Powell Talk: It's All About the Fed Chair's Comments Today, as 0.25% Rate Hike Baked In

(Wednesday Market Open) Today’s Federal Reserve rate decision comes just ahead of Groundhog Day. If the groundhog sees its shadow, it means another six weeks of winter, tradition tells us. If the Fed sees an inflation shadow still overhanging the economy, it could mean many, many more weeks of higher rates.

The Federal Open Market Committee (FOMC) meeting concludes at 2 p.m. ET with a rate announcement, and there’s a 99.1% probability of a quarter-point rate hike, according to the CME FedWatch Tool. That would put the target rate between 4.5% and 4.75%, a new 15-year high.

That’s followed by Federal Reserve Chairman Jerome Powell’s press conference. As we’ve noted before, investors might want to be cautious taking big positions ahead of Powell’s comments today. His recent press conferences have caused market whiplash, usually to the downside. The big question is what hints he gives, if any, about the future path of rates. The market expects a pause, possibly followed by rate cuts later this year. The Fed has told the market repeatedly it needs to be far less optimistic.

The Bank of England BOE and European Central Bank (ECB) meet tomorrow and both are expected to be even more aggressive with 50-basis-point hikes.

As central bank news heats up, we’ll get additional earnings starting with Meta (META) after the close today. More on that below. Apple AAPL, Amazon AMZN, and Alphabet GOOGL follow tomorrow afternoon as investors continue to parse yesterday afternoon’s tidings from semiconductor firm Advanced Micro Devices AMD.

But don’t forget Friday. That’s when January Nonfarm Payrolls report (more below) wraps up what’s likely to be one of the biggest economic weeks of the quarter.

Morning rush

• The 10-year Treasury yield (TNX) is down slightly at 3.48%.
• The U.S. Dollar Index ($DXY) is off 0.1% at 101.91, nearing recent lows.
• Cboe Volatility Index® (VIX) futures are back under 20 at 19.54.
• WTI Crude Oil (/CL) is climbing again, trading at $79.24 per barrel.

Just In

Private-sector jobs growth rose just 106,000 in January following a 253,000 increase in December, payroll processing firm ADP said. It’s a below-estimates report with most of the weakness in small business and the strongest gains in manufacturing and hospitality.  Those two sectors make an interesting mix for wage growth as hospitality tends to be lower-paying while manufacturing can pay a little more.

Earnings ahead

Meta (META): In November, the social media company announced an 11,000-worker soon after disappointing Wall Street with its Q4 guidance. Shares fell to six-year lows, but they clawed back some of those losses in December and January as the entire communication services sector regained strength.

Shareholders likely approach this afternoon’s Q4 META earnings report with trepidation, wondering what other unwelcome news might be in store as industry-thought leaders continue to question metaverse demand and note META’s struggles in other facets of its business, like advertising.

Earnings scorecard

On Tuesday afternoon, AMD became one of the first major semiconductor firms reporting this quarter that did not disappoint investors. Shares rose 3% in after-hours trading as the company beat Wall Street’s estimates on both revenue and earnings per share (EPS). AMD’s guidance was as analysts expected.

Drilling down a bit more, data center sales growth was strong at higher than 40%, but gaming sales fell year over year. AMD expects further gaming weakness ahead. That could have ramifications for AMD’s gaming competitor Nvidia (NVDA), which is expected to report later this month.

Shares of Snap (SNAP) went the other way after the social media company reported yesterday afternoon, falling 13%. Slowing sales and lack of guidance told the tale. This might speak the breadth of tightening we’re seeing from some companies out there.

Earnings nuggets

It’s hard to listen to or read transcripts of every key earnings call, especially in weeks like this when around 100 S&P 500® companies report. Still, we’ve listened for key commentary from executives around the spectrum. Here are a few takeaways we’ve picked up on these calls:  

Less Room to Maneuver: Yesterday, Caterpillar (CAT) discussed supply chain issues, and McDonald’s (MCD) served up some inflation worries. United Parcel Services (UPS) saw slower package volume but shored up earnings with higher prices. How much room do companies have to keep jacking up costs for consumers before they hurt demand? In other signs of corporate struggles, Intel (INTC) announced yesterday it’s trimming salaries and PayPal (PYPL) announced job cuts. Ad budgets are being cut as well, and it points to a general softening we’re seeing that makes the Fed’s observations today on the economy potentially more interesting.

Bargain-hunting spreads: The strong same-store sales across the globe at MCD could hint that customers on the lower-income side of the spectrum are gravitating more toward cheaper fast food. Even higher-income people might be shying away from spending too much, judging from price cuts for electric vehicles by Tesla (TSLA) and Ford (F). Overall, more price sensitivity could spell trouble for casual dining establishments with higher-cost menu items and could mean tough sledding for the auto industry if consumers rebel against these record-high sticker prices.

Buybacks resurfacing? Chevron (CVX) announced a $75 billion buyback package despite recent static from Washington about the practice or the new 1% federal tax on such transactions. Beyond that, it hasn’t really been a buyback-heavy quarter so far, but Chevron isn’t alone. Energy infrastructure company Kinder Morgan (KMI) was among a handful of other firms increasing its share repurchase authorization earlier this earning season. Will this stay an energy-only phenomenon? Stay tuned.

Expanding near home: Speaking of energy firms, ExxonMobil (XOM) announced mechanical completion of a major U.S. refining facility while also growing oil production in the Permian Basin of the southwestern United States. General Motors (GM) and Lithium Americas (LAC) announced a $650 million equity investment by GM in LAC’s project to develop a Nevada lithium mine aimed at providing raw materials for batteries to power electric cars. Intel Foundry Services, the division of Intel (INTC) that manufactures semiconductors, saw revenue rise 30% year over year as the company invests in new U.S. plants. All this could please the White House, which has been encouraging companies to focus on domestic investment.

Pandemic hangover: Some industries, including chipmakers, remain saddled with too much supply left over from pandemic times when demand spiked. Health care is also in the same boat. For instance, Pfizer (PFE) expects sales to fall this year for both its COVID-19 treatment and vaccine in part because governments around the world stockpiled so much of both, and product remains on shelves.

Fed thoughts

Fed Chairman Jerome Powell takes the mic at around 2:30 p.m. ET today, and the market might be prepared for another hawkish look at the rate picture. What should we listen for?

• What would Powell and the rest of the FOMC need to see data-wise before they feel comfortable with a pause in rate hikes?
• Does Powell feel that the current Fed expectation for a terminal, or peak, rate of between 5% and 5.25% this year seems appropriate considering some Fed speakers recently said it might need to go higher?
• What perspective does Powell have on Q4 corporate earnings to date? Has he seen or heard any signs that the Fed’s tightening has made things tougher for companies, potentially slowing growth?
• How does Powell view the impact so far of China’s reopening? Is it causing economic activity there to increase?

Data Docket

Before Friday’s Nonfarm Payrolls report, investors get a look at weekly Initial Jobless Claims before the open Thursday. The consensus is 201,000, up from an historically low 186,000 the prior week, according to research firm Briefing.com.

And even before that, today’s December Job Openings and Labor Turnover Survey (JOLTS) hits the tape soon after the open. The November figure was a higher-than-expected 10.46 million, and bullish investors would likely welcome a drop to below 10 million. That might signal a tighter jobs market where wage pressures could ease, taking more steam out of inflation.

Key data today comes right after the open too, when we get January’s Institute for Supply Management (ISM) Manufacturing Index. Expectations are for a headline figure of 48%, down from 48.5% in December and signaling more contraction in the manufacturing economy. If so, it would mark the third consecutive contracting month.

Important European and Asian economic data arrived overnight. Manufacturing numbers out of China and Japan showed their manufacturing sectors remain in contraction mode, while Europe’s January consumer inflation eased a bit more than expected. That’s a good reminder that the ECB meets tomorrow, and it’ll be interesting to get their take and other central banks’ takes on the global economic situation and progress on the inflation front.

Speaking of data, S&P put out a global manufacturing report for January that shows glimmers of strength in southeast Asia, perhaps a sign of China’s reopening starting to improve economic demand. This is good and bad—good in that it signals support for the global economy but could work against the Fed in its effort to slow inflation. 

Reviewing the market minutes

Major indexes stumbled early Tuesday but quickly regained footing for a vigorous run uphill that lasted pretty much all day. Some leaders included companies that reported Tuesday morning like GM, UPS, PFE, and International Paper (IP). These companies all benefitted either from solid earnings results or because investors liked their guidance.

Meanwhile, MCD and CAT shares were among the worst performers of the session. MCD’s results were strong, but shares fell after MCD made comments in its conference call about a tough environment ahead.

Tuesday’s rally was evenly spread across many sectors and can’t be properly called a growth rally or a value rally. Info tech and communication services finished mid-pack among sectors. Consumer discretionary led the way, but real estate was close behind and energy lagged.

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) rose 365 points, or 1.09%, to 34,086.
• The Nasdaq Composite® ($COMP) climbed 1.67% to 11,584, staying above its 200-day moving average.
• The Russell 2000® (RUT) gained 2.45% to 1,931.
• The S&P 500 index (SPX) rose 58 points, or 1.46%, to 4,076; its highest close since December 1.

Talking technicals: It might be meaningful that the SPX closed at 4,076 yesterday simply because that was also the SPX’s previous highest close back on December 1. It’s touched 4,100 intraday both in December and January but hasn’t closed above that since mid-September. Support at 4,015 held firm Tuesday with more support at 4,000 and below that near the 200-day moving average now at 3,954.

CHART OF THE DAY: WATCH IT CLIMB. Last week saw the SPX move above a key downtrending line. The Russell 2000 index (RUT—candlesticks) followed with a similar move of its own, as this one-year chart shows. It crossed a downtrending line (red line) from previous highs and is now well above both that and its 200-day moving average (blue line). Could a test of August highs above 2,000 be next for the RUT? Time will tell. Data source: FTSE Russell. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Jobs, jobs, jobs: It’s all about the Fed today, but don’t lose sight of Friday’s critical U.S. January Nonfarm Payrolls report. Analysts expect January jobs growth of 190,000, according to consensus from research firm Briefing.com. If the actual data are close to that, it’d be the lowest monthly growth since December 2020 and down from 223,000 in December 2022. Jobs growth of 190,000 is historically still solid, but not in the “outstanding” category of 250,000 and above seen so often last year. Until recently, the market often welcomed signs of a slowing economy in hopes it might take the Fed’s foot off the brake. More recently, weak data has received a more negative view. If the jobs data seem extremely light, that might actually hurt the market rather than help.

Yield Signs: The 10-year Treasury yield (TNX) closed right at 3.5% Tuesday, a level it’s pivoted around for a while now. This came despite a weaker dollar, which can often push yields higher. The rise in fixed income may have reflected easing inflation fears following Tuesday’s benign employment cost index data. The inverted spread between the 10-year yield and the 2-year Treasury yield has narrowed somewhat from last year’s peaks but remains historically wide at 70 basis points. Historically, a sharp inversion in the yield curve is a recessionary signal, so monitor where the curve goes today after the Fed meeting.

A January to remember: The first month of 2023 wrapped up Tuesday in marquee fashion as the SPX posted its best January since 2019. While history guarantees nothing, historical records show that the market often had strong years following January rallies. The strength wasn’t just here in the United States or in the stock market alone, Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop pointed out in a recent column. Getting into the Oscar spirit, Kleintop says January’s rise was an “Everything, Everywhere All at Once” rally, bringing back to mind the heady pre-pandemic markets where almost everything seemed to work for investors. The rally included U.S., international, and emerging markets stocks, bonds, and some commodities. Why the strength? It’s a mixture of things, including global central banks possibly reducing the size of their rate hikes, China’s reopening, and a European economy benefiting from a warmer winter and lower-than-expected energy costs. Risks ahead include commodities-driven inflation, additional rate hikes, and a possible U.S. earnings recession.

Notable calendar items

Feb. 2: December Factory Orders and expected earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL)

Feb. 3: January Nonfarm Payrolls and expected earnings from Sanofi (SNY) and Cigna (CI)

Feb. 6: Expected earnings from Cummins (CMI) and Tyson Foods (TSN)

Feb. 7: December Trade Balance and Consumer Credit and expected earnings from BP (BP), Centene (CNC), and Hertz (HTZ)

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

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

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