(Thursday Market Open) Caution is napping for the moment. Yesterday’s Federal Reserve meeting and press conference seemed to fuel sweet dreams for investors hoping for a so-called “soft landing,” and sent major indexes to five-month highs. This morning, “fear” indicators like bond yields, the dollar, and the Cboe Volatility Index® (VIX) enjoyed a bit of hibernation. Let’s see how long it lasts.
After the Federal Open Market Committee (FOMC) raised its target rate by 25 basis points to between 4.5% and 4.75%, a new 15-year high, stocks and bonds went on a tear late Wednesday to close at five-month highs. For more reaction, check out our Fed market response column published yesterday afternoon.
Though yesterday’s Fed talk was peppered with cautionary language about the need for more hikes, the market pretty much ignored any hawkish phrasing. Instead, investors were cheered by Fed Chairman Jerome Powell’s mention of the word “disinflation” to describe what he sees happening in some segments of the economy, and by the fact that the Fed and Powell don’t seem overly concerned about recent loosening financial conditions.
Going into the meeting, some market participants had worried the Fed might want to caution against any ease in borrowing costs across the economy, but that didn’t really happen.
The Bank of England BOE then raised rates by an expected 50 basis points this morning but added that it sees a “much shallower” recession than it had considered. The European Central Bank (ECB) followed up with a 50-point increase of its own a bit later in the morning. Bond yields fell both in the United States and Europe after the news, while European stock indexes tilted higher.
As central bank meetings now fade in the rear-view mirror, attention turns to tech earnings after today’s close. Apple AAPL, Amazon AMZN, and Alphabet GOOGL open their books this afternoon (more below).
It all builds up to tomorrow’s premarket highlight, the January Nonfarm Payrolls report. Will it show job growth continuing to slow? More importantly, after a government report earlier this week showed a smaller than expected rise in employment costs, will tomorrow’s payrolls report confirm or refute that? We’ve got more detail below.
- The 10-year Treasury yield (TNX) fell one basis point to 3.38% and is near recent lows.
- The U.S. Dollar Index ($DXY) trades at 101.18 after falling below 101 earlier.
- Cboe Volatility Index® (VIX) futures fell to 17.52. That’s a nearly 13-month low.
- WTI Crude Oil (/CL) recently traded at $76.25 per barrel, down for the day and well below recent highs above $80.
Weekly initial jobless claims just keep falling, this time to 183,000. That’s well below the 201,000 analysts had expected and speaks to a still-tight job market despite all these big layoffs in the news.
Tomorrow morning’s January Nonfarm Payrolls report wraps up a week to remember. While the headline data could grab initial headlines, keep wages in mind too (more below).
As a reminder, consensus on Wall Street is for January jobs growth of 190,000, according to Briefing.com. Analysts expect the unemployment rate to tick up just slightly from 3.5% to 3.6%.
As always, remember to check labor force participation, which ticked up from 62.2% to 62.3% in December but remains near historic lows. The Fed would probably like to see that go up to help tighten the job market and potentially help keep wage pressure in check.
Another thing to monitor is where job growth and losses took place in January. As a reminder, December’s report saw decent increases across a variety of sectors, led by service providers. Goods-producing payrolls rose, but manufacturing came in a bit weak with just 8,000 jobs added. Construction looked strong with 28,000 new jobs in December. These two categories are worth watching tomorrow. Did they level off or go into the red? Recent soft manufacturing data hint at the latter.
For a full rundown on what to expect from this afternoon’s mega-cap reporting parade, read our Info Tech Q4 earnings preview. But here are a few quick nuggets.
Expected Q4 EPS (analysts’ consensus): $1.95
Year-ago EPS: $2.12
Expected year-over-year EPS change: –8%
Expected Q4 revenue (analysts’ consensus): $122.05 billion
Year-ago revenue: $123.94 billion
AAPL shares had a banner day the last time it reported in October, rising nearly 8% to above $155. Strong Mac sales, among other things, helped the mega-cap iPhone maker outpace Wall Street’s quarterly EPS and revenue expectations.
In the background lurked some less cheery tidings, including quarterly demand that was slower than expected for iPhones, iPads, and services.
AAPL shares are off their recent 52-week lows, but investors may need a healthier performance from iPhones and services when AAPL reports if they’re going to stay enthusiastic about the stock.
AAPL doesn’t provide much in the way of guidance, making it hard to know quite what to expect when the company opens its books this afternoon. There is concern, however, about COVID-19 issues in China during the most recent quarter. Some analysts believe rising cases could’ve negatively affected iPhone production. Lower iPhone shipments, however, could be balanced slightly by higher-than-average selling prices.
Expected Q4 EPS (analysts’ consensus): $1.18
Year-ago EPS: $1.53
Expected year-over-year EPS change: –23%
Expected Q4 revenue (analysts’ consensus): $76.54 billion
Year-ago revenue: $75.33 billion
GOOGL approaches earnings with shares up sharply so far this year but still down dramatically from year-ago levels. More than most tech stocks, GOOGL relies on advertising to fuel progress, and the online ad space just hasn’t been firing on all cylinders lately.
Ad spending in the tech and media sectors slowed dramatically in 2022, media and tech research firm MoffettNathanson recently told The Atlantic. By the end of the holidays, there was “hardly any money being spent at all,” the research firm said. This advertising dip is coming on stronger and faster than the overall economic slowdown. Perhaps that could explain why tech’s been so aggressive in laying off employees lately, while the rest of the labor market seems healthy.
GOOGL’s earnings call could be one occasion when investors hear the latest on ad spending and whether it can revive in 2023. The previous quarter, investors couldn’t find much solace in GOOGL’s results as the tech giant missed Wall Street’s earnings and revenue estimates amid slower-than-expected growth in advertising and Google Cloud revenue. YouTube ad revenue in particular came up short of analysts’ expectations.
Microsoft (MSFT), which reported last week, had a strong quarter in its cloud business, which perhaps bodes well for that aspect of GOOGL’s quarter. However, MSFT’s guidance for the cloud space disappointed investors, so it’ll be interesting to see if GOOGL also sees slower growth ahead.
Expected Q4 EPS (analysts’ consensus): $0.18
Year-ago EPS: $1.39
Expected year-over-year EPS change: –87%
Expected Q4 revenue (analysts’ consensus): $145.4 billion
Year-ago revenue: $137.4 billion
No one has a bigger cloud business than AMZN, putting it in the spotlight Thursday following MSFT’s mixed forecast for that market. As MSFT CEO Satya Nadella said during last week’s earnings call, customers who “accelerated” their digital spend during the pandemic are now starting to “optimize” it. That’s a nice way of saying they’re exercising caution in what appears to be a slowing global economy. That’s bad news for MSFT—and potentially for AMZN.
After reporting Q3 earnings, AMZN saw shares plummet 13%, mostly due to its bearish Q4 forecast. Amazon Web Services (the company’s cloud business) revenue in Q3 came in below the Street’s expectations. The company said it expected total Q4 revenue of between $140 billion and $148 billion, while analysts expected $155.15 billion, according to Refinitiv.
AMZN shares went on to forge a new 52-week low in early January, and the company announced layoffs of 18,000, with Forbes reporting that most of the cuts are expected in departments like devices, retail, and human resources. That’s about 6% of the company’s workforce.
To make matters more worrisome, the latest U.S. government data on December Retail Sales disappointed Wall Street, implying a dismal holiday shopping season. We’ll find out more when AMZN reports Thursday on how or whether this had an impact on the retail aspect of its business.
Just yesterday we noted that few reporting companies had announced fresh buyback plans. Could it be a sign that Washington’s new 1% tax on this instrument was working? Then came Meta’s (META) earnings report Wednesday afternoon. The social media company’s earnings weren’t brilliant, but shares catapulted to 18% gains in premarket trading after META announced its authorization of a new $40 billion buyback plan.
To be fair, META’s gains arguably weren’t only due to the buyback announcement. They also might be a response to the company’s cost cuts, which it emphasized in its release. Also, Q4 revenue came in above Wall Street’s consensus even if earnings per share (EPS) was a miss. META also forecast Q1 revenue that was in line with Wall Street’s thinking.
Rechecking the Fed’s flight plan
The Fed’s 25-basis-point rate hike yesterday, while not unexpected, came even as signs of economic contraction continued. The latest job cuts came from FedEx FDX, following previous layoff announcements from PayPal PYPL, 3M MMM, and Dow Chemical (INDEXDJX: .DJI) over the last week or so.
The takeaway is that job losses aren’t just an info tech and financials sector issue. They’re moving into consumer discretionary and manufacturing too. If layoffs keep coming and spread to additional industries, it could reignite fears that the Fed is overtightening and sending the economy into recession. This also puts more importance on tomorrow’s jobs growth number following a disappointing January job tally from payroll provider ADP on Wednesday.
Perhaps consider what an RBC analyst said in a research note earlier this week: “Industrial layoffs tend to spike in recessions.” We’ll get more Fed economic outlook insight at its March 21 – 22 meeting when it releases updated projections.
Reviewing the Market Minutes
Judging by the market’s reaction to the rate hike and Fed Chairman Jerome Powell’s press conference after the decision, the market wasn’t too worried about recession late Wednesday.
Stocks initially extended losses after the decision, while Treasury yields rose. Then things reversed course, and the major indexes gained, while yields fell, suggesting investors might be hoping the peak of the rate-hike cycle is approaching. The S&P 500® index (SPX) closed above 4,100 for the first time since late August and above the peak close of its November – December rally, possibly a meaningful and positive technical development.
Semiconductors were on a roll late yesterday, demonstrated by a 5% gain in the PHLX Semiconductor Index (SOX). Advanced Micro Devices (AMD) rose 12%, and Nvidia (NVDA) rose 7%. Even shares of beleaguered Intel (INTC) posted nearly 3% gains. Signs of manufacturing strength in Southeast Asia might’ve provided at least part of the tailwind for chips because it increased hopes that China’s reopening could raise demand there.
With the exception of AAPL, which has lagged lately, mega-cap tech stocks also acquitted themselves well on Wednesday. Shares of Tesla (TSLA), AMZN, and MSFT had some wind in their sails.
Technically, it was a very solid performance on the charts for all the major indexes, especially the SPX, as mentioned above. Some of this technical strength has a chance to spill into trading in coming days, but don’t be surprised if some profit-taking creeps in today ahead of all the earnings and jobs news straight ahead.
Here’s how the major indexes performed Wednesday:
- The Dow Jones Industrial Average® ($DJI) closed 7 points higher at 34,092.
- The Nasdaq Composite® ($COMP) rose 2% to 11,816.
- The Russell 2000® (RUT) increased 1.36% to 1,958.
- The SPX climbed 42.6 points, or 1.05%, to 4,119; the highest close since August 25.
Three Things to Watch
About that raise … Friday’s January Nonfarm Payrolls report brings more than just the job count. Most notably, it provides a look into the wage picture, which a recent Wall Street Journal report said the Fed is most worried about in terms of what could keep driving inflation. In December, average hourly earnings moderated to 4.65% year over year from 4.8% in November. Consensus for Friday is that earnings will rise 0.3% month over month, equal to the December sequential rise. But keep an eye on the year-over-year data. If it continues to ease, that might also ease minds at the Fed.
Speaking of pay: The Bureau of Labor Statistic’s Employment Cost Index got a turn in the spotlight earlier this week, shifting discussion to a report that’s often overlooked. The data, which showed employment costs for civilian workers up 1% in the three months that ended in December, was slightly below Wall Street’s consensus of 1.1% and the previous reading of 1.2%, a sign costs are easing for companies. The market reacted positively, with Treasury yields falling on hopes the report might hint at easing inflation. It’s one of those data points that doesn’t really matter until it does. The market wants the Fed to get the sense that inflationary pressures are abating and that things are starting to slow down. That is what this report would indicate.
Crushed boxes: We’ve been hearing plenty about December’s disappointing retail sales numbers and consumers across the income spectrum watching their spending power dry up. Less buying means fewer boxes, according to the American Forest & Paper Association and Fibre Box Association. The industry associations reported over the weekend that cardboard box demand in Q4 slid 8.4% to the lowest level since 2009—in the midst of the Great Recession. That should put FedEx’s news Wednesday of a 10% job cut in its senior-level ranks in some perspective—seems fewer boxes can lead to fewer bosses.
Notable calendar items
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)
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
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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