Hey There Income Hunters,

Yesterday’s headline payroll was well above consensus (467k vs. 125k) and there were revisions higher for November and December.

But that news was secondary to a fresh high in average hourly earnings (AHE). Since the Fed’s only concern is inflation and wages, oil and rental prices are the big driver now.

And AHE in January was +5.68% year-over-year.

Part of the reason for the jump in AHE was a drop in hours worked from 34.7 to 34.5, while weekly earnings rose .2% and in line with December.

The Bottom Line: According to the market, pricing for rate hikes the AHE number has increased the number of hikes in 2022 to 5 with the chance for a .50% hike in March rising. 

Today, I’ll show you what the market is now pricing in for Fed rate hikes and a couple of critical signals for your money.

Market Prices in Fifth Rate Hike for 2022

The tables below show the market has now priced in a fifth rate hike:

I don’t think investors in general understand how damaging inflation is to an economy. 

Without real growth, inflation on it’s own can crush an economy. 

So, pricing in more rate hikes based on higher inflation doesn’t make a lot of sense. I understand that investors want to take the Fed’s commitment to getting inflation down “at all costs” at its word …

However, that is not how the Fed operates.

The central bank is always reacting to the market and operates in hindsight. If the economy is heading towards recession, the Fed will stop tightening in a heartbeat.  

S&P 500 Index / Consumer Staples Ratio

To monitor this ratio I use the S&P 500 ETF (Ticker: SPY) and the SPDR Select Sector Consumer Discretionary ETF (XLP).

What makes the chart below so valuable is that consumer staples is the most defensive sector of the market. When this spread breaks down it points to recession risk, which would force the Fed to stop tightening to avoid a much bigger issue – a debt crisis. 

This spread is similar to the yield curve flattening signpost, which flattened almost .05% yesterday and will pick up speed as the Fed raises rates … 

The flattening picks up steam when the Fed raises overnight rates, which impact the shortest maturities the most, making their yields rise relative to long rates.

You can see in the chart below how much the 2yr-10yr curve spread flattened in 2018 as the Fed was raising rates to slow down an economy without inflation.

This gives you an idea on how difficult their job will be now.

Bring It Home

I will continue to analyse the macro data and money flows so I can give you the most likely scenario based on forward-looking data.

This will allow us to front-run the consensus narrative in the market and the Fed. 

The market recovered some yesterday with help from Amazon after the big down Thursday. 

We may chop around for a bit but the clock is ticking on the Fed and the real economy growth story … 

Slower growth and a tightening Fed are not a good combination for the market longer-term.

Live and Trade With Passion My Friend,

Griff