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Welcome to the first real trading week of the year.
Yes, last week technically marked the beginning of trading in 2024, but the volume of trading was lower than usual as investors savored the final morsels of their winter vacations. That meant that the trades made moved the market more easily — and that's what we saw. Major indexes swung up and down and then up again, struggling to accurately interpret economic news and find a direction.
But Wall Street will likely become more decisive this week — setting the pace for the year to come. The December Consumer Price Index, a benchmark measure of US inflation, is due out on Thursday and several big banks kick off the fourth quarter earnings season on Friday.
Between all of that, JPMorgan will hold its health care conference, which will likely drive headlines about winning and losing stocks in the pharmaceutical sector. CES, one of the largest tech events in the world, will also push the artificial intelligence sector back to the center of the news cycle.
Before the Bell spoke with Joseph Brusuelas, chief economist at RSM US, to break it all down.
This interview has been edited for length and clarity.
Before the Bell: How are investors interpreting Friday's jobs report?
Joe Brusuelas: We had another strong report with 2.7 million jobs added to total employment in 2023 while the unemployment rate averaged 3.6%. It was quite simply the best performance in the US labor market since the 1950s.
Moreover, productivity looks like it increased by 2.3% this year. That's a huge move higher. What that means is that we really are moving beyond the pandemic. The balance is back in the labor market and the disinflation that's working through the economy is going to result in an inflation rate closer to 2% than 3% by the end of the year.
At the beginning of last year, Federal Reserve Chair Jerome Powell said the labor market had to weaken, but that was largely because productivity had stalled. So is that no longer the case?
Productivity really took off in the middle of last year. This is happening. I think that we have pivoted and you're going to see an improvement in productivity over the next couple of years. That's going to be quite beneficial for the economy. Markets are still adjusting to this idea that we're going to get rate cuts, but it's not going to be because the economy's weak, it's going to be because the policy rates are restrictive and the Fed is putting the floor under the economy.
The market right now is undecided about why rates will come down. Is it because of economic weakness? Or because the policy rates are too restrictive, and the Fed can begin to move towards a more neutral level over the next couple of years?
How do you think CPI will impact markets?
CPI is really what I think markets should care about. We're likely to see, internally in the report, downward pressure due to falling energy and gasoline prices, reassertion of the downward trend in US car prices and then the market will really begin to focus on the cost of housing and service inflation. I'm pretty certain that the cost of housing is going to ease considerably in the index going forward, given what we've seen in real time.
What we haven't seen, though, is a more meaningful decline in overall service inflation, which is 5.2% versus the 3.1% of the CPI. Once we see that, that's the go sign for markets. Then they know they're going to get their rate cuts.
Markets are just too far over their skis in thinking rate cuts will happen in March. We think cuts will begin in June, that there will be four of them equating to one percentage point. So I think the CPI is what's going to drive market action across asset classes next week.
And what about bank earnings on Friday?
I expect we're going to see an improvement in earnings, based on both fixed income and equity trading, which will offset some of the challenges in retail lending, specifically around the housing sector.
So is this week going to be another confusing one for markets?
We just don't quite yet have the conviction amongst asset classes that would determine early-year direction. (This) week may provide a bit of a signal on what that direction is.
It is really the beginning of the trading year, given CPI and bank earnings; those are more important than the payroll numbers we saw on Friday. We already had an idea that payrolls were going to be strong.
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