Michael Burry says sell and Jim Cramer says buy. As the Fed meets, here’s how they both could be wrong on stocks.

On the other end of the spectrum, Jim Cramer says it looks like we’re in a bull market now. “If we’re in a bull market, and I think we are, you have to prepare yourself,” said Cramer, whose penchant for mistimed comments has spawned a fund that is seeking Securities and Exchange Commission approval to bet against his views. “We have to prepare for the down days now because in a bull market, they’re buying opportunities,” the CNBC commentator added.

It’s possible neither Burry nor Cramer is correct.

Take the final day of January, in which stocks surged on data showing the employment cost index decelerated to a 1% quarterly rate, which was below expectations and importantly below the 1.2% of the third quarter. At the same time, though, the index is running 5.1% year-over-year.

Neil Dutta, head of economics at Renaissance Macro Research, was explaining to Barry Ritholtz of the Masters of Business podcast what that number means to the Fed. “For whatever reason, the Fed views the labor markets as the conduit [to inflation]. And if compensation growth is running, right now, let’s say it’s 5%, and productivity is 1%, one and a half, you’re basically talking about an inflation environment of three and a half percent-ish,” Dutta said.

Dutta, who got his start working with David Rosenberg at Merrill Lynch, later came back to the topic. “If wage inflation is still running at four and a half, 5%, it’s going to be difficult [for the Fed to cut]. I mean, I hate to say it like this, it just means the disinflation that you’re going to see this year is also transitory.”

If Dutta is correct, that means the Fed will not pivot to rate cuts in the back half of the year, which the stock market is not likely to take well.

All that said, Dutta is not a stock-market bear, owing to the corporate profit backdrop. “How do you get an earnings recession if nominal growth is running at 5%? Has anyone mentioned about the dollar? Like, the dollar is off 10%. Doesn’t that have a mechanical effect on corporate earnings for the multinationals that trade on the S&P 500 SPX, ” he asked.

“And I guess the other thing is, in a weird way, like interest rates coming down, and people betting on the Fed to kind of back off, juices the housing market because you see homebuilding stocks XHB at a 52-week high now.”

Dutta himself didn’t make a forecast on the stock market in the Ritholtz interview, saying he’s a business economist and not a strategist. But there are others who have said 2023 might be more of a pause than a big move in either direction. “Disinflation and a further decline in 10yr yields could provide (at least partially) offsetting P/E multiple support,” said Nick Reece, portfolio manager at Merk Investments, in a note last week. “Crosscurrents may lead to a sideways ‘time correction’ in the market, albeit with the potential for downside volatility along the way.”

The market

U.S. stock futures ES00 NQ00 were weaker ahead of the Fed decision. The yield on the 10-year Treasury BX:TMUBMUSD10Y slipped to 3.47%. Bad news for your breakfast: egg prices have been soaring, and now coffee futures KC00 are up 12% over the previous five sessions.

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The buzz

The Federal Open Market Committee decision is at 2 p.m. Eastern, followed by Chair Jerome Powell’s press conference at 2:30 p.m. There’s no dot plot to worry about. There are near universal expectations the Fed will lift rates by a quarter-point, so the question is how much further the central bank signals it’s ready to take interest rates.

There’s a flurry of data releases before the Fed announcement, including the Institute for Supply Management manufacturing index and job openings. ADP reported that private-sector payrolls decelerated to 106,000 in January, though the report noted California was coping with record floods, and back-to-back storms delivered ice and snow to the central and eastern U.S., in the reference week.

There were a number of interesting post-earnings moves after results on Tuesday night, mostly to the downside. Advanced Micro Devices AMD rose after the microchip maker reported stronger-than-forecast sales and profit.

Snapchat owner Snap SNAP skidded lower after a mixed fourth-quarter report, as the company did not provide guidance. Meta Platforms META, which reports its results after the close, slipped about 1%.

Electronic Arts EA shares slumped as the video game maker disclosed disappointing forecasts and announced a delay to an anticipated title. Dating service operator Match Group MTCH also slumped as it warned of challenging conditions through at least the first half of the year. Western Digital WDC, the data storage device maker, warned of a challenging price environment as well as “continued cloud inventory digestion.”

President Joe Biden is due to meet House Speaker Kevin McCarthy, as the two sides head toward a debt-ceiling collision. The Consumer Financial Protection Bureau issued a proposal to curb late credit-card fees.

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Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

The chart

Torsten Slok, chief economist of Apollo Global Management, says none of the indicators typically used by the group that determines whether the U.S. is in recession are suggesting there’s a recession right now. “It continues to look like a soft landing,” Slok said.

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