Decoding a Riveting January and February 2023

Its been a crazy start to the year! January and February have been riveting on both – economic data and market price action. Here is a short narrative to take you through the journey thus far this year. And then let that be food for thought as we try to think what the next few months will bring us on the economy and markets front. 

The Backdrop:

  • The overarching theme in central banking in the 2nd half of 2022 was “We do not want to repeat the policy mistakes of the seventies. a.k.a We do not want to do an Arthur Burns.
  • Personal Consumption Expenditure had been incredibly resilient. While there were a few signs of falling consumption, they weren’t enough to declare victory on inflation.
  • JOLTs data released on 4th Jan 2023 still showed about 10.5mn Job Openings beating expectations of approx. 10.0mn – evidencing a still tight labour market (despite all the monetary tightening thus far)

My Assessment in early Jan:

Resilient consumption, a tight labour market, significant credit creation from banks, yet to be exhausted pandemic savings – all pointed to an expanding economy running still too hot to handle. Hence it did not make sense that the Fed Funds futures market was pricing a peak Fed Funds rate of 4.9% when the FOMC itself is guiding to a peak Fed Funds rate of 5.1%.

Likewise the 2 year Treasury at 4.3% seemed too low. And the S&P500 at 3900 and the Nasdaq Composite at 10,600 still seemed too rich and probably factoring an incorrect risk free rate input in valuation models!

And equity markets seemed to be on a different footing. Short covering, surplus liquidity despite QT, Powell’s dovish FOMC press conference, etc – whatever the reason. Equity markets seemed to be going in a different direction than I anticipated. (And still not down to the level that I thought they should be at) 

January data in Charts:

And then came January’s economic data starting with Non-Farm Payrolls on Feb 3rd, 2023! The graphs below are so self-explanatory, I hardly need to write any further !

3rd Feb 2023 – Non Farm Payrolls

3rd Feb – ISM US Services PMI

14th Feb – Consumer Price Index

15th Feb – US Advance Retail Sales

15th Feb – Industrial Production

15th Feb – Industrial Production (Manufacturing)

16th Feb – Producer Price Index

24th Feb – PCE Price Index

27th Feb – Non Defence Capital Goods Ex Aircraft


With such a strong economic showing in January, the rates market has completely re-priced itself (with the 2 year touching 4.9% and the 10 year above 4%). But equity markets still seem to be distanced from reality.

As I write this, the February US Services PMI has just been released. And it recorded a healthy 55.1 again ! Which makes it harder for those who have been arguing about weather related factors playing a role in the unusually impressive economic showing in January. Also, it is worth noting that Initial jobless claims – week after week – are holding below a 200K threshold.

All eyes are now to the next February CPI print on 14th March and February PCE print on 31st March. And of course the FOMC in between. If inflation falls further, there would be a good chance that the equity markets will continue to rally (and we will start to hear soft landing chatter again). However, if inflation once again surprises to be upside, equity markets might not like the chatter of a 6% Fed Funds rate!

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