Productivity, Labor Costs Behave; Pre-Markets Still Down – December 7, 2022

Wednesday, December 7, 2022

Forget Santa Claus for now. The blue-chip Dow Jones index is now at its lowest since Nov. 17, the S&P 500 is at its lowest since Nov. 9. The Nasdaq has fallen in six of the past eight sessions, compared to seven of eight for the S&P. If there’s a silver lining anywhere, it’s that futures are less bearish following improvements in some key economic prints this morning.

Q3 Productivity The revision was — for the last time — +0.8%, 10 basis points (bps) more than expected, and a solid bounce from +0.3% last time around. This quarterly increase marks the best quarter of productivity since Q4 2021. And as any economist can tell you, productivity is the key between higher prices and inflation: with higher productivity we see lower inflation, despite higher prices.

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Q3 Unit labor cost The final read was revised — from +3.5% to +2.4% reported in the previous iteration. This is the lowest since we were still in the heart of the pandemic era: -4.2% in Q1 2021. And, like productivity, this metric is key to assessing economic health in relation to inflation: lower labor costs are a good thing when we’re trying to tame inflation.

Thus, the pre-market indices fell modestly from yesterday’s close: -45 points on the Dow, -15 points on the S&P and -75 on the Nasdaq. We are still operating at 80+ bps margins with an inverted yield curve between 2-year and 10-year bonds; What we want to see here is yield levels getting closer together, not further apart. It’s a stubborn reminder that we’re not done with the prospect of a recession yet — or that we’re not done with it.

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As Zacks VP Kevin Matras says, what we’re seeing in the last week or two is nothing more than profit taking. What we are saying here in this column is that we may see a “pop” as we saw last week when Fed Chair Powell put a 50 bps interest rate hike in the cards on December 14th. It’s a week from today.

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Otherwise, it’s a slog in a market with few catalysts. Such trade takes place during the festive season. If there is to be a Santa Claus rally this year — which would be a welcome diversion from the stock market struggles of 2022 — it looks like we’ll have to wait a little longer for it. And how many pops can we expect? From this vista, perhaps less than we were hopeful of a week or so ago.

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