Markets Weigh Labor Softening and Warsh Fed Outlook

Remy: Let's get to the big story break down. Wall Street looking at a shift from earlier optimism when strategists expected stocks to post their longest winning streak in nearly two decades. That outlook is still largely in place, supported by solid earnings. But investors are also focused on risks, including AI driven disruption and stretched valuations across assets, from gold and bitcoin to big tech. Now it's been a big week. It's been about a week since Trump nominated Kevin Warsh to be the 17th chair of the Federal Reserve, following Powell's term ending in May. Now, last April, Kevin Warsh delivered a lecture at the IMF that many now are calling the "Warsh Doctrine." Well, joining us to discuss what this strategic reset could mean for your portfolio is Jeffrey Roach, chief economist for LPL Financial. Jeffrey, good morning and happy Friday. It's been quite the week and so much for Job's Friday. We will be getting nonfarm payrolls next week. But what do you make of the latest labor market data?

Jeffrey: Well we did get a few really important data points recently. Two of them were the layoff announcements and then the other one was JOLTS. What I think is a key takeaway here from the JOLTS side of things is, is the demand for workers is waning and it's becoming a little bit more broad based. So what I like to do is look at the sectors that are represented in those headline numbers. So finance and insurance, the openings rate was down to where it was in 2009, in the depths of the great financial crisis. Now, of course, 2026 is no great financial crisis. But certainly the decline in the openings in that sector is noteworthy as well as professional business services. Very low number in the openings rate Bucking the trend a little bit inconstruction.

So we saw a little bit of an uptick in the hirings and openings there. Perhaps that provides a little bit of an offset. But key takeaway here is labor is weakening. It's the no hire, no fire. However, that might be changing because we are seeing a little more of the layoff announcements. Interestingly enough, again, going a little bit deeper than just the headlines we know from Challenger, Gray & Christmas, who puts out that number, the uptick in layoff announcements was driven by loss of contracts for many firms. So that was a driver there. That's very, very important. Thinking about what it might mean for 2026. We do think, you know it's going to be a low hire. So expect 40-50,000 on average per month when you think about 2026 in aggregate. We do think the unemployment will rise. Currently it's at 4.4%. We do think it will tick up a few times throughout the next few months, as labor market has a little bit more stress so far, though, the K shape continues. The upper part of that K household still have pretty decent balance sheets. Low debt service. I'm talking about the upper income households. But waning demand for labor. That's the key takeaway.

Remy: Yeah. And before we move away from labor, we will be getting nonfarm payrolls next Wednesday. We were supposed to get that data point out this morning, but due to that short lived partial government shutdown, that figure is delayed. You mentioned unemployment expected to stay steady at 4.4%. But what is your expectation for January nonfarm payrolls?

Jeffrey: Well, we think we'll still avoid a negative print. You know, it's been a long time since we've seen outside, outsized surprises there. We do know that average hirings is just ticking down. When you think about 2024 and then 2025, we've seen a consistent deceleration in hiring. So we expect will be in the 50,000 range for January, but certainly upside risk for unemployment. The reason of course that is a great predictor of the unemployment rate is what we call the job differential.

The difference of jobs plentiful versus jobs hard to get. That's taken from the conference board data. And that's one of the reasons why we think there's going to be an upside risk on the unemployment rate side of things.

Remy: Yeah. And Jeffrey, I do want to get to Warsh. Of course, a potential Warsh led Federal Reserve. Which version of Warsh do you think will govern? And are we looking at a more predictable Central Bank, or perhaps one that is simply less responsive when it comes to broader economic shifts?

Jeffrey: Well, Warsh is going to be an interesting leader. He's got to change a little bit, I think, and manage with consensus. You know, clearly we do have several years of history with him being on the board of governors for several years under the Bernanke-led fed. Now granted, in more recent times as a scholar in residence over in Stanford, Hoover Institute, being able to be a little bit more free with his comments. going to have to find a medium happy middle ground here.

But I think a couple things that are key takeaways. Number one, I do think we can we can build expectations and investors can expect an independent Federal Reserve. This is not a yes man to the president. It's one key takeaway that we can unpack a little bit here. And I think the second perhaps is even more important, that is that this might provide a little bit of stability for the dollar. You think about some of the fiscal hawkish ness that we've seen out of Kevin Warsh. We do expect perhaps some stability there in our own currency. And I think that's part of the reason why we saw a selloff here in precious metals since the announcement of Warsh. it will be a tightrope in some ways. Perhaps we'll get back to a more boring Greenspan esque fed where they focus on their mandates and they don't color outside the lines.

Remy: Yeah. And a lot of anticipation here and a lot of expectations. But when we take a step back, investors as well as CEOs have counted on the so-called Fed put, and Warsh does suggest that this has made the economy more fragile and increased national debt. So if he does follow through on his plan to reduce market interventions, what does this long term outlook actually look like? And for Americans out there who are wondering, what does it mean for their wallets, what would you say to them?

Jeffrey: Well, perhaps, you know, consumer rates will not fall as fast as they might have fallen under a different leader. Now, granted, you know, we're assuming he's going to pass. He's a nominee. He's got to go through a confirmation to the Senate. But we do expect that that to pass. But we do think that, you know rates will tick down in 2026, no question about that. But perhaps the speed of that won't be as fast. And you know, he'll have, I think a good balanced view. We do know Warsh has some good history in managing through crises. So that's, I think, a comfort to markets at this point. So expect a little bit of, perhaps choppiness, as he comes into that role and grows into it. But we do think that we may expect a little bit more dissents. I mean, we do have other strong leaders on that committee. The president of the New York Fed has been around a long time. Of course, President Goolsbee, president of Chicago Fed's been around several years. Kashkari of course, of Minneapolis. it's not as if Warsh is going to be able to strong arm.

This is a committee and it's a vote by committee. So there's a lot of consensus building that needs to happen.

Remy: Okay Jeffrey. we will have to leave it there for today. But thank you so much for joining us and have a great weekend.

Jeffrey: Thank you.