Inflation Spikes, Stocks Tackled: Latest Data Adds Fuel to Fears Fed Will Keep Rates Higher for Longer

(Friday market open) Wall Street received another hot read on January inflation this morning, and this time from the inflation meter most closely watched by the Federal Reserve. Stocks had already been lower in premarket trading before the data while Treasury yields climbed, and that pattern resumed once investors had the report in their hands.

Today’s data potentially adds fuel to the argument that the Fed will keep interest rates higher for longer. Odds of a 50-basis point rated hike in March climbed above 30% after the data, according to the CME FedWatch Tool. Higher rates tend to have the most negative impact on growth stocks, so it’s no surprise that the tech-heavy Nasdaq Composite ($COMP) is the laggard in premarket trading.

If you’re wondering where technical support might come in for the S&P 500® index (SPX), the 200-day moving average, now near 3,940, could be a useful barometer.

Just in

Personal Consumption Expenditures (PCE) prices rose 0.6% in January and core PCE prices also rose 0.6%, the Bureau of Economic Analysis said Friday.  Wall Street consensus was for headline PCE of 0.4%, up from a revised 0.2% in December, and core PCE of 0.4%, equal to a revised 0.4% in December.

Both of the December price figures were revised upward, another sign that investors might have been too sanguine about inflation earlier this year. The government recently delivered upward revisions of December consumer and producer prices as well.

Prices weren’t the only aspect of today’s data. Personal income in January rose 0.6%, while Personal Spending Rose 1.8%. Personal Income and Consumer Spending were expected to rise 1% and 1.4%, respectively, according to consensus.

Morning rush

• The 10-year Treasury note yield (TNX) rose 5 basis points to 3.93%.
• The U.S. Dollar Index ($DXY) jumped above 105 for the first time since early January.
• Cboe Volatility Index® (VIX) futures rose to 22.36, but remained below this week’s peaks.
• WTI Crude Oil (/CL) was nearly unchanged at $75.48 per barrel.

The 10-year yield flirted with 4% earlier this week and might do so again today, the way things are looking. It hasn’t been above 4% since November 10.

Eye on the Fed

The Federal Open Market Committee (FOMC) meeting minutes released earlier this week didn’t offer much to please the bulls. Even so, the minutes apparently didn’t scare investors into thinking things could get much worse, judging by a slight pullback in Treasury yields over the last day or two and a drop in volatility. Those developments helped clear the way for yesterday’s positive results on Wall Street after stocks got pinned down by rate worries earlier in the week.

Easing yields came despite rising probabilities of a 50-basis-point Fed rate hike next month. Chances are now 33%, according to the CME FedWatch Tool, up from 15% a week ago and virtually nil a month ago. One idea is that such a move wouldn’t necessarily be so bad, kind of like taking a full dose of medicine rather than dividing it into smaller spoonfuls and dreading each one. Still, most analysts expect another 25-basis-point hike at the March 21 – 22 meeting, followed by another of the same size in May.

Stocks in spotlight

Warner Brothers Discovery (WBD):The mass media and entertainment conglomerate had a tough 2022 as streaming competition intensified. Challenges apparently continued in Q4, with WBD posting revenue that missed analysts’ expectations. Shares fell 2% in premarket trading. However, company leadership sounded positive in its earnings press release, and earnings per share (EPS) met Wall Street’s estimates. A Harry Potter-associated game WBD recently released is off to a strong start, the company reported. Maybe this will help slow WBD’s loss of house points.

Boeing (BA): Just when BA seemed to be emerging from its pandemic- and 737 Max-related slump, the company’s shares came under pressure early Friday as BA temporarily halted deliveries of its 787 Dreamliners jets. The stock fell 3% in premarket trading as the U.S. jet maker comes under Federal Aviation Administration scrutiny over a fuselage component, Reuters reported. BA said it discovered a supplier error related to the forward pressure bulkhead on the planes. The supplier, Spirit AeroSystems (SPR), said in a statement that it’s too early to assert there was an error on their part. Whoever’s fault it might be, the problem comes at an awkward time, considering just two months ago United Airlines (UAL) announced it was buying 100 Dreamliners with the option to purchase 100 more. After the 737 Max issue, BA is under more pressure than ever to satisfy its airline customers.

Beyond Meat (BYND): This stock was the talk of Wall Street back in 2019 when shares briefly soared to $250. It hasn’t delivered investors much protein in the years since, but it’s up 12% in the premarket today to nearly $20 after sales beat expectations and losses narrowed in Q4. Sales still declined year over year but guidance was better than feared, Barron’s reported. The company’s been hurt by inflation, which has sent consumers scurrying toward cheaper meat products.

Netflix (NFLX): When Tesla (TSLA) announced product price cuts in mid-January, investors barely blinked and the stock’s rally didn’t hit the brakes. This was not the case for NFLX. When the company announced a subscription price drop Thursday, shares dropped too, around 4%. Subscription streaming and buying a $50,000 car are very different things, of course, but one reason NFLX shares slumped while TSLA’s kept climbing could be margin- related. Generally, analysts felt TSLA was competitively positioned to cut prices and still deliver decent profits. Judging from the NFLX share losses yesterday, there may be some doubt whether Netflix can do the same.

What to watch

Moving on up? January Existing Home Sales were a disappointment earlier this week, though homebuilder Toll Brothers (TOL) followed with a strong earnings report expressing optimism about the market. Will January New Home Sales due shortly after the opening bell today paint a different picture? There was a nice boost in December as mortgage rates fell. In January, rates crept up again, but the strong labor market and what appears to be continued solid demand for higher-end homes could influence January’s data. Analysts expect a small rise from December’s seasonally adjusted 616,000.

Consumer sentiment: The final February University of Michigan Consumer Sentiment Index comes out shortly after the bell today too. Judging from the solid labor market and soaring retail sales, it wouldn’t be surprising to see the final February number at least match the preliminary one. Wall Street’s consensus is 66.6. As always, keep an eye on the report’s inflation expectations for the year ahead. In a disappointing preview, many consumer-oriented stocks lost ground Thursday, including Domino’s (DPZ), Dollar General (DG), and Wayfair (W). Weak company forecasts continue to dog many retail firms so far this earnings season.

Market minutes

Here’s how the major indexes performed Thursday:

• The Dow Jones Industrial Average® ($DJI) rose 108 points, or 0.33%, to 33,153.
• The $COMP climbed 0.72% to 11,590.
• The Russell 2000® (RUT) gained 0.71% to 1,908.
• The SPX increased 21 points, or 0.53%, to 4,012.

A popular cartoon mouse once considered it his job to save the day. Thursday’s market rescue squad was led by chip market giant Nvidia (NVDA), which helped power the entire info tech sector and $COMP higher with its solid earnings and outlook. The $COMP enjoyed a second-straight day of gains as the SPX saw its four-day slide arrested.

Semiconductor stocks led the way, skiing in NVDA’s wake. Micron (MU), Advanced Micro Devices (AMD), Texas Instruments (TXN), and Intel (INTC) all posted nice gains.

The chip market strength carried info tech into first place on the sector scorecard Thursday, but interestingly it didn’t translate to some mega-tech companies like Alphabet (GOOGL), Cisco (CSCO), and Apple (AAPL). For a real tech rally to lift off, mega caps probably need to participate.

Energy and real estate took silver and bronze Thursday, each responding to some positive industry fundamentals. The slight pullback in Treasury yields likely supported real estate, which has been under pressure the last month as mortgage rates rebounded from early 2023 lows.

Energy has been the worst-performing market sector since late January amid rising crude stock levels and a massive sell-off in natural gas futures. Thursday saw a bit of recovery in crude and natural gas prices, leading to talk that perhaps natural gas might be bottoming. Still, companies with natural gas exposure like Kinder Morgan (KMI) and ConocoPhillips (COP) have seen their stocks struggle since late January.

Talking technicals: Thursday’s action was constructive from a technical perspective. The SPX fell below 4,000 during the session, descending at midday to more than 20 points below its 50-day moving average near 3,980. It was all uphill after that as the index regained 4,000 after finishing below that big round number after two straight days, potentially setting up a follow-through scenario early today.

CHART OF THE DAY: CROSSING A LINE. The S&P 500 index (SPX—candlesticks) managed to climb back above 4,000 late Thursday after falling below its 50-day moving average (red line) near 3,980 earlier in the session. The 100-day moving average (blue line) is another chart point worth watching. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Full steam ahead on data: Recent U.S. economic data indicate continued growth, something that’s not expected to change with the coming batch of reports, according to research firm CFRA. The firm expects improvements to show up in the numbers due early next week, including Chicago PMI, Consumer Confidence, and Pending Home Sales. Durable Goods Orders might be the exception, CFRA said, but may climb slightly by stripping out transportation. As next week continues, the critical report to check is the February Manufacturing Index from the Institute for Supply Management (ISM), due March 1. The last three ISM reads showed U.S. manufacturing contracting. With much of the recent economic strength reflecting services rather than goods, did manufacturing continue to lag this month?

Margin call: The U.S. economy charges along at full speed, but earnings are in the ditch. CFRA now sees Q4 S&P 500 EPS falling 3.4%, followed by a 5.3% dip in Q1 and a 5.4% decline in Q2. This gets back to the “earnings recession” theme mentioned by Charles Schwab Senior Investment Strategist Kevin Gordon earlier this week in an interview on the TD Ameritrade Network. Gordon’s focused on company margins and believes some analysts remain too optimistic. “Consensus still expects a pick-up in margins,” Gordon said. “I’m not sure if that’s the case if the labor market stays tight and revenue continues to slow.”

Homework time: Earnings weakness tends to make life tougher for anyone contemplating an investment. Though there’s no guarantee, it’s often less difficult to invest during strong earnings periods because earnings drive stocks. If profits rise across a broad base of sectors, the market tends to go up, though the correlation doesn’t always work. When earnings decline, it puts pressure on investors to get more granular and find companies better equipped to buck the trend. If you watch the major financial networks, you might’ve heard analysts saying recently that it’s more of a “stock picker’s market,” meaning individual stock performance is likely to be less correlated with the performance of major indexes like the SPX. If that’s the case, the “dartboard” approach likely won’t work. If you’re considering investing in individual stocks or a certain sector, you’re going to have to do more than your usual homework to explain to yourself why that stock or sector can thrive in an environment where overall earnings declines are widespread. It could be lack of competition or a new and exciting product. Maybe it’s a great management team with a track record of weathering storms. Or maybe it’s an industry that’s gaining acceptance and generating excitement among businesses and consumers. As always, know why you’re investing before you buy and have a plan.

Calendar

Feb. 27: January Durable Goods Orders and Pending Home Sales

Feb. 28: February Chicago PMI, February Consumer Confidence, and expected earnings from Target (TGT), Ross Stores (ROST), and HP (HPQ)

March 1: February ISM Manufacturing Index, January Construction Spending, and expected earnings from Kohl’s (KSS) and Lowe’s (LOW)

March 2: Preliminary Q4 Productivity and expected earnings from Anheuser-Busch (BUD), Best Buy (BBY), Kroger (KR), and Macy’s (M)

March 3: January ISM Non-Manufacturing Index

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

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