Fed Patient WIth A Pro-Growth Message

The stock market may trade cautiously but with a positive tilt this week.  Caution would reflect concern about possible unfavorable data surprises like January's unexpected Payroll/Wage prints.  For example, the January CPI (due February 13) conceivably could be boosted by start-of-year price hikes.  However, the January Employment Report was not entirely strong.  And, the Fed's policy stance remains not only patient but essentially pro-growth, based on Chair Powell's comments at the post-FOMC news conference.  In an important comment, he downplayed a theoretical trade-off between growth and inflation  So, while the Fed and markets are likely to take a "wait and see" view -- waiting to see more data, including the February Employment Report (released well before the March FOMC meeting),  upside data surprises may damage stocks only temporarily.

The strong 353k surge in January Payrolls overstated the full import of the Employment Report, as it was not confirmed by other parts of the Employment Report.  The Household Survey showed a decline in Civilian Employment and a steady 3.7% Unemployment Rate.  The Nonfarm Workweek plunged to 34.1 Hours from 34.3 Hours in December.  As a result, the level of Total Hours Worked in January are 1.0% (annualized) below the Q423 average.  Possibly, there was a reporting problem impacting jobs and other data in the Establishment Survey.  There have been times in the past when company responses to the BLS survey were not accurately done during the holiday season.  If this is the case now, there could be large revisions in the February Report. 

The high 0.6% m/m jump in Average Hourly Earnings was most likely a one-off start-of-year spike, if not a measurement problem.  The February Employment Report should show a smaller increase.  This possibility, as well as the mixed composition of the January Employment Report should constrain market concerns that the Fed will shift back to a more hawkish stance.

The potential volatility of the data at this time of year nonetheless underscores why Powell ruled out a rate cut at the March FOMC Meeting.  Although the stock market did not take his comment well, in fact, the essential message of his remarks was highly positive for stocks.  He downplayed a trade-off between economic growth and inflation, highlighting that inflation has fallen despite strong growth over the past couple of years.  This a pro-growth/pro-stocks stance by the Fed.  It means the Fed will not act to restrain economic growth as long as inflation is seen moving toward its 2% target.  It could tolerate strong growth.  To be sure, data showing slower growth/easier labor market conditions are still a market positive, since they will increase the Fed's confidence in achieving sustained low inflation