The "Pre" rally continued on Tuesday. Pre-December CPI. Pre-Q4 earnings season. Perhaps prices reflect hopes for a below consensus CPI print? There likely would be an immediate algorithmic reaction if that came to bear.
Currently, for the month of December, Wall Street is looking for headline consumer level inflation of 6.5% year over year, down from 7.1% in November, and down from a peak of 9.1% back in June. At the core, expectations are for a year over year print of 5.7%. That would be down from 6% in November and down from an apex of 6.6% in September. These numbers will not hit the tape until Thursday morning, with earnings season kicking into gear the very next morning.
Wall Street, for its part, extended the "pre-season" optimism that we have seen of late. Despite a negative midday reversal on Monday that came about due to an algorithmic response to some hawkish Fed-speak that day, the Nasdaq Composite has now put together a three day winning streak for the first time since early November. The same goes for the Philadelphia Semiconductor Index, and the Russell 2000, except that for the Russell, the wait had been shorter. The Russell 2000 had put together three consecutive "up" days in late November.
The S&P 500, which is really the most important equity index, at least as far as large-caps are concerned, posted a "down" day on Monday, keeping the longest winning streak for that index to just one session since the week before Christmas.
Talking Heads
On Monday, Atlanta Fed Pres. Raphael Bostic and San Francisco Fed Pres. Mary Daly turned rallying equity markets around - not to mention currency and Treasury markets - with well-placed midday public appearances where they hammered home the ideas that the FOMC was likely to take the Fed Funds Rate up over 5% and keep it there for over a year. There was even talk of a willingness to "overshoot" in order to make sure that inflation withers and dies. Never mind the US economy.
On Tuesday, with markets back in rally mode, though much more cautiously, there was more Fed-speak. Fed Chair Jerome Powell spoke publicly from Sweden, but as expected, largely stayed away from policy. He was scheduled to speak on central bank independence and he did not stray.
However, Fed Gov. Michelle Bowman did step up to the plate and took a couple of swings. Bowman said that she was "committed to taking further actions to bring inflation back down" to the Fed's goal. Bowman added... "I expect that once we achieve a sufficiently restrictive federal funds rate, it will need to remain at that level for some time." This time, markets yawned.
Even private sector bankers spoke out. JP Morgan (JPM) CEO Jamie Dimon said about the expectation for a 5% terminal Fed Funds Rate... "I'm on the side that it may not be enough. We were a little slow getting going." What Dimon inferred was that he thinks that there's a roughly 50/50 chance that 5% is where the overnight rate peaks and a 50/50 chance that the benchmark rate will have to go to 6%.
Marketplace
Still, equity markets rallied. Ten of the 11 S&P sector SPDRs traded higher, with Communication Services (XLC) , Discretionaries (XLY) and Materials (XLB) all gaining at least a full percentage point. Defensive sectors lagged, with only the Staples (XLP) losing ground for the session, despite Treasury yields moving higher for the day.
Breadth was solid, as it has been for a couple of weeks now. Winners beat losers by a rough 5 to 2 at both of New York's key equity exchanges. Advancing volume took a commanding share of composite trade for names listed both downtown (75.6%) and up in midtown (78.7%).
There was a catch however. Trading volume was light on Tuesday. On a day over day basis, NYSE-listed trading volume decreased by 10.6% and Nasdaq-listed trading volume decreased by 8.2%. Across both the S&P 500 and the Nasdaq Composite, Tuesday was the lightest trading day to date of the new year. In other words, Tuesday's rally was the work of traders, not portfolio managers.
Reality
It's very likely that the fourth quarter will end up being the first of three consecutive quarters of S&P 500 earnings contraction. You may have noticed that on Tuesday, UBS (UBS) gave up on the notion of a soft landing for the economy. UBS states "Households are running down savings rapidly. Credit Card balances are rising. Goods spending remains elevated. House prices are falling. Wealth is moving lower." UBS adds, "We expect job losses to materialize in Q2."
You know that I think the US economy moves into an overtly recessionary environment, possibly as soon as Q2. I have been pounding this idea home for months now. This forces some hard questions...
- Why does the Fed as a whole appear to be unwilling to consider that they might be mistaken in the pace of their aggression? Especially given their track record. We know that equity markets tend to bottom after a Fed pivot. We only ask for a pause (not a pivot) so that forward looking decision making might be made using substantive data.
- That said... Why does the Fed speak as one?
- Does no one at the central bank have an opinion outside of group consensus?
- We know that both the manufacturing and services sides of the US economy have already entered into a deep state of contraction. Why does the Fed insist on an agenda, despite this posture requiring a certain insensitivity to economic performance?
- We also know that labor markets have turned a corner. Competition in labor markets has shifted from the demand side to the supply side of that balance. So, why does the FOMC still need to push the Fed Funds Rate well above 5% and then keep it there for a year?
- Finally, why can't the Fed simply be data-dependent? Does that make too much sense?
It does not make sense. Unless massed wealth destruction and broad income insecurity is the ulterior motive.
Drugs
Eli Lilly (LLY) CFO Anat Ashkenazi spoke on Tuesday from the JP Morgan Healthcare Conference. She mentioned that the firm was building a "well of evidence" demonstrating that Mounjaro can do more than help individuals lose weight. The firm has data that shows this drug potential in treating sleep apnea, heart failure and kidney disease. The firm awaits US FDA action on its rolling submission for the weight loss indication and believes that the medication could launch for that purpose by the end of 2023.
Speaking at the same conference, AbbVie (ABBV) CEO Rick Gonzalez said that by 2025, Rinvoq and Skyrizi will account for more than $17.5B in annual revenue, and account for more than $27B in sales by 2027. This is key as the firm's top seller, Humira, will face competition from biosimilars this year. ABBV also expects that its aesthetics business could be poised for significant growth and could drive more than $9B in sales by 2029.
The chart says that Wall Street is not buying it...
Readers will see a nearly perfect April through December cup with handle pattern followed by a failed attempt to break out past pivot ($168) in early January. The shares will now try to form up support at the 50 day SMA (simple moving average) ($158).
A big pharma chart that is currently trying to break out is the chart of AstraZeneca (AZN) despite looking somewhat overbought.
I am not in this name. I just noticed it last night when I was doing my homework. The shares appear to be trying to break out past a $71 pivot created by a late August through December cup with handle pattern. Should the shares hold pivot, in my opinion... $81 is very realistic.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.58%.
07:00 - MBA Mortgage Applications (Weekly): Last -10.3% y/y.
10:30 - Oil Inventories (Weekly): Last +1.694M.
10:30 - Gasoline Stocks (Weekly): Last -346K.
13:00 - US Ten Year Note Auction: $32B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SJR) (.38)
After the Close: (KBH) (2.85)
