The balloon crisis that got out of control last week and over the weekend could now go two ways. The entire incident could be largely forgotten by a public with an admittedly short attention span within a matter of weeks. The matter could also end up driving a wedge (or another wedge) between the world's two largest economies, the two most capable militaries and perhaps the two governments with the most global and regional influence.
The whole affair has become very embarrassing for both sides.
On Beijing's side, the embarrassment comes from getting caught spying on the US and apparently other nations using high altitude balloons flying well within the airspace of those nations.
The embarrassment on the US side is two fold. News has broken that China has flown this kind of balloon through US territorial skies several times over the past few years seemingly for much shorter periods of duration and had avoided detection until after the fact on these occasions. Another source of embarrassment would be the excruciatingly slow response from the US leadership once the balloon had been discovered.
Apparently, the airship, which Beijing is calling a civilian aircraft that blew off course, entered into Alaskan airspace last week, was eventually spotted over Montana after having crossed Canadian airspace, where it flew over a number of sensitive military sites and was allowed to cross the balance of the continental US unmolested until east of South Carolina, still in US airspace where it was taken out by an F-22 Raptor fighter aircraft.
The F-22 Raptor is a 5th generation air combat capable craft with fourth generation stealth technology and is considered the successor to the F-16 (also Lockheed Martin) by the United States Air Force. The fighter is manufactured by Lockheed Martin (LMT) . Boeing (BA) is also a major subcontractor.
There are two questions that now must be asked.
For one... just how much damage has this whole incident done to already fragile US/China relations? US Secretary of State Anthony Blinken has already postponed a trip to Beijing that was seen as an opportunity to stabilize tensions over the strained relationship between China and the island of Formosa (Taiwan). Beijing sees Taipei as a province of a larger China, while Taipei continues to govern and defend itself independently. Beijing's Vice Minister of foreign affairs has, already on Monday, lodged a formal protest with the US embassy in Beijing accusing the US of "indiscriminate use of military force", referring to the balloon as "a civilian unmanned airship."
The second question, knowing that the US military also uses this kind of reconnaissance balloon, but has never on record allowed one to cross into another nation's airspace, is why US leadership did not take care of this balloon once it entered Alaskan or NORAD airspace and why it was allowed to cross the continental US sending potentially transmitting who knows what kind of information back across the US. There is a lot of open space between the waters of Alaska and South Carolina.
The Latest Vehicle
"They" always come up with something. The latest way to gamble on market direction has become "Zero days to expiration" options or what Wall Street now refers to as 0DTE options. Many market thinkers see these options as not only becoming popular but also as vehicles whose increased usage is also increasing trading volume in the underlying assets themselves while also exacerbating market direction. The SPDR S&P 500 ETF (SPY) has quickly become a commonly used asset for this purpose.
How much this activity devalues or skews other metrics once commonly used for determining market trend is a question now being asked by very smart people. The public has not seemed to mind because equity markets have had a nice, almost irrational run through the early party of 2023.
It does stand to reason however, that if the trading in these options is creating increased activity elsewhere that exacerbates market direction that this is a blade that will cut both ways. I suspect that once that blade damages the net-long crowd in a fast and furious way, that the public will decide at that point to notice.
The Week Past
The last five trading days present as another "just wow" week. Traders, investors and the public at large entered the week knowing that there would be a lot of wood to cut.
There would be the FOMC policy decision and statement on Wednesday. There would be three of the "mega-cap" names that once formed to create the "FAANG" acronym all reporting within a few minutes of each other on Thursday evening. Then, Friday, the BLS would publish the results of its January "Employment Situation" surveys.
There was no doubt that trading would be frenetic for the week and that decisions would have to be made. For the S&P 500, last week was the highest week for aggregate trading volume since the week ending December 16th. For the Nasdaq Composite, last week was the busiest week since the week ending May 13th. Yes, that reads as May. Not a misprint.
Perhaps what surprised traders and investors the most would be the market's reaction. Reaction to what you ask? How about a reaction to an FOMC that did raise rates and indicate that more rate increases would be necessary... or to all three of these former FAANGs as they stumbled through disappointing earnings, and then BLS surveys that showed a blowout month for job creation in January. A month the likes of which none of us saw coming. Those reactions were, for the most part, positive.
Yes, Friday was a bit weak, but there was indeed some profit taking mixed in there, especially late.
On Wednesday, the FOMC took the Fed Funds Rate up to a range spanning from 4.5% to 4.75%, and kept the phrase (3rd paragraph, 3rd sentence) that included "ongoing increases" in the statement. The difference was that Fed Chair Jerome mentioned "disinflation" a number of times during the press conference and sounded not hawkish, and not even dovish.. but quite pragmatic. That was enough for the algorithms that control price discovery to jump on his speech like an 86 MPH fastball down the middle with no mustard on it. See ya !!!
The Big Three
Disappointments galore. Alphabet (GOOGL) probably made the worst showing among the three, as YouTube and online advertising underwhelmed. The Amazon (AMZN) release was also alarming as AWS growth slowed significantly. AWS is where Amazon's profit margin (which was notably missing) comes from. Only Apple (AAPL) , where there was still disappointment, but at least there, the problems were in the supply chain and in FX, not so much in demand. Apple still showed growth and even set new records in key places where investors needed to see such things.
Really incredible. According to the Bureau of Labor Statistics' Establishment Survey, an astounding 517K jobs were created in January. Of course, according to the Bureau of Labor Statistics' Household Survey, a simply stunning 894K new positions were filled. Then again, if one trusts the ADP Employment Report, which is the only one of the three even attempting to use more data, and less survey, only 106K private sector jobs were created.
I guess we accept for now that January was strong even though we know from 2022, that any numbers produced by the BLS can be a great deal more than a little inaccurate and must be looked at as subject to later and sizable revision.
That said, using the BLS data, simply because I seem to be the only one who ever doubts their numbers, the Unemployment Rate dropped from 3.6% to 3.4% as participation increased from 62.3% to 62.4% and the average workweek increased from 34.3 hours all the way to 34.7. If these numbers are to be trusted as a reflection of increased demand for labor, these are the kinds of numbers that turn part-timers into full-times and end up increasing wages.
On the negative side, the unemployment rates for college graduates and for high-school graduates both moved higher, while the unemployment rate for those without a high-school diploma dropped significantly. This kind of shifting employment across educational demographics, reflected in a less than flattering way on the quality of this increased demand. This condition would also most likely lead to eventual pressure on wages in the aggregate.
Speaking of hourly wage growth, those numbers printed at +0.3% m/m and +4.4% y/y, both on consensus, and both down from December's growth of 0.4% and 4.9%, respectively (after revisions).
Earnings season on the whole had gotten the season off to a sloppy start and that start has continued. In fact, the forward looking outlook for corporate profits is weakening as we go on. According to FactSet, with 50% of the S&P 500 having already reported, 70% of companies have beaten earnings expectations, while just 61% of companies have reported revenue generation ahead of estimates. These are below normal results.
Staying with data provided by FactSet, the blended (results & estimates) year over earnings decline for the S&P 500 for Q4 2022 is now -5.3%, down in succession from -5.0%, -4.6%, and -3.9% for the few weeks prior. Revenue growth for the quarter is now running at 4.3%, that is up from 3.9% a week ago. Consensus view is now for successive year over year S&P 500 earnings contractions for Q4, Q1, and Q2 and the depth of those projections are getting worse every week.
For the full calendar year 2023, consensus view is now for earnings growth of 3.0% (Q4 2023 still better be a doozy) on revenue growth of 2.5%. That's down from 3.4% and 2.6% a week ago, respectively.
Equity markets made the most of that technical breakout that we mentioned last week. The Nasdaq Composite has now put some distance between the last sale and its 200 day SMA, not to mention its long-term upper trendline that had been in place since November 2021.
The S&P 500, as readers can see here, has not only pulled away from its 200 day SMA, it has also seemingly forgotten all about that running triangle that we (or maybe just I) had seen as potentially bearish the week prior to last.
For the past five trading days, the S&P 500 gained 1.62% despite surrendering 1.04% on Friday. The Nasdaq Composite rallied a whopping 3.31% last week, even after taking a 1.59% drubbing on Friday. The Philadelphia Semiconductor Index, which readers know is something that I always watch closely, screamed 4.65% higher last week, despite giving back 1.9% on Friday. This leaves us with the Russell 2000. The popular small-cap index rallied 4.65% for the week after giving back 0.78% higher on Friday.
Eight of the 11 S&P sector-select SPDR ETFs shaded green for the week past, as once again, growth outperformed while defensive sectors lagged. Communication Services led the way higher at +5.26%, with Technology (XLK) in second place at +3.71%. Energy (XLE) was the big loser for the week at -5.78%.
According to FactSet, the S&P 500 now trades at 18.4 times forward looking earnings, up from 17.8 times last week. This ratio remains just below the S&P 500's five year average of 18.5 times, and has moved significantly higher than its ten year average (17.2).
Friday's employment numbers forced a selloff up and down the spectrum of Treasury securities and out a bid under the US dollar. While the upward pressure on yields exacerbated the spread between the yields paid by the US Ten and Two Year Notes...
The spread between the Ten Year Note and the Three Month T-Bill actually eased as that selling even reached down to the very short end of the curve...
The week ahead will be much quieter than was the week immediately behind you. No doubt, this week will be another heavy week of fourth quarter earnings results, but with a few exceptions, the names will be of a lower profile. For the coming week, investors will hear from Chipotle Mexican Grill (CMG) , Uber Technologies (UBER) , The Walt Disney Company (DIS) , PepsiCo (PEP) , Lyft (LYFT) , and Enbridge (ENB) , among many others.
The week ahead is also a much lighter macro week. While the headline events from a macroeconomic perspective might be the Ten Year Note and Thirty Year Auctions on Wednesday and Thursday, the week will once again see its share of Fed speakers.
The 'blackout" period enjoyed by the public for most of the past two weeks has ended. Fed Chair Jerome Powell will speak on Tuesday afternoon and I am counting at least six other public appearances by Fed officials. I would think that this number will grow.
One item of note for traders and investors to keep an eye on. This Tuesday, February 7th, will be the day of Alphabet's "Search and AI'' event. The event may externally impact such names as Microsoft (MSFT) and Nvidia (NVDA) as those names are considered to be industry leaders.
In the wake of last week's policy decision, and robust looking jobs numbers, Fed Funds futures trading in Chicago are currently pricing in a 100% probability for a 25 basis point increase being made the the Fed Funds Rate on March 22nd.
Futures show that this hike will be followed by a 68% likelihood for another 25 basis point increase on May 3rd that gets the Fed to 5% to 5.25%, which would be the terminal rate. Futures now expect that range to hold until November 1st, and now show a 56% chance for a first rate cut in November.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CMI) (4.52), (TSN) (1.37)
After the Close: (ATVI) (1.51), (PINS) (.28), (SPG) (3.13), (SWKS) (2.60)
(LMT, GOOGL, AMZN, AAPL, XLE, CMG, PEP and MSFT are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)