Will a More Dovish or Hawkish Powell Show Up Today After Friday's Hot Jobs Report?

(Tuesday Market Open) Last week, Federal Reserve Chairman Jerome Powell let loose the doves. Now, following Friday’s dramatically bullish January jobs data, today’s scheduled comments from the Fed chief and other central bank speakers could indicate whether the hawks are back in charge.

Early today, for instance, Minneapolis Fed President Neel Kashkari said the Fed hasn’t made enough progress and that the target rate may need to rise as high as 5.4% from the current target range of 4.5% to 4.75% to beat inflation.

The same tone might be what to expect at 12:40 p.m. ET today when Powell takes the mic again. Stock index futures were mixed early Tuesday after surrendering a host of their gains the last two sessions as bond yields rose amid growing worries about a stricter and longer-lasting Fed approach.

This week is a little thin on data, putting the spotlight on today’s December Trade Balance report. It showed the U.S. trade balance widening to -$67.4 billion from a revised -$61 billion in November as exports fell and imports increased.

Morning rush

• The 10-year Treasury yield (TNX) is flat near 3.63%, still up sharply from lows below 3.4% last week.
• The U.S. Dollar Index ($DXY) traded at 103.7, the highest in a month.
• Cboe Volatility Index® (VIX) futures stayed in recent territory at 19.47.
• WTI Crude Oil (/CL) has climbed sharply this week to $75.49 per barrel.

Yesterday’s plunge in Treasuries lifted the 10-year Treasury yield above its 50-day moving average. It remains in a longer-term range between roughly 3.4% and 3.8%.

Up next

Powell Talk: Federal Reserve Chairman Jerome Powell spoke less than a week ago, but many think last Friday’s hot jobs report could reset the Fed’s conversation on rates, recession, and potentially much more. Powell will probably get asked about the jobs data today at a 12:40 p.m. ET event in Washington. If so, every word of his response is likely to come under Wall Street’s microscope.

Friday’s Nonfarm Payrolls report showed nearly three times the January job creation analysts had expected. Since then, Treasury yields have spiked to nearly one-month highs and stocks have continued to backtrack. The dollar’s recent rally also accelerated, all hallmarks of what can happen when investors get nervous about Fed hawkishness. Just a week ago, things had been moving the opposite way amid ideas the Fed might step back and let prevailing looser financial conditions prevail.

The question is whether Powell wants to rock the boat so soon after last Wednesday’s rate announcement. He caught investors’ attention with references to “disinflation” in parts of the economy even as he promised more rate hikes. Don’t be surprised if Powell’s appearance today—billed as a “conversation,” not a speech—doesn’t yield the major news people might expect. However, other Fed speakers will be making public remarks Wednesday and Friday. Powell won’t have the final word.

Disney earnings: Powell today, the house of mouse tomorrow. The entertainment and media company is expected to report after Wednesday’s close, representing this week’s earnings benchmark.

This is the first chance for CEO Robert Iger to face analysts and investors since resuming his old job late last year. He faces a big test, The New York Times reported yesterday, with questions about possible cost-cutting and layoffs overhanging the company, an activist investor making noise, and continued pressure on DIS’s traditional cable business as more viewers cut cords.

DIS and competitors continue to lose money on both traditional cable and streaming, although streaming losses are moderating. DIS has said its Disney+ streaming business will turn a profit by this autumn. But the Times noted that was a promise made by Iger’s fired predecessor Bob Chapek. Will DIS back off from that prediction with Iger at the helm? More answers could come tomorrow.

Besides that, investors worry about declining profit margins at theme parks, though big crowds over the holidays might’ve eased those fears. Business on the big screen seems better too, and with many Americans traveling, at least according to the airlines, perhaps the resort business will continue recovering from COVID-19.

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

More earnings nuggets

With just more than 50% of S&P companies now finished reporting Q4 earnings, a few trends stand out, according to the Schwab Center for Financial Research:

• Only about 70% of companies have beaten analysts’ earnings per share (EPS) estimates. That’s down from the average of 80% over the last several years.
• Just 50% of companies have beaten the Street’s revenue estimates. That’s well below the five-year average of 69%.
• Positive earnings “surprises” are averaging only 1% to 2% above analyst estimates, well below normal levels and a sign that even companies beating estimates aren’t beating by a lot. Meanwhile, the companies missing estimates have tended to miss dramatically.
• Though overall blended Q4 EPS (which includes companies already reporting and estimates for those remaining) is down 2.8%; however, the actual drop would be 7% if you stripped out the energy sector. Energy earnings look strong, up 59% to 60%.
• The weakest Q4 sectors for earnings have been communication services (down 27% in EPS year over year) and materials (down 20% year over year). Info tech is down 10%. However, all those sectors faced tough comparisons with the year-earlier quarter. Comparisons should get easier as we head into 2023 calendar-year earnings.

For more insight on a “chilly” earnings season so far, read the latest from Charles Schwab Chief Market Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.

Reviewing the market minutes

Major indexes closed lower for the second straight session Monday, shaken up by climbing Treasury yields, a stronger dollar, and possible profit-taking after the dizzy January rally.

The S&P 500® index (SPX) managed to close above 4,100 after dropping below that level during intraday trading, possibly a constructive technical development. The 4,100 level had marked significant technical resistance for months before the SPX climbed above it last week. It likely remains key support.

Monday saw a shift from the previous week. Instead of growth sectors like info tech and communications services lifting the Nasdaq Composite® ($COMP) while the Dow Jones Industrial Average® ($DJI) lagged, the $DJI enjoyed the best performance, and $COMP had one of the worst. January saw many investors covering short positions in growth sectors or entering new longs there. That’s died down the last day or two amid higher interest rate concerns.

Staples stocks like Clorox (CLX), PepsiCo (PEP), and Kraft Heinz (KHC) that mostly missed January’s rally performed better recently, while mega-cap tech stocks dipped, hurt in part by last week’s disappointing earnings. PEP is expected to report this week, and KHC is next week, providing insight into consumer spending.

Here’s how the major indexes performed Monday:

• The $DJI fell 35 points, or 0.1%, to 33,891.
• The $COMP slid 1% to 11,887.
• The Russell 2000® (RUT) dropped 1.4% to 1,957.
• The SPX slipped 25 points, or 0.61%, to 4,111.

Three Things to Watch

Employment and GDP: Last week’s jobs data might have some experts  rethinking their U.S. 2023 Gross Domestic Product (GDP) forecasts. While it’s important not to overemphasize the impact of one report, Friday’s data were so far above analysts’ forecasts, perhaps they could indicate a problem with some of the long-accepted market wisdom about a slowing economy and falling earnings. The Atlanta Fed’s GDPNow meter, last updated February 1, predicted Q1 GDP growth of just 0.7%. The indicator is due for a refresh today, and it’ll be interesting to see how the jobs report factors into it. Generally, analysts had forecast GDP to grow in Q1 before going flat or even falling the rest of the year. The Conference Board last month forecast U.S. 2023 GDP growth of just 0.2%, rebounding slightly to 1.7% in 2024. If analysts start expecting GDP to improve, could it eventually translate into better S&P earnings performance than many had forecast? That possibility can’t be overlooked. However, we’d also need better data from other reports, including those ahead  later this month like Retail Sales and University of Michigan Consumer Sentiment, which sagged recently.

So much for pausing: In light of the jobs report, many analysts who’d predicted a pause in Fed rate hikes changed their minds. This includes CFRA, which now predicts not one, but two rate hikes of 25 basis points to ultimately raise the Federal funds target midpoint to 5.13%. The firm had previously predicted a pause in hikes after March. Overall, the jobs report appears to have nudged futures traders more toward the Fed’s line of thinking on future rate hikes. Until Friday, there was a large gap in the Fed’s rate hike projections versus the market’s because investors remained far more optimistic the Fed could avoid going above 5%. By midday Monday, the CME FedWatch Tool showed the market now firmly in the Fed’s camp, penciling in more than an 80% probability of rates rising above 5% by midsummer. That compares with less than a 40% chance a week ago. Where do investors still differ with the Fed? On their end-of-the-year rate outlook, FedWatch showed a 75% chance that the Fed will have rates below 5% by December. CFRA, for instance, predicts a Q4 cut. Powell said last week not to expect rate cuts this year. The jury is still out.

Transport tailwind? Crude oil supplies have been up each week since mid-December and recently climbed back above the five-year average for this time of year at 452.7 million barrels. That’s up from 415 million a year ago, and the most in storage at any time since June 2021. Having above-normal supplies this time of year in the traditional stock-building season bodes well for manageable prices this summer, which could be good news for airline and trucking companies as well as retail giants that send products by rail, ship, and truck. The wild card is China. Recent data show economic activity increasing there and in Southeast Asian economies that produce goods China uses. Recent factory orders data from Germany—a big trading partner of China’s—also bodes well. Inflation data expected later this week from China might be another chance to check how that economy’s doing—and what that might mean for global energy use.

Notable calendar items

Feb. 8: December Wholesale Inventories and expected earnings from Bunge (BG), Disney (DIS), 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

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)

 

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

 

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