Sundays with Powell: Fed Chair Urges Rate Cut Patience on '60 Minutes,' Sending Dollar, Yields Up

The U.S. dollar and Treasury yields both rose early Monday, putting pressure on major indexes, after Fed Chairman Jerome Powell used a weekend "60 Minutes" appearance to reiterate that a March rate cut is unlikely. McDonald's and Caterpillar earnings also are in focus early today.

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Key Takeaways

  • Powell goes on “60 Minutes” to reaffirm that March rate cut odds are slim

  • Military strikes in Middle East over weekend could trigger geopolitical volatility

  • Lack of data puts most of the focus on earnings as McDonald’s, Caterpillar report

(Monday market open) Major U.S. indexes stare down another round of major earnings, highlighted by consumer standbys like McDonald’s (MCD) and Walt Disney (DIS). The backdrop is another rebound in Treasury yields and the dollar following Federal Reserve Chairman Jerome Powell’s TV interview over the weekend where he delivered another blow to fading hopes for a March rate cut.

The market shook off a hawkish Fed meeting last week to set new record highs, buoyed by overachieving mega-cap earnings and a blow-out January jobs report. At the same time, on a more bearish note, both the U.S. dollar and Treasury yields climbed Friday even before Powell’s weekend remarks despite the equity rally. Major indexes began Monday mostly lower as investors chewed over earnings from MCD and Caterpillar (CAT).

“There aren’t a lot of catalysts on the economic calendar this week, so most of the focus will likely be on corporate earnings,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “If we get a higher ‘reset’[HL1]  in bond yields, this could potentially temper bullish sentiment, leading to a profit-taking consolidation move. The other potential monkey wrench is bearish seasonality.”

The rally keeps being driven by the biggest companies while smaller names lag. The small cap Russell 2000® Index (RUT) fell 0.6% Friday and posted a drop of 0.8% for the week. Semiconductors like Nvidia (NVDA) and Advanced Micro Devices (AMD) both added to recent gains early Monday as the semiconductor sector kept rolling. “Breadth” continues to be an issue, with concentration focused on the 10 largest companies. Declining shares led advancers by a two-to-one margin Friday despite the S&P 500® index (SPX) setting a new all-time high.

In other markets, the U.S. Dollar Index($DXY) posted new two-month highs this morning amid expectations interest rates will remain elevated. The benchmark 10-year Treasury note yield climbed again after a massive 16 basis point gain following Friday’s jobs report. Dollar strength tends to hurt emerging markets and multinational U.S. stocks.

All markets could get a dose of geopolitics following more U.S. strikes on Iran-backed groups in the Middle East over the weekend. Crude oil prices are especially prone to related volatility but fell early Monday.

Futures based on the SPX dropped 0.27% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.25%, and Nasdaq-100® (NDX) fell 0.13%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) rose eight basis points to 4.12%.
  • The U.S. Dollar Index ($DXY) continued its ascent and trades at 104.38, the highest since mid-November.
  • The Cboe Volatility Index® (VIX) climbed to 14.21.
  • WTI Crude Oil (/CL) fell slightly to $72.03 per barrel.

Just in

If you missed Powell on “60 Minutes” but saw him after the Fed meeting last week, you should have a good idea of what he said. The remarks weren’t that different regarding chances for a March rate cut.

Powell essentially warned against “moving too soon” on rates. He added that the “danger of moving too soon is that the job is not quite done, and that the really good readings we’ve had for the last six months somehow turn out to be not a true indicator of where inflation is heading. We don’t think that is the case,” Powell said. “But the prudent thing to do is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.” Powell said it isn’t likely that policymakers “will reach that level of confidence” about the path of inflation by the time of the March 19–20 meeting.

Despite Powell reiterating what he said Wednesday, the Treasury market took the interview badly and rates—which move the opposite way of underlying Treasury notes—jumped early Monday in response. When yields climb, it can hurt rate-sensitive areas like small caps, real estate, staples, and utilities.

Fed speakers are back this week after the end of the meeting-associated “quiet period.” Atlanta Fed President Raphael Bostic is scheduled later today, followed by a host of Fed speakers tomorrow and Wednesday whose collective remarks could help set the tone. Today also features a couple of Treasury auctions. Chances of a March rate cut slid further early Monday, with futures trading predicting only a 15% chance, down from around one-third late last week.

Stocks in spotlight

No more mega caps report until Nvidia on February 21, according to Earnings Whispers. But there’s packed earnings calendar ahead. It started this morning with McDonald’s and Caterpillar. Shares of those two went opposite ways after their reports.

So far, 46% of S&P 500 companies have reported Q4 results and 72% beat analysts’ average earnings per share (EPS) estimate with 65% beating on revenue, research firm FactSet said.  FactSet sees blended Q4 earnings growth (including companies yet to report) of 1.6%, which would be the second straight quarter of gains. Still, the SPX trades at a high price-to-earnings (P/E) ratio of 20, FactSet said, though that heavily reflects the top 10 stocks in the index and their large P/Es.

Missed it by that much: McDonald’s shares cooled by less than 1% early Monday after the fast-food giant barely missed analysts’ quarterly average revenue estimates. The tally of $6.41 billion compared with the FactSet consensus of $6.45 billion, hurt by a shortfall in Middle East sales. Earnings per share did top Wall Street’s thinking and comparable sales rose in both U.S. and international markets. Strong average check growth was a factor there, the company said, which turns attention to the chain’s higher-priced offerings. It recently rolled out an “improved” burger.

Caterpillar inched higher early Monday up more than 2%, after an earnings beat that included improved profit margins. The quarter saw equipment sales volume decline slightly, but as Barron’s noted, “higher prices more than made up for the decline.” Looking ahead, Caterpillar sees 2024 full-year sales and revenues to be “broadly similar to 2023.”

Other major companies reporting this week include Eli Lilly (LLY) and Dupont (DD), tomorrow morning, Ford (F) tomorrow afternoon, and Uber (UBER) on Wednesday, Earnings Whispers said. Snap (SNAP), PayPal (PYPL), and Spotify (SPOT) are others to watch this week. Walt Disney’s results could put some fireworks into Wednesday afternoon. And those are just a few of the better-known companies on the list.

What to watch

Jobs report redux: Friday’s jobs report remains a hot topic in terms of what it might mean for the Fed. It came two days after the Fed signaled hesitancy about lowering rates from current elevated levels. The report reinforced that thinking.

“We still expect the Fed to cut rates this year, but this report allows the Fed to be more patient,” said Collin Martin, a director of fixed income strategy at Schwab. “Fed expectations for the timing of rate cuts got pushed back again—the implied probability of a rate cut in March fell to just 25%. We have been in the camp that May was more likely anyway.”

Unemployment remained at 3.7% in January, while the jobs growth of 353,000 far outpaced average analysts’ expectations of 180,000. Another interesting aspect of the report was a slight dip in the average work week to 34.1 hours in January from 34.3 in December. This could reflect wintry weather that temporarily shuttered certain parts of the economy, for instance crude oil production in North Dakota.

The hours worked decline likely showed up in higher average hourly wages, so it’s important to see if February’s wage numbers bear out the gains from January or if that was a blip. Wages likely also firmed due to the mix of jobs growth, focused in higher-paying business and professional services. Still, services-related jobs growth continues outpacing goods-producing gains, a trend for most of the last year, and higher wages keep inflation fears in the mix.

“Wage gains can keep consumer spending strong and can keep inflationary pressures bubbling under the surface,” Schwab’s Martin said. “Fed Chair Jerome Powell said he wants to see more data that suggests inflation will fall to 2%, and this will likely be a cause for concern.”

Data docket: There’s no major U.S. data Monday and Tuesday, and even when reports filter in later this week they’re mostly ho-hum affairs like Consumer Credit and Trade Balance. Next week is more significant, featuring consumer and producer prices along with retail sales.

Trader’s eye view: For a look at the week ahead written with the active trader in mind, check Schwab’s Weekly Trader’s Outlook by Schwab’s Nathan Peterson. This week, he examines the potential for higher volatility, noting that both the Cboe VIX and 10-year Treasury note yield finished higher with major indexes Friday, “which is counter to the general inverse relationship they’ve held with stocks.”

Eye on the Fed

Early today, futures trading pegged chances at 15.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 60% chance the funds rate will be lower than now after the Fed’s May meeting. The market now sees smaller odds of six rate cuts this year, but seems to be gravitating more toward four or five. That’s still more than the two to three in the FOMC’s last set of projections.

CHART OF THE DAY: SUPPORT CHECK. Though no year is “typical,” historically the S&P 500 Index (SPX-candlesticks) typically experiences a 5% pullback once or twice in any given year, and hasn’t since last October. This three-month chart shows the 20-day moving average (red line) as a possible support point if the index does start to drop, with the 200-day moving average (blue line) representing about a 10% drop from current levels. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

What and when? The Fed’s cautious wording last Wednesday caught some investors and analysts by surprise. Fed Chairman Jerome Powell’s reticence about rate cuts contrasted with his more dovish attitude in December which, at the time, helped spark rallies in major U.S. indexes and Treasuries. The kicker came Friday when January’s jobs report showed massive growth. Thoughts flashed back two days to Powell and company, leading some to ask that old question, “What did they know and when did they know it?” It remains unclear what, if anything, FOMC policy makers know ahead of time about major data releases. Also, the FOMC didn’t necessarily need advance notice to understand the labor market remained hot. Tuesday’s strong job openings data, consumer confidence gains, and Employment Cost Index all flashed green lights about the labor picture. Friday’s news was simply the cherry on top.

Financials focus: Many U.S. regional banks already reported, but the sector is worth watching after recent shakiness. Worries that the Fed might keep rates high for longer caused concerns to resurface about the commercial office market and banks that may have exposure. Bank fears might show up in the small cap RUT index, which weighs heavily toward financials.

Pay raise sunset? Solid wage gains could be one factor driving consumer spending, which makes up about 70% of the economy. Friday’s January jobs report showed annual wage growth of 4.5%. Credit card firm Visa (V) said in its earnings conference call that retail spending on key shopping days in Q4 was much stronger than the year before. All three major credit card companies including Mastercard (MA) and American Express (AXP) reported strong quarters. One possible challenge for wage growth, however, is the recent flurry of layoffs. United Parcel Service (UPS) announced 12,000 layoffs last week, and PayPal (PYPL) also announced job cuts. Overall layoffs were stable in December at 1.6 million, the government said. But Challenger, Gray, and Christmas data last week showed job cuts rising 100% month over month in January. UPS saw costs rise after reaching a new deal last year with the Teamsters union. If more companies begin struggling with payrolls, layoffs could follow and wage growth could slow. Wage growth remains above pre-pandemic levels but is trending toward what would be consistent with 2% inflation, Powell said last week.

Calendar

February 6: Expected earnings from DuPont (DD), Eli Lilly (LLY), Spotify (SPOT), and Ford (F).

February 7: December Consumer Credit and expected earnings from Uber (UBER), Alibaba (BABA), CVS Health (CVS), Bunge (BG), and Yum Brands (YUM).

February 8: Expected earnings from Baxter (BAX), ConocoPhillips (COP), Philip Morris (PM), Ralph Lauren (RL), Zimmer Biomet (ZBH), and Under Armour (UAA).

February 9: Expected earnings from PepsiCo (PEP).

February 12: No major earnings or data expected.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

Print

Key Takeaways

  • Powell goes on “60 Minutes” to reaffirm that March rate cut odds are slim

  • Military strikes in Middle East over weekend could trigger geopolitical volatility

  • Lack of data puts most of the focus on earnings as McDonald’s, Caterpillar report

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