As Powell takes the podium again, markets brace for possible volatility. Yesterday’s remarks by the Fed Chairman have market participants expecting a 50-basis-point rate hike this month and more to come, but that also raises recession fears. Watch the dollar and yields.
Markets brace for more Powell testimony, with dollar and volatility edging up ahead of bell
January JOLTS jobs openings data due soon after open—will it show any drop in labor demand?
Trading could be choppy as Powell speaks and ahead of Friday’s February employment report
Shawn Cruz, Head Trading Strategist, TD Ameritrade
(Wednesday market open) After Federal Reserve Chairman Jerome Powell sent a stern message to the Senate yesterday indicating the pace of rate hikes could increase, he moves on to the House where he’ll face additional questioning. Markets are flat this morning ahead of his appearance.
Powell’s Tuesday remarks upended the short-lived rally that began last Thursday, sending the two-year Treasury yield above 5% for the first time since 2007 as chances of a 50-basis-point March rate hike climbed to 70%, according to the CME FedWatch Tool. Powell didn’t pull punches in his message about possible higher rates. Powell and other Federal Open Market Committee (FOMC) members will watch data for signs of additional heat, starting with Friday’s February employment report (more below).
As a side note, volatility remained relatively well-behaved Tuesday despite the market’s swoon. The Cboe Volatility Index® (VIX) did rise and tested 20 but didn’t make it there. VIX could continue to climb amid Powell’s additional testimony and the jobs report, so be on the lookout for possible choppy trading, especially if the dollar and yields continue trending upward. If you’re trading, tread carefully.
Private businesses picked up the pace of hiring in February, adding 242,000 jobs, according to this morning’s ADP data. Analysts had expected 200,000. ADP also upwardly revised its January report to 119,000. It’s debatable whether the ADP numbers provide any indication of what we’ll see in the government’s jobs report Friday. January’s ADP data, for instance, came in below expectations but was followed by a blowout government jobs number.
“Jobs week” continues after the open with the January Job Openings and Labor Turnover Survey (JOLTS) report at 10 a.m. ET. Monthly job openings haven’t fallen below 10 million since June 2021 and they topped 11 million in December. A drop below 11 million might indicate a little less tightness in the labor force. Year-over-year job openings are down the last two months.
Shorter-term Treasury notes have taken a far worse beating than longer-term ones this week, in part because the shorter-term ones are more sensitive to near-term interest rate changes. The yield curve inversion extended itself sharply Tuesday, with the 2-year Treasury yield now owning a more than 100-basis-point premium to the 10-year Treasury yield for the first time since 1981, according to research firm Briefing.com. It’s considered a recessionary sign when investors pile into longer-term Treasuries for perceived “safety” from economic storms despite the lower yields these instruments offer. No investment, however, is truly safe.
Powell repeated what he’s said about being ready to increase rates if the data warrant that. He added that the peak fed funds rate could rise higher than anticipated, which the market’s been factoring in since January’s sizzling jobs and inflation data released last month.
The one fresh takeaway, which likely delivered the biggest blow to Wall Street, was Powell indicating the pace of hikes could increase. Market participants took that to mean 50 basis points could be in play at this month’s FOMC meeting. Until this week, the market had factored in 25 basis points.
Yields rose further as Powell spoke, particularly the rate-sensitive 2-year Treasury yield. It’s now at its highest level since 2007 and holds a full-point premium to the 10-year Treasury yield, something virtually unprecedented and generally considered bearish for stocks.
The next FOMC meeting after this month takes place in early May, and the highest probability now is that we’d exit that meeting with the target range between 5.25% and 5.5%, up from 4.5% and 4.75% today, the FedWatch Tool says. That also aligns with the market’s current thinking for a peak range. But probabilities are rising for a 50-basis point increase in May, as well, which would conceivably take the target range to between 5.5% and 5.75%. Look for the market to continue wrestling with where the ultimate terminal, or peak, rate might end up. Is 6% in the realm of possibility now?
Payrolls ahead: The data highlight this week is Friday morning’s February Nonfarm Payrolls report, due at 8:30 a.m. ET. January’s report helped kick off the 60-basis-point rally in Treasury yields and a nearly 5% decline in the S&P 500 index® (SPX) over the month that followed. As seen Tuesday, we’re still dealing with the after-effects of that massive January employment jump of more than 500,000 positions.
Here’s what analysts anticipate for Friday’s data, according to research firm Briefing.com:
Keep in mind: January’s unexpectedly strong job gains showed that the economy—particularly the labor market—isn’t slowing as quickly as the Fed would like. A drop to 200,000 in February would likely come as a relief to bullish investors, but it’s still strong historically.
Wages may be even more important. Average hourly earnings climbed 4.4% year over year in January. Still, the 0.3% monthly rise was down from 0.4% in December, a trend bulls would likely welcome if it continued. Smaller wage gains could give companies more room to defend margins.
Oracle (ORCL) is expected to report earnings tomorrow afternoon. CrowdStrike (CRWD) earnings beat analysts’ expectations on earnings and revenue, and guidance also looked positive. Shares rose 5% in premarket trading.
Here’s how the major indexes performed Tuesday:
There weren’t many positives yesterday, unless you like higher Treasury note yields. Every stock market sector finished lower. Banks got buried, including losses of 2% or more for JP Morgan Chase (JPM), Goldman Sachs (GS), and Bank of America (BAC) as recession fears flashed. Energy shares also got shredded as the dollar rallied on Powell’s tighter money remarks and WTI crude (/CL) fell 2% to below $78 per barrel. Rate-sensitive real estate stocks also skidded.
Tuesday’s gainers included the airlines. Almost every major U.S. airline advanced 1% or better after the Justice Department said it would block JetBlue’s (JBLU) planned takeover of Spirit (SAVE). A couple of analyst upgrades for United Airlines (UAL) and Delta Airlines (DAL) didn’t hurt, either. Lower energy prices and China’s reopening could be making the skies more friendly, analysts said.
Talking Technicals: The SPX dove below 4,000 relatively early Tuesday but seemed like it might be able to hold onto its 50-day moving average (MA) near 3,995. That didn’t end up happening. A late comeback fizzled in the final minutes, taking the SPX down below 3,990. The next major technical support could be the 200-day MA of 3,940, which the SPX bounced off more than once recently. Whether that can happen again with interest rates likely to rise more significantly than previously expected remains a question.
CHART OF THE DAY: PILING ON. The Dollar Index ($DXY—candlesticks) got another boost yesterday from Fed Chairman Powell and his hawkish tone. This wasn’t such good news for gold (/GC—purple line), which sagged as investors saw the Fed putting on its inflation-fighting gloves. Data sources: CME Group, ICE.Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Musical chairs: There’ve been some leadership switches lately among sectors and individual stocks. Generally, last year’s worst-performing stocks have been among the best performers this year, while the best performers of 2022 have been among the worst so far in 2023. It’s been a topsy-turvy market so far, making it more important than ever for investors to know what they’re buying—especially as it relates to growth, value, and quality. Get up to speed on the changes in this column by Charles Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.
Deluxe accommodations: Wealthy Chinese consumers often help drive revenue for makers of luxury goods including Signet (SIG), Movado (MOV), Tapestry (TPR), and Ferrari (RACE). Like most of the market, these stocks sagged in 2022, and they’re delivering a mixed performance two months into 2023. Not many years ago, one popular barometer of China’s economy was earnings from Tiffany, but it’s no longer publicly traded. Chinese tourists were also once a key performance driver for luxury brands selling their wares in the United States (Tiffany being one of them). The average Chinese visitor to the United States spent $6,500 in 2018, the highest of any overseas tourist, according to the U.S. Travel Association. There were 3 million visitors from China to the United States that year, but visits fell steeply during the pandemic. Could this be the year Chinese visitors flock back and open their wallets for U.S. luxury retailers? Geopolitics and the pace of China’s reopening could factor into that.
Peak gas? U.S. gasoline sales appear to have topped off for good, Barron’s reported Tuesday. It’s not just electric vehicles causing this, though that’s one aspect. Working from home plays a big role in the demand decline, as 35% of Americans do so five days a week. Recent high gas prices also drove down consumer demand. And if automakers hit their EV production targets, gasoline demand could drop 16% from 2022 levels by 2030, the article said. This puts pressure on the energy industry to adapt, though, as the article notes, gasoline demand continues to rise overseas, giving refining companies new markets for their product. Also, crude oil demand isn’t going anywhere, as it’s needed for products like jet fuel. Crude production likely won’t peak until 2030. In the meantime, companies like Exxon Mobil (XOM) that run so-called “downstream” operations supplying gasoline to retailers, and companies like Costco (COST) that sell gas to consumers, could feel the bite if Americans continue to pass up the pump.
March 9: Initial and Continuing Jobless Claims and expected earnings from JD.com (JD) and Oracle (ORCL)
March 10: February Nonfarm Payrolls
March 13: No major data or earnings
March 14: February Consumer Price Index (CPI) and Core CPI
March 15: February Retail Sales and February Producer Price Index (PPI).
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.