Waiting for Powell: As Fed Meeting Starts, Investors Parse Mixed Q4 Earnings and Consider What's Next for Rates

(Tuesday Market Open) With three major central banks releasing rate decisions starting tomorrow, investors might be wise to expect subdued trading Tuesday following a sell-off to start the week. 

January’s last day is off to a soft start as investors brace for the Fed meeting and mull incoming earnings reports that suggest points of weakness in the economy, especially from Caterpillar (CAT) and United Parcel Services (UPS). More on that below.

The central bank action begins today with a two-day Federal Open Market Committee (FOMC) meeting where there’s a 99.1% probability of a quarter-point rate hike, according to the CME FedWatch Tool. That would put the target rate between 4.5% and 4.75%, a new 15-year high.

The Fed’s decision is due at 2 p.m. ET tomorrow, followed by Federal Reserve Chairman Jerome Powell’s press conference.

While an anticipated hike is basically baked in, the press conference could bring drama. Powell’s latest press briefings have been anything but soothing, as Wall Street quickly sagged when he spoke following the November and December FOMC meetings. For what to possibly expect from Powell, read more below.

The Bank of England (BoE) and European Central Bank (ECB) meet Thursday and both are expected to be even more aggressive with 50-basis-point hikes. The eurozone economy grew 0.1% sequentially in Q4, down from 0.3% the previous quarter, but better than the 0.1% contraction analysts had expected. On the other side of the globe, China’s Manufacturing PMI came in slightly higher than expectations for January. However, Chinese stocks, which started the year strong, lost ground.

Along with the meetings come earnings this week from key companies, including Apple AAPL, Amazon AMZN, Alphabet GOOGL, Meta META, Starbucks SBUX, Advanced Micro Devices AMD, and McDonald’s MCD. Then there’s the small matter of January’s jobs report Friday.

Morning rush

• The 10-year Treasury yield (TNX) slipped 3 basis points to just below 3.52%.
• The U.S. Dollar Index ($DXY) climbed to 102.47 and is now up for the fourth-straight day.
• Cboe Volatility Index® (VIX) futures continued their upward path, rising to 20.26.
• WTI Crude Oil (/CL) slid nearly 1% to $77.18 per barrel.

In data news this morning, Q4 employment costs came in below expectations month over month and, adjusted for inflation, fell year over year. That’s good news for inflation, but maybe bad for the health of the consumer if you’re worried about a recession hitting demand.

Just in

The earnings barrage started this morning with results from several dominant U.S. industrial, materials, and health firms.

General Motors GM: The automaker easily beat Wall Street’s earnings expectations, and exceeded consensus on revenue, too. Shares zoomed to nearly 5% gains in premarket trading. The company’s guidance also looked strong. Basically, a really nice report.

Caterpillar CAT: Earnings from the industrial giant disappointed, missing analysts’ consensus by $0.17. Revenue rose more than 20%, however, to beat the street’s estimates. That didn’t help shares, which fell 2.5% in premarket.

McDonald’s MCD: This morning’s menu suggests inflation-weary customers are flocking to MCD from higher-priced eating places. U.S. same-store sales rose more than 10% in the quarter, and global same-store sales rose nearly 13%. Those are excellent performances. MCD beat analysts’ revenue and EPS estimates, too, but the stock slipped more than 2% in premarket trading. The early weakness could reflect inflation worries, as MCD said short-term prices pressures remain.

ExxonMobil XOM: No surprises here. Analysts expected powerful earnings from the oil industry and that’s what they got. Earnings per share (EPS) came in $0.12 better than consensus and revenue beat Wall Steet’s forecast by $5 billion. However, so-called “upstream” earnings, referring to drilling activities, decreased from Q3 thanks in part to lower crude prices. Shares of XOM barely moved in premarket trading.

Pfizer PFE: The pharmaceutical company reported a decent quarter with revenue and EPS that beat Wall Street’s forecasts, but shares fell more than 2% in premarket trading as investors absorbed less healthy guidance. The company expects revenue from Paxlovid, its COVID-19 medication, to fall 58% in 2023 from 2022. It also expects a more than 60% drop in sales of its COVID-19 vaccine.

Spotify SPOT: Shares busted out to nearly 10% gains in premarket trading despite EPS missing Wall Street’s estimates. Investors appeared to be cheered by subscriber growth.

United Parcel Service UPS: The company delivered a mixed earnings report with EPS that slightly beat the street’s expectations and revenue that came up short in what appeared to be a weak holiday delivery season. Guidance also looked a bit disappointing, but shares rose slightly in premarket trading. The softer-than-expected Q4 revenue for UPS could be a harbinger of weaker retail earnings to come when the big stores report next month.

Numbers to know

99.1%: The probable odds of a Fed 25-basis-point rate hike Wednesday.

84%: The probable odds of another Fed 25-basis-point rate hike in March.

48%: Wall Street’s consensus for January’s Institute for Supply Management (ISM) Manufacturing Index, down from 48.4% in December, on Wednesday. Anything under 50% signals contraction.

20: The number of days since January 12, the last time a front-month WTI crude (/CL) futures contract traded lower than Tuesday morning’s low of just below $77 per barrel. Crude’s relative weakness could reflect strength in the dollar early this week as investors prepare for another Fed hike. Higher rates tend to support a stronger dollar, which in turn tends to keep crude prices in check.

4,015 and 4,000: Possible technical support levels for the S&P 500® index (SPX). It closed just above 4,015 on Monday after failing in an attempt at resistance of 4,100 on Friday.

Where could the Fed go next?

The main question at tomorrow’s Powell presser is likely to be when and whether the Fed chairman sees chances for a pause in rate hikes, given that nearly all recent inflation data show signs of easing.

There’s not much near-term optimism for a pause in the Fed’s hiking regimen, judging from FedWatch. It shows an 85% chance of another 25-basis-point rate hike in March to a range between 4.75% and 5%.

What comes after that? Fed officials are adamant that rates will then advance above 5% at some point this year. The market seems to be coming around a bit more to that idea lately, projecting 45% odds of rates above 5% by midyear. But a huge chunk of the market thinks that’ll never happen and that rates will finish the year below 5%. Perhaps even lower, implying not just the chance of a Fed pause but of Fed cuts as well.

Some of the recent market strength could reflect that thinking. Commentary from the Fed and several high-profile Wall Street CEOs keeps pushing against that theory, however. Clearly there needs to be reconciliation at some point that would harmonize those two perspectives.

What Powell says tomorrow could help provide clarity, and judging from his recent hawkish tendencies, it seems naïve to expect him to back down, especially given a Wall Street Journal report over the weekend about the Fed being concerned that tight labor markets could fuel further inflation.

Reviewing the market minutes

January is on its way out and looks like it’ll be one of the best months in a long time for stocks, but investors seemed to be taking profits ahead of so much earnings and Fed news.

The same sectors that led us higher most of the month sagged Monday. Energy, info tech, and communications services all stepped back while more defensive areas like staples and utilities had the best start to the week. That said, 10 of the 11 SPX sectors finished in the red.

One interesting development was a drop in Treasuries even as investors showed caution in their stock market trading. This felt like an echo of 2022 when there was no cover for investors in either equities or fixed income. However, yesterday’s yield rise was modest.

Here’s how the major indexes performed Monday:

• The Dow Jones Industrial Average® ($DJI) fell 261 points, or 0.77%, to 33,717.
• The Nasdaq Composite® ($COMP) fell 1.96% to 11,391.
• The Russell 2000® (RUT) dropped 1.35% to 1,885.
• The SPX fell 52 points, or 1.3%, to 4,017.

Thinking fixed? If you’re venturing into fixed income investing, you might want to check Charles Schwab’s latest suggestions about how to build a bond portfolio. For many investors, bonds are back thanks to the attractive yields they offer, but the Fed is still raising rates, and bond price swings are something to brace for, even in the highest-quality offerings.

CHART OF THE DAY:  DANCING ALONE? Last year, the Cboe Volatility Index (VIX—candlesticks) often hitches its fortunes to those of the 10-year Treasury yield (TNX—purple line), rising and falling as yields went up and down. That pattern changed dramatically in recent months, as this one-year chart shows, with the VIX hitting one-year lows last week, while the 10-year yield stalled at levels it’s been pivoting around since late November near 3.5%. Does the VIX need to rebound a bit to account for inflation and rate worries still reflected in yields? Data source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Layoffs and the consumer: Though last Friday’s December Personal Consumption Expenditures (PCE) data showed a drop in consumer spending, some leading stocks last week were consumer-oriented, including Tesla (TSLA) and American Express (AXP). Both companies cater to higher-end consumers, and AXP offered nice guidance last Friday, which bodes well for consumer spending among wealthier people who use that product. One worry, however, is that higher-income consumer spending might be clipped by all the recent info tech layoffs. Though tech jobs only make up about 2% of U.S. employment, they do tend to be better-paying positions, meaning people with such salaries might spend more on big-ticket items and now could be cutting back. This doesn’t apply only to those looking for work, but to employed high earners worried about their jobs. The news comes as data provider PYMNTS reported that 36% of consumers earning $250,000 or more now live paycheck to paycheck. This week’s earnings calls from consumer-facing companies like General Motors (GM), Amazon (AMZN), and MCD might be worth monitoring for a consumer health checkup.

Pricing power: Earnings from GM arrived today after GM said earlier this month it’s committed to “advancing an all-electric future” using its Ultium electric vehicle (EV) battery platform. GM recently increased the price of its Chevy Bolt electric following a $6,000 price drop last year, but Bolt remains one of the cheapest EVs on the market. GM and Ford (F)—with their vast dealer and production networks—could have the pole position to make EVs more affordable. F, which is expected to report Thursday, yesterday followed TSLA’s recent price drop announcement with plans to cut the sticker on its Mustang-Mach-E electric vehicle (EV). Investors will likely listen closely to GM and F’s earnings calls for commentary on what’s next for the EV-pricing environment. It’ll also be interesting to check Q4 Mach-E sales after F delivered 10,414 units in Q3.

EV adoption charging ahead: Bloomberg analysts expect overall EV adoption to rise at a slower pace this year than in the last two. Total EV sales rose to 10 million in 2022 from 3.3 million in 2020, Bloomberg said, and it anticipates 13.6 million EV passenger vehicle sales this year, with around 75% of those being fully electric. Commercial vehicles are used more intensely than passenger cars, so quicker commercial adoption could lead to outsized drops in emissions and oil demand, Bloomberg said. While passenger EVs remain front and center for U.S. automakers, commercial EVs are another major market. GM is taking a step into this segment with its BrightDrop van for logistics and delivery, but commercial EV remains dominated by overseas makers like AB Volvo, Daimler Trucks, and Dongfeng Motor Company, according to Allied Market Research.

Notable calendar items

Feb. 1: FOMC rate decision, December Construction Spending, January ISM Manufacturing, and expected earnings from Altria (MO), Meta (META), Peloton (PTON), and Waste Management (WM)

Feb. 2: December Factory Orders and expected earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL)

Feb. 3: January Nonfarm Payrolls and expected earnings from Sanofi (SNY) and Cigna (CI)

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)

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

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