Rising inflation expectations and robust economic data mean the Fed will likely pause rate cuts for several months. Stocks reacted negatively, but gold seemed unfazed.
The US economy shows slow but steady growth, with total weekly hours worked growing at an annual rate of 1.0% compared to real GDP at 2.5% in 2024.
Heavy truck sales, a reliable leading indicator, fell sharply in December but rebounded to a robust 44.5K in January.
Another reliable leading indicator is employment in cyclical sectors, which also shows robust growth. In a recession, manufacturing, construction, and transportation & warehousing typically shed far more jobs than the rest of the economy.
ISM Survey
ISM business surveys show continued expansion in the services sector in January.
It was joined by a manufacturing recovery above 50% after 26 months of contraction.
Labor Market
The labor market added a modest 143K jobs in January.
However, the unemployment rate fell to 4.0% from 4.2% in November, possibly aided by a surge in deportations.
Average weekly hours worked fell to 34.1 for the first time since the 2020 pandemic. This typically serves as an early warning of increased layoffs. Employers first cut back hours before shedding staff.
Lower weekly hours is contradicted by the JOLTS report, which showed job openings exceeding unemployment in December.
Average Hourly Earnings
A sharp increase in average hourly earnings, showing 4.1% growth for the 12 months to January, will likely cause concern at the Fed.
December earnings growth surprised, at close to 0.5% for the month or 5.7% annualized.
University of Michigan Survey
Consumer sentiment dipped slightly in February, with the 3-month moving average declining to 71. Sentiment remains below levels during the 2020 pandemic.
The current economic conditions index declined to 68.7 in February, but the 3-month MA is still rising.
Expectations are also falling, with the 3-month MA declining to 70.
Financial markets were spooked by the sharp jump in expected price increases in the next 12 months, which reached 4.3% in February, with the 3-month MA at 3.5%.
Five-year inflation expectations are also rising, with the 3-month MA climbing to 3.2% in February.
Treasury Market
Ten-year Treasury yields rallied in response to the stronger inflation outlook, testing resistance at 4.5%. Recovery above the descending trendline would warn of another advance.
Stocks
The S&P 500 fell sharply in response to the prospect of higher interest rates. Breach of 5850 would signal a test of primary support at 5800.
Dollar & Gold
The Dollar rallied, testing resistance at 108 in response to higher interest rates. Breakout would offer a short-term target of 110.
Gold is retracing to test support at $2,850 per ounce. Respect would signal a test of $3,000.
Silver broke its new support level at $32 per ounce, warning of retracement to test $30.
Conclusion
Strong growth in average hourly earnings and rising consumer inflation expectations will likely cause the Fed to pause rate cuts until the current uptrend reverses. That could take more than six months.
10-year Treasury yields are expected to resume their uptrend. Recovery above 4.5% would confirm.
Rising long-term yields are bearish for stocks, with the S&P 500 likely to test primary support at 5800.
The Dollar Index is also expected to resume its uptrend. Breakout above 108 would signal another test of resistance at 110.
Gold is expected to continue its uptrend, with a breakout above $2,900 per ounce signaling a test of $3,000 for the first time. Rising inflation expectations and increased bullion holdings by foreign central banks will likely maintain a shortage of physical gold.
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