-- "I Don't Know" Osbourne, Rhoads, Daisley (Ozzy Osbourne), 1980
The Week Past
It made sense. For a while. Equity markets ended February and started March on weakness as interest rates, or what the US Ten Year Note, specifically yielded, spiked higher. This is something that I can understand. Dollar valuations rallied into mid-week as well. This all tells a tale that can be retold.
Then, it all changed. Suddenly, from the point where it felt as if someone, somewhere had rung the "all-clear" bell, the "ugly stick" was quickly shoved back inside of its closet and the risk-on machine was back in motion.
What gave? Or what gives? A dovish sounding or should I say, dovishly written essay written by Atlanta Fed Pres. Raphael Bostic? Bostic, who does not vote on policy this year, apparently feels that the FOMC can now move in baby steps (25 basis points at a time) as policy might now be "sufficiently restrictive." Is it though? Fed Gov. Christopher Waller, who does vote on policy and who some might consider to be more influential than Bostic, was far more hawkish in his posture. Markets did not care.
What about the macro? I think this strength in the January data that has been landing all month... has surprised a lot of folks? The ISM numbers that printed last week were for February though. The strength apparently continued. We know that January in general did get at least some boost from seasonal adjustments that simply set a bit too aggressively. Perhaps it was the unseasonably warm weather that much of the country enjoyed. If this was truly the reason behind January's strong economic performance, then an unwind of some kind would have to be evident in the February data. Hmm.
While the manufacturing sector remained mired in weakness, manufacturing prices, without much support from the rest of that ISM survey, somehow found some footing. As for the services sector, there was strength to be seen up and down the entire survey. New Orders were strong as was employment as were of course, prices. A strong February on top of a strong January? What will that do to monetary policy?
This "strength" is an environment that provoked an equity market rally by the weekend. On dovish Fed speak? This caused a rally in Treasuries on Friday that unwound a lot of midweek progress on rates? Kind of tough to make all of this make sense.
The focus, as far as the Fed is concerned, will move away this week from the ancillary players and squarely into the halls of our legislative bodies. On Tuesday morning, Fed Chair Jerome Powell will testify before the Senate Banking Committee and on Wednesday, he will go through the whole dog and pony show once again before the House Financial Services Committee. This is a twice a year event, these twin testimonies and they always do draw quite a bit of attention.
These events will take center stage for the financial media, and while occasionally there will be a pertinent question asked that we really would like to hear some information on, the whole two-day episode usually only serves to qualify many members of these committees as to be in way beyond their intellectual depth when discussing economic matters, and largely exposes many as grossly under qualified for the positions in which they currently serve.
Outside of the US, the Bank of Japan meets on policy this Thursday. Why this is important is that this will be Haruhiko Kuroda's last meeting as the leader of that central bank. The BOJ has been a thought leader as far as extremely dovish monetary policy is concerned and is at least part of the reason behind global financial conditions that are looser now than they were when the Fed started trying to tighten policy a year ago. Kazuo Ueda, who will be Kuroda's successor at the BOJ is not considered to be as dovish in nature as has been his predecessor.
Fed Funds futures trading in Chicago are currently pricing in just a 72% probability for a 25 basis point increase being made the the Fed Funds Rate on March 22nd. This means that these markets also show a 28% chance for a 50 bps rate hike at that time.
Futures also now show an 82% likelihood that what would be a terminal rate of 5.25% to 5.5% that will be reached by June 14th and held at that level for at least five meetings. This projected rate is 25 basis points higher than it was when I wrote this column two weeks ago. Surprisingly, futures now show a 51% chance for a first rate cut late in January of 2024.
Just About Done
Fourth quarter earnings season is now, for all intents and purposes complete. We will still run into a few stragglers coming in on a daily basis, and even a headliner or two, but there aren't enough names left unreported out there as to seriously impact the "final" score for the S&P 500 for the fourth quarter.
According to FactSet, with 99% of the S&P 500 having already reported, 69% of companies have beaten earnings expectations, while just 65% of companies have reported revenue generation ahead of estimates. These beat rates are below average for the S&P 500 as are the size of these beats. The average earnings result for the S&P 500 for the fourth quarter has beaten consensus view by a mere 1.3%, which is well below the five year average beat of 8.6%. Staying with data provided by FactSet, the year over earnings decline for the S&P 500 for the fourth quarter of 2022 was -4.6%. Revenue growth is now (just about) closed at 5.3%. This was the first year over year earnings contraction for the S&P 500 since Q3 2020.
Looking out a bit, according to FactSet, the current quarter (Q1 2023) is seen at earnings growth of -5.9% on revenue growth of 1.9%. Q2 2023 is seen at earnings growth of -3.8% on revenue growth of -0.1%. For the full calendar year of 2023, consensus view is now for earnings growth of 2.1% on revenue growth of 2.0%. The full year numbers keep moving lower.
As mentioned above, equity markets were really acting weakly last week until that late week surge that came about either due to some dovish Fed speak, which I am sure you can tell that I doubt, some stronger than expected macro regarding employment and inflation, where I also have some doubt, or something built in... or technical. This is what I believe mattered more than anything else late last week. That and maybe some shorts might have needed covering going into the weekend.
Check out the Nasdaq Composite. The index straddled its own 200 day SMA on both Wednesday and Thursday, and then catapulted up through its 21 day EMA on Friday.
The S&P 500, made a much more precise example of traders (really algorithms more than actual living, breathing humans) using the key moving averages as trading levels. The S&P 500 tested and bounded off of its 200 day SMA three days in five before soaring right through its 50 day SMA and retaking its 21 day EMA as well.
For the past five trading days, the S&P 500 rallied 1.9%, after enjoying that 1.61% run on Friday. The Nasdaq Composite ran 1.97% on Friday, to close out the week up 2.58%. The Philadelphia Semiconductor Index, which readers know is something that I always watch closely, and is usually more volatile than most of the other indexes we watch, rallied sharply (+1.48%) on Friday to end the week up quite the robust 3.18%. This leaves us with the Russell 2000. The Russell 2000 rallied 1.35% on Friday to gain an even 2% for the five day period.
Nine of the 11 S&P sector-select SPDR ETFs shaded green for the week past, as all 11 posted gains for Friday. Materials (XLB) led easily, up 4.2% for the week, while the Industrials (XLI) finished the week in second place, up 3.35%. The week's two losers were the Staples (XLP) and the Utilities (XLU) , as both of those funds finished the week in the red.
According to FactSet, the S&P 500 now trades at 17.5 times forward looking earnings, which is down from where it has been trading recently. This ratio remains well below the S&P 500's five year average of 18.5 times, and just a touch higher than its 10 year average (17.2).
Readers may have noticed that the yield spread between the US Ten Year Note and The Month T-Bill appears to be moving toward something less badly inverted...
However, the Ten Year Note/Two Year Note remains as badly inverted as anything we have seen throughout this cycle...
What's that all mean? Instead of looking at the spread alone above, look at the actual yields of US Two and Ten year paper on the same chart. Look at how correlated the moves are, but also at how the spread seems to continue to broaden with time.
Not sure if there's a timing for any oncoming freight train that I can take away from this, but of one thing I am certain. There is no positive take-away here, at least not one that I can see.
The Week Ahead
Jobs Week. There may be a lot on our collective plates this week, but really... What more needs to be said? First, investors will get hit with that double dose of Jerome Powell testimonies. Then they'll watch what central banks will do elsewhere (Japan, Canada), which probably won't be much. Then, February jobs data will land squarely upon our doorsteps on Friday.
Non-Farm Payrolls are expected to return to the area around 200K for February job creation after that very surprising print of 517K Non-Farm Payrolls hit the tape a month ago. Keep in mind that the ADP Employment Report only posted 106K private sector jobs created in January, so somebody is going to be very wrong once the revisions do come in.
This week will be light on the earnings front, but there will be something to look at and potentially trade every single day. Ciena Corp (CIEN) will kick things off on Monday morning, followed by Dick's Sporting Goods (DKS) , Thor Industries (THO) , CrowdStike (CRWD) , Campbell's Soup (CPB) , DocuSign (DOCU) , Oracle (ORCL) and Ulta Beauty (ULTA) as the week wears on. Friday will be thin away from the BLS survey data.
Economics (All Times Eastern)
10:00 - Factory Orders (Jan): Expecting -1.8% m/m, Last +1.8% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: CIEN (0.36)
After the Close: (TCOM) (-0.16)