Textbook Company’s Results Show Students Are Hitting The Job Market Instead Of The Books - Alibaba Gr Hldgs (NYSE:BABA), Brookfield Asset Mgmt (NYSE:BAM)

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(Thursday Market Open) Stock index futures were headed lower before today’s opening bell as investors parsed Federal Reserve Chairman Jerome Powell’s comments, especially the possibility that a future 75-basis-point rate hike may be off the table.

CME FedWatch is now pointing to a 50-basis point hike in June, which implies the market is already pricing this in—and now, it’s time to wait for inflation signals confirmed by next Wednesday’s Consumer Price Index (CPI) data.

Potential Market Movers

The Cboe Volatility Index (VIX) hovered around 26 before the market open indicating that investors might find more upside in today’s market as they digest Tuesday’s 932-point rally on the Dow Jones Industrial Average ($DJI) after the Fed rate hike and Powell’s balance sheet comments. But readings in the mid-20s don’t mean we’re out of the woods quite yet.

Europe apparently doesn’t think so either, as Bank of England raised their key interest rate 25 basis points this morning to a 13-year high with a prediction that it sees inflation hitting 10% this year. At midday, the London FTSE index was up 1.57% at midday.

Also, supply chain and COVID-19 disruptions appear far from over in China as the nation has reaffirmed their zero-COVID commitment. This indicates that a return to normal for Chinese business and manufacturing is still distant as Hong Kong retail sales plunged and the China Composite PMI dropped significantly to 37.2.

Near the open, the S&P 500 futures were down 0.62%, Dow Jones fell 0.48% and the Nasdaq lost 0.69%.

Overnight, Shell (SHEL) announced its highest quarterly earnings since 2008 and raised its dividend 4% despite costs related to its wartime exit from Russia. Shell posted adjusted earnings of $9.1 billion in line with for the three months through to the end of March, beating analysts’ estimates. The oil giant’s shares were trading down fractionally before the open.

As summer approaches, the spotlight grows on the travel sector. Booking Holdings (BKNG), parent of Priceline and Booking.com, rose 7.7% in postmarket trading Wednesday after its first-quarter revenue and gross bookings beat estimates.

Etsy ETSY and eBay EBAY both fell in extended trading Wednesday despite better-than-expected results because both companies gave weaker guidance. The downward guidance suggests that e-commerce may be cooling as shoppers return to physical stores. Shares of eBay fell more than 6% in extended trading, while Etsy’s fell as much as 12%.

Reviewing the Market Minutes

Stocks appeared a bit listless ahead of the Fed announcement as the S&P 500 (SPX) bounced between the positive and the negative. The 10-year Treasury yield (TNX) crept 27 basis points higher ahead of the announcement. However, it all flipped soon after the announcement with yields falling and stocks experiencing a big rally.

The FOMC announcement came in as expected with the Fed raising the overnight rate 50 basis points. This was the first half-point hike in more than two decades. The vote for the rate hike was unanimous, which means the more hawkish Fed members like St. Louis Fed President James Bullard didn’t hold out for a bigger hike. However, further rates hikes are expected, and the CME FedWatch Tool is discounting a 74% probability of another half-point hike in June.

The Fed is also sticking with its plans to start selling Treasuries and mortgage-backed securities from its balance sheet. The Fed plans to start selling $47.5 billion in the first three months beginning in June with the goal to ramp up to $95 billion per month.

The Fed’s statement was carefully scripted to not sound too hawkish or too dovish by leaving plans open-ended and pointing out that rate hikes often take time to take effect. The Fed was also positive about the economy but recognized potential risks in the supply chain, particularly with China’s pandemic lockdowns.

CHART OF THE DAY: BOUNCE. The S&P 500 (SPX—candlesticks) fell below support three days ago but was able to rally back. Wednesday’s rally may be read as a support bounce by many technical analysts. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Trust Issues: During his press conference, Fed chairman Powell started by addressing the American people to let them know that he and his associates at the Fed are aware of the pain that comes with inflation and that the Fed will work to bring it down. Throughout the press conference, Powell emphasized the strong economy and tight labor conditions that should help workers gain better paying jobs and potential raises.

In his opening statement, Powell said that the Fed could continue to use additional 50-basis-point hikes. He later clarified his statement by saying the committee isn’t currently considering larger hikes. Last month, Mr. Bullard suggested that the Fed should consider 75-basis-point hikes.

A particularly pointed question came when Powell was asked if he felt that the Fed had a trust problem because many analysts have expressed concern about the Fed being behind the curve on inflation and because Powell opened the presser addressing the American people. However, Powell said he felt the Fed had a good track record and was able to maintain trust.

Flow of Funds: Interest rate risk is one risk bond investors must account for because rising bond yields makes their old bonds worth less if sold before maturity. So, it’s not uncommon to see investors sell out of bond investments in anticipation of rising rates. Looking at the Estimated Long-Term Mutual Funds Flows from the Investment Company Institute® (ICI), investors had a net reduction in bonds investments in December 2021. Each month, the total amount of net outflows has increased.

Often, when investors move out of bonds, they go into stocks. However, the ICI data is also recording net outflows in stocks as well. This means investors appear to be using their investment funds elsewhere. As far as investable assets, real estate and commodity markets have performed well, which could suggest investors are employing capital in these markets. Investors could also be in cash. A worse scenario is that investors are having to sell long-term investments to pay bills.

When investors feel that the Fed is near the end of its rate-hiking cycle, they’ll likely start moving back into bond investments to take advantage of the higher yields.

Back to School? Chegg CHGG, a textbook publisher and digital learning services provider, beat on earnings expectations earlier in the week, but shared weaker guidance that many students are delaying enrollment while taking advantage of a robust job market. The company’s shares lost 1.96% in premarket trading with a 20% loss over the past five trading sessions. So much for hitting the books.