Testimony From Fed Chair Powell Prompts Jump In 10-Year Yield

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(Thursday Market Open) Investors gained some clarity on Wednesday after Federal Reserve Chair Jerome Powell testified before Congress that he could see the rate hike in March being just a quarter of a point. This shifts investor focus to the Russian invasion of Ukraine and potential solutions to the situation. Investors are also looking for data that may change minds at the Fed starting with tomorrow’s Employment Situation report.   

Chair Powell will continue his testimony before Congress today with the backdrop of more employment data. Before the open, the initial jobless claims revealed that fewer people filed for unemployment benefits. Analysts expected 226,000, but only 215,000 claims were filed. However, there was a sign of labor inflation because the unit labor costs came in at 0.9%, which was well above the forecasted number of 0.3%. Later this morning the ISM Non-Manufacturing PMI report will be released.

Overnight, crude futures shot up another 4.5% to trade above $116 per barrel. However, oil has turned around and was trading 3.4% lower before the open. Stocks aren’t getting much help from Europe, which has been down 3 of last 4 days. The European Stoxx 600 index, the London FTSE 100, and the German DAX were all lower before the U.S. markets opened.  

Before the bell, some retailers were making a bad show in earnings, starting with Best Buy (BBY) and Burlington (BURL) reporting misses on top and bottom line numbers. BJs Wholesale (BJ) beat on earnings but missed on revenue. However, BBY was rallying in premarket trading, climbing 6.5% based on a positive long-term outlook from the company. On the other hand, BURL fell nearly 10% before the bell, and BJ dropped nearly 13%.

After the market close on Wednesday, Snowflake (SNOW) reported that it missed on its earnings estimate despite exceeding revenue. To make matters worse, SNOW’s annual forecast came in below expectations, which prompted the stock to fall 24% in extended-hours trading. The company was able to double sales last year but projected 70% growth for the new fiscal year.

On Wednesday, Amazon (AMZN) announced that its closing some of its physical stores and all of its bookstores to focus on Amazon Fresh, Whole foods, Amazon Style stores, and its “Just Walk Out” technology.

Another major reorganization announcement came from Ford (F), which plans to separate its electric vehicle (EV) and legacy vehicle businesses. The separation will be mostly internal but it’s expected to allow the EV business to grow without being dragged down by the legacy combustible engine business. The legacy business will be known as Ford Blue going forward.

Stocks rallied on Wednesday as the S&P 500 (SPX) bounced off the 4,300 support level to close 1.86% higher. The Dow Jones Industrial Average ($DJI) bounced off its own level of support around 33,300. The Nasdaq Composite ($COMP) rallied from its 13,000 support level five days ago but still traded 1.62% higher on the day. The Cboe Market Volatility Index (VIX) had spiked up over 34 at the open but retraced just below 31 by the end of the day.

The 10-year Treasury yield (TNX) rallied on Wednesday as Chair Powell testified before the House Financial Services Committee, where he intimated that a quarter of a point hike was likely. The rally caused the TNX to recover its losses from Tuesday’s sell-off. Powell reassured the committee that the Fed will “proceed carefully.” The Fed must now walk another line of higher inflation and the threat of an economic slowdown that could accompany an escalation in Ukraine.

Commodity Cornered

The Fed isn’t getting much help on the inflation side of its mission because oil prices rose again on Wednesday. WTI crude oil futures climbed to $112 throughout the day but closed near $111 before the aforementioned rally overnight. The futures market appears to be still be expecting the spike in oil to be short term because oil prices are in backwardation, which means the current month futures contracts have higher prices than later months.

The Energy Information Administration’s (EIA) released its weekly report that showed a surprise decline in U.S. oil and gas inventories. Inventories could continue to decline if businesses keep refusing to buy oil from Russia. The government sanctions were meant to hit Russia nearly everywhere but commodities. However, the financial sanctions are making it harder for businesses to pay for Russian commodities, and many companies are choosing to just not do business with Russia because of the invasion.

OPEC+ (Organization of the Petroleum Exporting Countries plus its allies) met on Wednesday and agreed to gradually increase its production. Some analysts believe that OPEC+ could increase production to make up for the Russian shortfall, while others aren’t so sure. Some analysts believe that many OPEC+ members are already near their peak production. Many OPEC+ members are sympathetic to Russia and may see rising oil prices as a way to help Russia leverage their demands. Currently, the promise to increase production is just on paper.

RBOB gasoline futures shot up on Wednesday, climbing 8.42%, which is about 14% in the last two days. However, heating oil futures have moved the most, spiking 12.46% on Wednesday for a two-day rocket of about 22%. Other commodities that are closely related to Russia continue to rise as well. Palladium rose 5.09%, extending its three-day 13% rally. Wheat futures have dwarfed them all after breaking out seven days ago. Wheat rose 7.62%, extending its rally to 33%.

Outside of palladium, which is commonly used in auto manufacturing and jewelry, the rising prices in these commodities could literally hit people where they live because these are all used in day-to-day life. However, the Consumer Price Index (CPI) tends to discount food and fuel because they’re historically cyclical in nature. Therefore, the Bureau of Labor Statistics likes to focus on “core” inflation, which excludes food and fuel despite the fact these items are core budget items in every household. 

CHART OF THE DAY: RUSHIN’ COMMODITIES. In the last six months, RBOB gasoline futures (/RB—candlesticks) have grown more than 68%. WTI crude oil futures (/CL—pink) have risen 65%. Palladium futures have climbed nearly 50%. Wheat futures have risen nearly 30%. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Misery Index: The Misery Index ticked up to 11.48 in January from 10.94 in December. The Misery Index attempts to measure the struggle people are feeling by combining the unemployment rate and the inflation rate. In April 2020, the Misery Index jumped from 5.94 to 15.03 as the pandemic caused the unemployment rate to jump to around 14%. Since that time, unemployment has gotten better, but inflation has climbed, keeping the index high.

The unemployment rate for February will be released this Friday as part of the Employment Situation Report, while the inflation rate comes out March 10 when the CPI is released.

Sneak Peek: The ADP Nonfarm Employment report was released Wednesday morning, and hopefully, it’s a preview of Friday’s Employment Situation report. The ADP report showed more jobs than expected were added in February, and the January number was revised higher as well. Most jobs were added by medium and large companies, while small businesses were net negative. Leisure and hospitality were the top hiring industry groups once again. Trade, transportation, and utilities were the second-highest hirers.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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

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