> Stock futures slid and bond yields shot higher early Friday after the Labor Department announced jobs growth of 517,000 in January. That compared with expectations for 190,000 and suggests the economy, and possibly consumer demand, could remain hot and keep pressure on the Fed to raise rates.
Beyond jobs data, China’s latest reopenings tied to early upswing in crude
After earnings, Apple probably has fresh hopes for a rebound in Asia
Don’t take your eyes off copper and oil—just yet
Shawn Cruz, Head Trading Strategist, TD Ameritrade
(Friday Market Open) January jobs growth blew Wall Street’s estimates completely out of the water as the government reported 517,000 new positions created. That compared with analysts’ consensus for less than 200,000 and suggests the labor market is still nowhere near a slowdown.
Stock index futures, which were already under pressure from Thursday afternoon’s less-than-stellar technology earnings reports, saw more selling in the wake of the sizzling monthly jobs data. The report might reignite fears of a more hawkish Federal Reserve just days after a Fed meeting cooled those concerns.
So where do market participants go from here? Many have welcomed recent economic data that’s diminished recession fears, but some may be torn on how to address this report. While this isn’t a sign that rate hikes may stop soon, it’s likely not indicative of an economy on the brink of cratering.
The U.S. 10-year Treasury yield skyrocketed 10 basis points to nearly 3.5% moments after the report came out, a clear sign that investors believe the data points to a more hawkish Fed.
Moving beyond jobs data, there’s been some progress with China’s reopening. The country announced it will fully reopen its borders with Hong Kong and Macau on February 6. Services data for January in China also moved out of contraction, another positive sign. Crude oil is slightly higher this morning, perhaps due to an expected rise in energy demand tied to China’s recovery. Other commodities might also get a lift if the reopening recharges economic activity in Asia.
After the jobs report:
After the tech-driven market rally Thursday, earnings from Amazon (AMZN), Alphabet (GOOGL), and Apple (AAPL) all disappointed. This could send Wall Street the opposite direction today.
By now, you’ve likely seen all the numbers, so there’s no point repeating them here. Second-day takeaways include:
Investors also weren’t happy with yesterday’s earnings news from Qualcomm (QCOM), Starbucks (SBUX), and Ford (F), which all slid in the premarket. On the whole, yesterday afternoon’s reports were an epic earnings strikeout.
There’s a growing debate between economists who think the Federal Reserve just delivered its last rate hike of the cycle and others who believe multiple hikes are still ahead.
The first theory posits the Fed knows rate hikes take time to filter through the economy—so a pause to wait and see may be warranted. At least that’s the thinking from research firm CFRA, which told investors this week that the Fed doesn’t want to risk sending the economy into recession by raising rates too high.
The other point of view is to take the Fed at its word. The Federal Open Market Committee’s (FOMC) December projection was for a terminal, or peak, rate of between 5% and 5.25% this year, up from the current level of between 4.5% and 4.75%. That implies two more 25-basis-point increases lie ahead.
For more specific words, look to Fed Chairman Jerome Powell himself. At Wednesday’s post-meeting press conference, he said, “Given our outlook, I don’t see us cutting rates this year,” adding, “If our outlook turns true ... If we do see inflation coming down more quickly, that will play into our policy-setting course.”
Powell noted that the Fed has tools to rectify the situation if inflation falls more quickly than expected and starts to threaten the economy. Worries about deflation—that’s certainly a change of pace. For now, however, the Fed’s fears continue to be focused on inflation, especially because the services sector and wages continue to show strength.
What does the futures market see? As of Thursday, there’s an 85% probability of an additional 25-basis-point rate hike in March, basically unchanged from before Wednesday’s meeting, according to the CME FedWatch Tool. There’s only an 14% chance of no hike in March.
Market participants still pencil in nearly 60% chances of the Fed reducing rates before the end of the year, FedWatch said. But it’s debatable whether that’s good or bad news. If the Fed cuts rates in 2023, it’ll possibly be in response to a recession, which no one likely wants. Remember Powell’s warning Wednesday, however, that he knows the Fed’s rate policy could cause slower growth.
The major indexes might’ve gotten a bit over their skis yesterday, especially the Nasdaq Composite® ($COMP). Optimism ahead of the afternoon earnings reports from AMZN, GOOGL, and AAPL helped launch a 3.25% rally Thursday in $COMP, but none of the three companies impressed with their results after the close, and all came under pressure premarket.
Before the close, things looked rosy right across the board with the exception of weakness in the Dow Jones Industrial Average® ($DJI). That red mark on Wall Street stems from the trend discussed above in which investors have begun moving back into growth stocks from more value-oriented names like the big industrials that make up the $DJI. Softness in AAPL, a $DJI component, could keep the pressure going today for that index.
Here’s how the major indexes performed Thursday:
It appears major indexes got a bit stretched yesterday, and these recent highs may be hard for bulls to defend.
CHART OF THE DAY: BUILDING BLOCKS. Two major building blocks of the economy—copper (/HG—candlesticks) and crude oil (/CL—purple line)—are both off their recent highs, possibly suggesting an economic slowdown. Will China’s reopening stop these commodities from losing more ground? Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Shades of 2019: The pre-pandemic info tech and communication services rally is enjoying a second act this week as many investors think the Fed and other central banks are approaching the finale of their respective rate-hike cycles. It’s no coincidence seeing stocks like Meta (META), Nvidia (NVDA), Tesla (TSLA), and Alphabet (GOOGL) among the list of market leaders late this week because so much of the growth-stock thesis relies on a lower-rate environment. While the Fed certainly didn’t promise rate cuts (in fact, it forecast additional hikes), the very fact that Powell and company aren’t taking greater aim at looser financial conditions seems encouraging. It isn’t just tech stocks rallying. Other rate-sensitive stocks like homebuilders also got an injection of bullish energy yesterday.
Growth is back, but watch valuations: As growth and rate-sensitive stocks climbed the ladder Thursday, the $DJI sagged following disappointing earnings from traditional-economy stalwarts like Caterpillar (CAT) and Honeywell (HON). The industrials, materials, and energy side of Wall Street’s ledger all stood on the sidelines as investors flocked to “new economy” names. It’s easy to understand this dichotomy if you look at one-year performance, where energy, health care, industrials, and materials stocks top the leader board and info tech, consumer discretionary, and communication services occupy the very bottom of the standings. There could simply be pent-up investor demand for sectors that suffered in 2022. Whether this makes sense from a valuation standpoint is another question. Both info tech and consumer discretionary are among the sectors with the highest forward price-earnings (P/E) ratios on the Street.
Out of whack: A few more things seem counterintuitive here as the weekend approaches. For one thing, fixed income yields are dropping worldwide despite the Fed’s, Bank of England’s (BoE), and European Central Bank’s (ECB) rate hikes. Many might wonder whether rate hikes should cause bond yields to rise, and they’d be right to ask that. Another question is why did the dollar rise yesterday despite many signs of weak U.S. economic growth? Perhaps the stronger greenback benefited from the promise of more Fed rate hikes and buying interest near recent eight-month lows. The recent dollar weakness appears to be helping overseas economies, especially in Asia where some data looked a bit better this week. Another question is this surprising weakness in volatility despite so much news about slowing economic indicators and companies laying off employees. Should investors really be so sanguine, especially with key U.S. inflation data arriving at mid-month?
Feb. 6: Expected earnings from Cummins (CMI) and Tyson Foods (TSN)
Feb. 7: December Trade Balance and Consumer Credit and expected earnings from BP (BP), Centene (CNC), and Hertz (HTZ)
Feb. 8: December Wholesale Inventories and expected earnings from Bunge (BG), Uber (UBER), and Yum Brands (YUM)
Feb. 9: Weekly Initial Jobless Claims and expected earnings from AbbVie (ABBV), AstraZeneca (AZN), Baxter (BAX), and PepsiCo (PEP)
Feb. 10: University of Michigan February Consumer Sentiment and expected earnings from Enbridge (ENB) and Honda Motor (HMC)
Feb. 13: No major earnings or data of note
Feb. 14: January Consumer Price Index (CPI) and expected earnings from Coca-Cola (KO) and Marriott (MAR)
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