Wall Street optimism, but the chief economist warns: – Don’t see the economy slowing sharply yet

Optimism prevailed in New York stock exchanges on Tuesday. This is what the leading stock market indices looked like at the close of trading at 10pm NST:

• The S&P 500 Collective Index, made up of the 500 largest companies listed in the United States, rose 0.7 percent.
• The Nasdaq Composite Index, which is dominated by technology companies, rose 1 percent.
• The Dow Jones, which consists of 30 stocks that are supposed to be important in the industry, rose 0.55 percent.

US central bank chief Jerome Powell spoke on Tuesday at a seminar organized by Sweden’s Riksbank. Powell gave no direct indications about the future level of interest rates, but instead took the opportunity to stress the importance of protecting central banks’ independence from political influence.

Restoring price stability when inflation is high may require unpopular measures in the short term, where we raise interest rates to slow the economy, says Powell.

Right now, the market is pricing in that the key rate will peak at around 4.9 percent in the summer, while the Fed itself has indicated a peak rate of around 5.1 percent – and has factored in that it could be higher.

However, the market believes that the Fed will implement two rate cuts before 2023 ends, with the interest rate ending at around 4.5 percent. According to the minutes of the previous interest rate meeting, it is None of the Fed’s members think it is appropriate to cut interest rates in 2023.

– I think the central bank is mostly right, because we don’t see the economy slowing down so hard yet. Interest rates are likely to remain high to keep inflation in check, says Harald Magnus Andreessen, chief economist at Sparebank 1 Markets.

Tesla turns around

The market is now anxiously awaiting the January inflation figures, which will be published on Thursday. According to Trading Economics, headline inflation is expected to decline from 7.1 percent in December to 6.5 percent, while core inflation will drop from 6.0 percent to 5.7 percent.

Now, among other things, major bank JPMorgan Chase believes inflation will come in lower than consensus, and that stance helped drive Tuesday’s rally on Wall Street, Bloomberg writes.

Among the stocks that moved was Tesla, which fell 0.8 percent after a sharp rise on Monday.

Richard Branson, who, like Tesla CEO Elon Musk, has invested in space, saw the Virgin Orbit holding’s crash path on Earth, after a technical error prevented the company’s rocket from reaching orbit.

– the result of a dream

However, Andreassen at Sparebank 1 Markets is more interested in a tight labor market, where high wage growth could make it difficult to bring inflation down to the long-term target of 2%.

The labor market report presented on Friday last week showed that unemployment decreased slightly to 3.5 percent. Despite the fact that unemployment is at its lowest level in several decades and there is still a sea of ​​vacancies in the US, wage growth was revised down to 4.6%. In advance, a salary increase of five percent was expected.

– It was the result of a dream. I still think it will take a lot for US wage growth to decline enough without experiencing material weakness in the labor market. When it didn’t happen before, one has to be careful to believe it’s happening now, says Andreessen.

Andreessen also believes that the Atlanta federal wage tracker is the best indicator of wage growth in the United States. In November, this showed a salary increase of 6.4 percent compared to the previous year. The December recap will be released on Thursday of this week.

Central banks are working partly blindly, because it takes a long time before we get enough statistics, and we’re always unsure of the numbers. In any case, wage growth is much higher than the normal level, and there is a clear relationship between labor shortage and wage growth.

– the best you could wish for

The broad S&P 500 has moved sideways so far in 2023, after falling nearly 20% in 2022. The big question is how quickly inflation will fall toward the target, how high interest rates will go and how macroeconomic headwinds will affect Corporate earnings.

Although Andreessen urges caution because he believes earnings estimates should be cut further, he believes it is not impossible to create a scenario in which the stock market remains flat even if the Fed keeps interest rates above five percent throughout 2023.

The best you can wish for the stock market is that the economy remains strong even though interest rates are high, but wage growth is down. The combination of a sharply slowing economy, continued high wage growth, and the Federal Reserve’s halt at five percent isn’t going to be good news for stocks.

The interest rate on 10-year US government bonds, often referred to as the most important interest rate in the world, is now close to 3.6 percent. A year ago, the interest rate was 1.5 percent.

The 10-year nominal interest rate can be “dissected” by looking at what is due to increased inflation expectations and what is a consequence of increased interest rate expectations. What you’re seeing is that the rise in the nominal ten-year rate in the last two years has been driven almost exclusively by an increase in the real ten-year rate.

The rise in interest rates was insidious because it was not matched by an increase in income. Inflation is not bad in and of itself, because companies are selling inflation. Over the past 20 years, periods of high interest rates have been good for stocks, because they have coincided with a strong economy. What’s special this time around, Andreessen says, is that interest rates have gone up while the economy is weakening.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For additional terms look here.