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Ahead of CPI, the jobs number a few weeks ago and constant Fed rhetoric since definitely succeeded as of now to convince the Treasury market that the Fed is not done hiking and they will NOT be cutting rates in the back half of this year. That of course is how that market feels today and can always change but for now, only the December 2023/January 2024 fed funds futures contract does a rate below 5% show up and barely. The peak rate is seen in August at 5.19%. I’ll say again, either way, the Fed is still almost done hiking and people need to shift their attention to living with high rates rather than how much higher they’ll go from here. Keeping rates higher for a while is itself a continued form of monetary tightening when you go 15 years with pancake like rates and in one year thereafter they go vertical. And don’t forget QT.

Coca Cola (a stock we own) is following all of its peers where pricing is driving all of their revenue. In their just reported quarter, revenues grew by 15% y/o/y while ‘unit case volume’ fell 1%. 

So rather than taking advantage of a below $80 WTI price to restock and cover their short, the Department of Energy is instead pressing their shorts by selling another 26mm barrels of crude oil. After the short term impact it is another reason to be bullish on the price of oil. I’ll ask the DoE, what if the price of WTI never ends up getting to $70, are you going to chase it higher in order to refill the SPR at some point?

The January NFIB small business optimism index rose .5 pt to 89.8 after falling by 2.1 pts in December. The components were pretty mixed though. Plans to Hire rose 2 pts but it’s still tough finding workers as Positions Not Able to Fill rose 4 pts to a 3 month high. Current compensation rose 2 pts to match a 6 month high but compensation plans fell by 5 pts. Those that Expect a Better Economy rose 6 pts after falling by 8 pts last month but those that Expect Higher Sales fell 4 pts to a 5 month low. Of note too, those that plan on Increased Capital Spending dropped by 2 pts to 21%, the least since March 2021 which if it became broad based across the economy would be a big missing leg to the economic stool. Those that Plan to Increase Inventory declined by 4 pts to the least since 2009 and will be a GDP drag in the 1st half of 2023 after the big build in Q4 2022. Those that plan on Higher Selling Prices fell 1 pt to the lowest since May 2021 but the NFIB said it is “far too high to be consistent with 2% inflation.” The Earnings Trend rose 4 pts after falling by 8 pts last month. Credit access remains tight but 1 pt less so. 

The NFIB said “While inflation is starting to ease for small businesses, owners remain cynical about future business conditions. Owners have a negative outlook on the small business economy but continue to try to fill open positions and return to a full staff to improve productivity…Count small business owners among the crowd predicting a recession this year.” And I keep hearing more economists talk about ‘no landing’ or an acceleration in economic growth. So the most aggressive rise in interest rates in a 12 month span is going to result in ‘no landing’ ? I just don’t think so. 

NFIB

The Bank of England’s job remains tough too after the UK reported a 6.7% y/o/y wage growth ex bonus print for the 3 months ended December. That is the 2nd highest level in at least 20 years that I have data on. While great to see higher wages for UK workers, it still remains well below CPI. Their labor market is tight too with an unemployment rate at just 3.7% after more jobs than expected were added. The January jobless claims figure saw a decline of 12.9k and December was revised to a drop too. In response to the hotter jobs data, gilt yields are higher with the 2 yr yield up 8 bps to 3.72% and that is the highest since October. The 10 yr yield is up by 5 bps to 3.45% and the pound is higher. 

2 yr Gilt Yield