Still Parsing Powell: Market Dips as Investors Ponder Latest Musings from Fed Chairman

(Wednesday Market Open) Wall Street’s seesaw ride continued early Wednesday as investors continued to parse Federal Reserve Chairman Jerome Powell’s statements, which could be taken as hawkish or dovish depending on how you read them.

With nothing concrete from Powell at this moment that’s clearly hawkish or dovish, it could make reading the incoming data even more difficult and possibly rekindle volatility.

However, despite the last few days, volatility remains soft, implying less chance of dramatic peaks and valleys ahead. Friday’s University of Michigan Consumer Sentiment data is the next key metric to watch, followed by next Tuesday’s Consumer Price Index (CPI).

Stay tuned for Walt Disney (DIS) earnings after the close today (more below).

Morning rush

• The 10-year Treasury yield (TNX) slid 2 basis points to 3.64%.
• The U.S. Dollar Index ($DXY) slid to 103.22.
• Cboe Volatility Index® (VIX) futures inched up to 18.92.
• WTI Crude Oil (/CL) rose to $77.66 per barrel.

Parsing Powell

Yesterday’s enthusiastic market response to Federal Reserve Chairman Jerome Powell’s latest public comments is a bit of a head-scratcher. Powell emphasized how the Fed’s tough fight against inflation is complicated by data like last Friday’s monster January Nonfarm Payrolls report. Powell told a Washington audience yesterday that jobs growth of 517,000 was “stronger than anyone I know expected.”

Getting inflation back to the Fed’s 2% goal, Powell said, “is likely to take a bit of time,” will be a “bumpy” process, and will require the Fed to “hold policy at a restrictive level for some time.”

The probability of the Fed raising rates above 5% at its May meeting climbed above 75% following Powell’s remarks, according to the CME FedWatch Tool. A 25-basis-point hike in March is pretty much penciled in.

Yet the market rallied.

Perhaps the bullish response reflects Powell’s observation that “the labor market is strong because the economy is strong” and his expectation of 2023 being a year of “significant declines in inflation.” It also might have helped that Powell said the Fed wouldn’t have raised rates more than 25 basis points last week even if it had known at that time about the jobs number. Which signals that the monster January jobs growth didn’t necessarily worry the Fed too much.

In addition, the jobs report means the Fed may have to do more to take inflation lower, but it also potentially means less chance of a severe recession.

Data docket

Good news from home front: The MBA Weekly Mortgage Applications Index rose 7.4% after falling 9% the previous week. Refinancing applications rose 18%, possibly a sign that lower rates are starting to inject some fuel into the homebuying and refinancing markets. See if this report fires up real estate stocks this morning, adding to gains in a sector already up nearly 10% year to date.

Jobless claims: All roads seem to lead back to last week’s jobs report, including future data like tomorrow’s initial weekly jobless claims report. Claims have been near record lows for weeks, a stubborn signal that despite the Fed’s efforts and recent tech sector layoffs, the labor market remains robust. Analysts don’t expect Thursday’s report, due before the open, to show much change. The average estimate is 194,000, according to research firm Briefing.com. That’s above 183,000 the week before but still way below historic averages.

Investor insight: In a week without much other government data, here’s some of our own. TD Ameritrade’s Investor Movement Index® (IMX) moved higher to 4.31, up 3.36%, during the January period.

The latest IMX shows a bit more appetite for risk among retail investors after retail sentiment tracked lower through most of 2022. The recent drop below 20 in the VIX could correlate with a heavier appetite for risk, though it’s important to also be careful about taking on too much risk amid rising interest rates in the wake of the jobs report.

Popular stocks with investors tracked by the IMX in January included electric vehicle makers like Tesla (TSLA), Rivian (RIVN) and Ford (F), as well as info tech giants Apple (AAPL) and Intel (INTC). The IMX also saw net buying of Amazon (AMZN), Microsoft (MSFT), Walt Disney (DIS), and Verizon (VZ). TD Ameritrade clients were net sellers once again of Meta Platforms (META), American Airlines (AAL), and Boeing (BA).

Just In

Uber (UBER) shares rose today after the rideshare company beat analysts’ estimates on both top- and bottom lines. From a macro standpoint, it’s worth noting that UBER’s CEO appeared on CNBC this morning and said inflation in the Uber Eats business isn’t worsening and the company doesn’t see any decline in consumer demand.

In other earnings news this morning, shares of CVS Health (CVS) and Under Armour (UAA) both rose after their quarterly growth beat analysts’ estimates.

Earnings up next

Disney earnings: The entertainment and media company is expected likely faces questions about possible cost-cutting, layoffs, and continued pressure on its traditional cable business. Anticipated strength in DIS theme parks and resorts might be a tailwind, considering how much the travel sector rebounded recently. This week, Royal Caribbean (RCL) became the latest travel firm to report a solid quarter with higher Q4 bookings.

Numbers to watch at DIS include:

Disney+ subscribers: 163 million, according to FactSet

Earnings per share: $0.79, down from $1.06 a year ago, according to an average of 21 analyst estimates

Revenue: $23.36 billion, up from $21.8 billion a year ago, according to an average of 19 analyst estimates

Reviewing the market minutes

As noted above, the S&P 500® index (SPX) and other major indexes rebounded, and bond yields eased following Powell’s remarks at midday. For the second day in a row, the SPX dipped below 4,100 during the session and ended up closing above it. This is technically positive.

The Nasdaq Composite® ($COMP) outpaced other indexes Tuesday, lifted by a big day for many semiconductor stocks and Microsoft (MSFT). Excitement flared over artificial intelligence (AI) in the wake of MSFT and other firms announcing AI-powered updates to their platforms.

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) climbed 265 points, or 0.78%, to 34,156.
• The $COMP finished 1.9% higher at 12,113.
• The Russell 2000® (RUT) rose 0.76% to 1,972.
• The SPX rallied 53 points, or 1.3%, to 4,164. Last week’s high close of 4,179 might be a resistance point.

Public/private primer: Have you ever wanted to know more about the difference between private and public companies and why public companies sometimes decide to go private? Check out this short video from Charles Schwab, which also offers some facts about initial public offerings, or IPOs.

CHART OF THE DAY: CHANGING CHANNELS. Yesterday we discussed how the S&P 500 (SPX) broke out of its downward channel, but it isn’t the only asset trying to change channels. WTI crude oil futures (/CL—candlesticks) broke its downward channel in January and appears to be retesting old resistance as potentially new support. If the move in the SPX is harbinger of a strengthening economy, oil may be the specter that haunts the economy because it could be an ominous sign for inflation. There’s a lot of layers of business between commodities and finished products, and rising oil prices don’t often translate into broader inflation. But, because we’re already in an inflationary environment, rising oil prices could be a problem for inflation hawks. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Watching the dollar: The dollar is showing new signs of life, potentially bad news for many U.S. companies just starting to feel some relief from last year’s two-decade highs in the greenback. In Q4, the U.S. dollar index fell to near 103 by late December after peaking near 115 in Q3. Still, a dollar index that averaged in the 108 – 110 range for most of Q4 presented a heavy burden for U.S. companies selling their wares overseas, cutting into their earnings. For instance, last week Caterpillar (CAT) was among many U.S. multinational firms noting that “unfavorable currency impacts” affected international sales in Q4. Things improved in early January as the dollar scraped seven-month lows around 101. Lower U.S. inflation growth and hopes for a pause in Fed rate hikes eased the dollar, as did signs of improvement in overseas economies, including China’s reopening. But since last week’s strong jobs report, the $DXY is up nearly 3% and touching one-month highs above 103. The market seems to be pricing in the probability of higher interest rates for longer as tighter Fed policy tends to support the dollar.

The greenback and earnings: Before last Friday’s jobs data, many hoped the dollar’s turnaround in Q4 and its potential for more favorable currency comparisons going forward would boost earnings for many U.S. multinationals. Now that could be in question. Among the S&P sectors, info tech—with 59% of revenue coming from overseas—is the most dollar-sensitive, followed by materials with 54% international revenue and consumer staples with 44%. Other sectors with heavy overseas exposure include communication services and energy. Utilities, real estate, and financials are best insulated from the dollar’s climb. If the dollar strength continues, the January rally that lifted info tech and communication services stocks will likely get harder to extend. Also, international and emerging market stocks rallied in January, something that could brake if the dollar strength lasts. The 200-day moving average for the $DXY is 106.39, worth watching on any continued rally.

Better job market, better GDP: More people employed usually means more people spending money, translating to a faster-growing economy. The Atlanta Fed’s GDPNow indicator jumped from the previous 0.7% to 2.1% for expected Q1 Gross Domestic Product (GDP) growth. In raising the estimate, the Atlanta Fed cited several recent data providers, most notably the U.S. Bureau of Labor Statistics (BLS), which released last Friday’s blowout January jobs report. However, some analysts began questioning Friday’s jobs data, noting that it may ultimately need to be revised downward as it may have overcounted. January’s warm weather also may have played a role in boosting jobs growth that month, especially as companies in leisure and hospitality tried to bounce back from a severe cold stretch in December that caused disruption. If that’s the case, the number might not change but also wouldn’t be the start of a new trend in an economic metric that had been slowly heading downward. Watch the February Nonfarm Payrolls report, due March 10, for any possible BLS revisions to the January number of 517,000.

Notable calendar items

Feb. 9: Weekly Initial Jobless Claims and expected earnings from AbbVie (ABBV), AstraZeneca (AZN), Baxter (BAX), and PepsiCo (PEP)

Feb. 10: University of Michigan Consumer Sentiment for February 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)

Feb. 15: January Retail Sales, January Capacity Utilization and Industrial Production, and expected earnings from Biogen (BIIB) and Kraft Heinz (KHC)

Feb. 16: January Housing Starts and Building Permits, January Producer Price Index (PPI), and expected earnings from Entergy (ETR), Hasbro (HAS), and Hyatt Hotels (H)

Feb. 17: January Import and Export Prices, January Leading Indicators, and expected earnings from Deere (DE)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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