fast if traders realize the gotchas hidden in the data.



So, the bottom line from the “jobs” report is a statistical anomaly, much like the drop in the unemployment numbers shortly before the 2020 election.

So, what happens?

The market hates to see people with “jobs”, so fell. We could expect next month’s report to show a “stunning…Alarming…SHOCKING!!!” drop in month over month “jobs”, so the market should fly.



I have been trying to sort out in my mind the impact of this program. Really in supply v demand terms fewer dollar assets in the bond market means the dollar will have an internal and external appreciation in value. Bringing down input costs in its wake this is an industrial policy. This buoys interest rates by lowering the supply of paper in the markets although this paper is not mortgage based lending. The value and stability of banking reserves improves bringing about a normalization of the banking business and bank deposits again need to be put towards the banking lending process with an interest yield differential.

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@Leap1 note that the article you linked is from 2022. The result of the Fed’s balance sheet shrinkage is here. It is only a tiny fraction of the immense purchases by the Fed.

The increase of the Fed’s assets from its long-term average under $1 Trillion before the 2008 financial crisis to today’s level of $8.43 Trillion represents cash which was pumped into the banks, suppressing interest rates and supporting giant asset bubbles in stocks, bonds and real estate. Relatively little of this immense tsunami of cash made its way into consumer hands which is why the CPI was not increased until after the Covid-related fiscal stimulus.

The 10 year Treasury yield rose from a low of 0.52% on 8/7/2020 to 4.25% on 10/24/2022. At that point, the entire yield curve was still rising and was pretty flat (with minor inversions).

I don’t know whether the rises in the long-term yield was due to the Fed’s sales of its securities or pulled along with the fed funds raises.

This is industrial policy in two important ways.

The Fed’s suppression of real yields to negative enabled the “financialization” of companies, where borrowed money was used to take over companies and to borrow a huge amount which burdened the companies but enriched the managers.

Due to this huge borrowing, many companies are now “zombies” which can barely meet their interest payments. When their low-interest debt matures they will be forced to borrow at higher rates. About 10% of listed companies are zombies. Within the next few years many could default if rates stay high.



The more important question is - what percent of total market cap do those 10% represent? If only a small percentage (mostly smaller companies) then it may not represent as large an issue.

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@MarkR good question.

Zombie companies are typically defined as firms that haven’t produced enough profit to service their debts (also known as an interest coverage ratio below one) for three straight years. Based on that definition, some 13% of companies based in the U.S. could be considered examples of the living dead.

But that metric captures a swath of enterprises, typically technology companies, that are high growth firms, according to Goldman Sachs Research analysts Michael Puempel and Ben Shumway. These companies are often young, and investors expect them to have high earnings in the future. Investors see them as companies that are yet to reach their potential rather than nearing the end of their lifespan.

Goldman Sachs Research accounted for this by only including firms whose equity underperformed the S&P 500 Index of U.S. equities by at least 5% in each of the past two years. With that filter in place, the number of so-called zombies shrinks to less than 4% of U.S. companies, accounting for around $200 billion of net debt. [end quote]

Corporate debt of non-financial companies in the U.S. was $7,542 billion.

According to this article, many of the zombies are “Saul-type” growth stocks that have already been punished by the market. Many of them are probably small NASDAQ rather than NYSE or SPX stocks.



[quote=“WendyBG, post:4, topic:87943”]
This is industrial policy in two important ways.

The Fed’s suppression of real yields to negative enabled the “financialization” of companies, where borrowed money was used to take over companies and to borrow a huge amount which burdened the companies but enriched the managers.

Due to this huge borrowing, many companies are now “zombies” which can barely meet their interest payments. When their low-interest debt matures they will be forced to borrow at higher rates. About 10% of listed companies are zombies. Within the next few years many could default if rates stay high.

@WendyBG those are capital policies. Those are prior to the IRA in most regards. Although ongoing because the capital is there but with yields rising and IRR coming down for the planners it will be slowing down considerably to reasonable levels…read more intelligent levels based on better decisions. That is why we can afford higher rates. Higher rates optimize the US economy longer term.

Industrial policies facilitate factories not capital formation. The infrastructure allows indirectly for factories which create GDP. Capital formation allows for vacuous actions instead of production. Playing games with outsourcing. Disastrous money management.

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Interesting observation. Tough to evaluate these kinds of adjustments (like seasonality) without being in the weeds on their methodology. I did see an article in which an economist questioned the size of the nonfarm payrolls number (517,000) and wondered if part of it was methodological, such as weird seasonal adjustments for January, or like you mention above.

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That’s why I like to see the raw data without adjustments as well as data with seasonal adjustments (which is usually smoothed out by the adjustments).

All Employees, Total Nonfarm, Not seasonally adjusted and seasonally adjusted

It’s clear from these charts that the actual (not adjusted) number of employees has dropped from Nov. 2022 to Jan. 2023, which is normal since it happens every year. This is NOT consistent with an increase in employment of 517,000 as reported excitedly by the newspapers!

The seasonally-adjusted chart shows a smooth, consistent line without a spike in January 2023.

@mostlylong, you’re a smart guy. If you were forecasting the economic weather what would this say to you?

Important read…the first reasons sighted are critical to the pandemic…the second reason towards the bottom of the article is the crux of why our labor market has fallen off.

Bloomberg - Are you a robot?.

The link is safe, the headline and subheadline…

Job Market’s 2.6 Million Missing People Unnerves Star Harvard Economist

New research from Raj Chetty pinpoints a lasting economic scar from the pandemic: Low-wage workers in high-cost areas aren’t returning to the labor force.

I’m also wondering if the latest news might, for one last time, put TIPS back into buying range (5s and 10s with yields > 1.75%)?

Yellen’s thoughts on the economy.

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@MarkR, I am watching this closely. Fidelity currently is selling only 16 secondary market TIPS that mature between 5 and 10 years from now. Yield 1.6% on the short end, 1.3% on the long end.


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This seems to change almost every day. One day growth stocks, mostly tech stocks are up. And another counter cyclicals and recession resistant stocks do well.

Yes, after the Fed presentation last week, investors seem more confident that a soft landing is possible. And then they decide to sell and take profits. Why take a chance?

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I donno

I think the market will be slightly up and slightly down for many months to come. The low may not be in yet. From here at some point we have more down.

I’m in agreement with Leap and Yellen on this. If we get a recession, it’s only because the Fed caused the recession. The data just doesn’t warrant a recession. The only question in my mind now is if the Fed is competent or not.

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Let’s make sure we think about the whole cause and effect chain here.

I agree that if we get a recession, it will be caused in significant part by the Fed raising interest rates.
But why is the Fed raising interest rates?

Inflation, of course. The Fed has two goals - keep inflation positive but low, and keep employment high consistent with low inflation. Remember that employment getting too high - or unemployment getting too low if you prefer - can be a cause of inflation.

So the Fed raised rates in response to inflation getting too high. And they’re keeping rates up because employment is still tight - unemployment is low enough to be an inflationary pressure. Now we have another question - Why did inflation start?

The largest cause is probably the big monetary stimulus from the government in 2020 and 2021. A huge amount of money was given away to help people stay afloat during the pandemic shut downs. That money had the desired effect of stimulating the economy and avoiding a recession then. In hindsight, the stimulus was probably too big and that triggered the inflation we’ve been seeing recently.

So if you really want to place blame for any recession that may be coming, blame the coronavirus. That is the trigger that started this whole chain.

It’s also important to note that the Fed is not tasked with avoiding recessions. Recessions tend to cause high unemployment, but the Fed’s job is not the recession, it’s employment. If they see a problem with high unemployment, they will take action. Doesn’t matter if there is a recession or not. And if they see very high employment - which is connected with increasing inflation - they will also take action. They won’t care if that action causes a recession, because that is not their actual problem. If there is a recession with no inflation and no employment problem, the Fed doesn’t need to act.



Wendy should be reminded that the word “data” is plural. The singular term is “datum.” Hence title should be: What are the data saying?


Overzealous grammar mavens aside, “data” is commonly used as a mass noun (like “water” or “information”) and therefore may take a singular verb conjugation.


Thank you! Somebody had to say it! It can also be used the was “family” is often used. My family is… or My family are… Both are correct