A Feel-Good Mentality

Articles From: Briefing.com
Website: Briefing.com

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Chief Market Analyst

We surmised yesterday that the market could fight back against a hawkish-sounding Fed Chair Powell. That fight would be evident, we said, in a weakening dollar, a nonplussed Treasury market, and a more resilient stock market than one might expect to see.

Mr. Powell led off his press conference with an acclimation that the “Full effects of rapid tightening so far have yet to be felt and we have more work to do.” As he continued to talk, the dollar weakened noticeably, Treasury yields shot lower, and stock prices shot higher.

The irony is that those reactions had little to do with the market fighting back against the Fed Chair’s hawkish-sounding comments. Instead, they had everything to do with the conclusion that the Fed Chair did not fight back strongly against the stock market’s rally effort nor its expectation that the Fed will cut rates before the end of the year.

Granted he did say that rate cuts in 2023 would not be appropriate if economic conditions evolved in-line with the Fed’s expectations, yet he tempered that view with the acknowledgment that, if the Fed sees inflation coming down much more quickly, it will play into the Fed’s policy setting (i.e., the Fed just might be compelled to cut rate before the end of the year).

Overall, the capital markets behaved as if they are confident in the idea that the Fed will be pausing its rate hikes soon and that a rate cut before the end of the year is not out of the question.

The 2-yr note yield sank to 4.11% (from 4.24%) and the 10-yr note yield dropped to 3.40% (from 3.49%). They are sitting at 4.05% and 3.36%, respectively, this morning.

That is one factor that has been supportive for the broader market. The primary factor this morning, though, is a 20% gain in Meta Platforms (META) following its earnings report, better-than-expected guidance, and announcement of a $40 billion share repurchase authorization.

That’s not a metaverse reaction either. It’s the real thing and it has fostered some nice gains in other mega-cap stocks, including Apple (AAPL)Alphabet (GOOG), and Amazon.com (AMZN), all of which report their earnings results after today’s close.

The strength there is manifesting itself in the Nasdaq 100 futures, which are up 242 points and are trading 2.0% above fair value, and in the S&P 500 futures, which are up 40 points and are trading 1.0% above fair value. The Dow Jones Industrial Average futures, though, are trailing behind. They are up 40 points and are trading 0.1% above fair value, weighed down by losses in Honeywell (HON) and Merck (MRK) following their earnings reports and guidance.

It isn’t all good then, yet there is certainly a feel-good mentality underpinning the broader market and this morning’s economic data is feeding into that.

Q4 productivity increased 3.0% (Briefing.com consensus 2.5%), as output increased 3.5% and hours worked increased 0.5%, following an upwardly revised 1.4% increase (from 0.8%) in the third quarter. Unit labor costs rose 1.1% (Briefing.com consensus 1.5%) following a downwardly revised 2.0% (from 2.4%) in the third quarter.

The key takeaway from the report is that the pickup in productivity helped tame unit labor costs, which is something the Fed will be pleased to see.

Separately, initial jobless claims for the week ending January 28 decreased by 3,000 to 183,000 (Briefing.com consensus 201,000), which is the lowest number of initial claims since April 2022. Continuing jobless claims for the week ending January 21 decreased by 11,000 to 1.655 million.

The key takeaway from the report is that the low level of initial claims is an encouraging signal for the labor market, which, in light of Fed Chair Powell’s comments yesterday, is not the scare factor for the market that it has been in the past. On the contrary, the default view for the market now is to perceive it as good portent for a soft landing.

The futures for the main indices all improved in the wake of this morning’s economic data. We would add, too, that there were no ruffled feathers after the Bank of England (BOE) and European Central Bank (ECB) earlier raised their key lending rates by 50 basis points, as expected.

Notably, the BOE vote was 7-2 and the two dissents favored no rate hike; meanwhile, the ECB directive indicated the Governing Council intends to raise interest rates by another 50 basis points at its next meeting in March.

The stock market has had a lot to process since yesterday’s FOMC decision. It is showing some processing power this morning, though, heartened by a belief that the outlook for the Fed’s monetary policy, and earnings, just might turn out better than feared.

How far it runs with that idea will hinge a lot on how comfortable it is trading at a premium valuation.

Originally Posted February 2, 2023 – A feel-good mentality

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