Well, that got a little rough. Oh, capital did flow on Thursday. More like riding the rapids right out of software, out of semiconductors, out of non-legacy (solely electric) autos, out of biotech, out of the Internet, and even out of some retailers and materials.
Need a silver lining? While the Nasdaq siblings (Composite & 100) were routed (down 2.5% and 2.6%, respectively), the Dow Jones Transportation Average somehow managed to break its four-day losing streak.
Fantastic beatdowns of 13.2%, 9.7%, and 9.6% were handed down to the likes (in that order) of Cloudflare (NET) , Unity Software (U) and MongoDB (MDB) . Semiconductors fared little better. Sarge focus names Marvell Technology (MRVL) and Nvidia (NVDA) were taken out back for 7.4% and 5.1% whoopings, respectively. I did manage to sidestep the Marvell beating, but took NVDA right on the chin. Apparently, at least some of the semi-panicked cash creation that hit these high-multiple names did end up in airline stocks.
Interestingly, Thursday was the eighth consecutive session that both the S&P 500 and Nasdaq Composite opened either strong or weak and reversed later in the morning with that reversal holding throughout. Algorithmic headfake? Every day? I guess until it stops working. Even more importantly, readers will note that the Nasdaq Composite closed at its lowest level on Thursday since mid-November.
Index bulls need to see the Nasdaq Composite close out the week without surrendering that 200-day simple moving average (SMA) and without creating a new intraday low for the week. Note that the 21-day exponential moving average (EMA) has acted as resistance for this index the last three times it was tested.
Though the S&P 500 "only" gave up 1.4%, there was also considerable technical damage done here. The index surrendered its 50-day SMA for the third day in four and for the second day in four failed to retake that line by the closing bell. Note that the line is not broken until contact is lost and not quickly regained. This has not yet happened. Be cognizant that once certain moving averages are lost (50-day SMAs and 200-day SMAs key among them) more than a few portfolio managers are compelled by their firm's risk managers to act.
There was a saving grace for equities, even for the Nasdaq twins. Trading volume was in no way anything traders might consider to be heavy on Thursday. Losers beat winners at the New York Stock Exchange by less than 200 names, while advancing volume comprised 43.5% of the aggregate. NYSE composite trading volume increased 3.6% on Thursday from Wednesday but remained thin. Trading volume directly attributable to S&P 500 constituent stocks landed 12% short of the 50-day trading volume SMA for that index. Thursday was the third consecutive day that trading across the S&P 500 was lighter than its norm'.
Losers beat winners by a more decisive nine to four at the Nasdaq, while advancing volume comprised just 28.6% of the Nasdaq aggregate. Nasdaq Market Site composite trading volume actually contracted 1.8% on Thursday from Wednesday, while trading volume across Nasdaq Composite constituent names also fell 12% short of its 50-day trading volume SMA and fell short of that mark for a third consecutive day.
U.S. Treasury Markets
Some of this newly created dough wound its way into the longer end of the US Treasury spectrum on Thursday. Though there was plenty of hawkish Fed speak to go around, which did have an impact on keyword-reading algorithmic decision-making, the long end of the curve was well-supported for the day. The US Treasury sold $22 billion of 30-year bonds on Thursday afternoon, and despite a small tail (high yield: 2.075%; when issued: 2.072%), one could not call the auction poor or weak. Bid to cover was relatively strong (2.4) while Indirect, or foreign, (65%) and Direct (17.1%) participation was up from recent monthly auctions. Dealers were stuck with less than 18% of the issue.
In addition, the US 10-Year Note was rather strong on Thursday, yielding a rough 1.7% at the top. That series has softened a bit overnight and pays nearly 1.74% at zero-dark thirty on Friday morning. Not to be alarmed, because these are not close to a point where I would sound such an alarm, but as the Fed has talked up rate hikes and balance sheet contraction, the spreads between both the US three-month and US Two-Year and the US 10-Year are notably contracting.
Note that the San Francisco Fed in the past has released research discussing economic health and Treasury yield spreads. While an inverted Three-Month/10-Year spread is considered by the central bank to be the most accurate predictor of a coming economic contraction at their disposal, the Two-Year/10-Year spread is nearly as important. These spreads can also act as rough projectors for net interest across the financial industry. I definitely do not like the look of that lower chart. The Two-Year/10-Year spread now tries to rebound where it had peaked for most of December.
Out in Force
The Fed's "blackout period" begins tomorrow (Saturday). Eight times a year, leading into the following policy statement (in this case, Jan. 26), Fed officials must pipe down and not speak publicly until after the Federal Open Market Committee (FOMC) post-statement news conference. Probably a difficult period for a few of them. That's one reason why you saw the Fed out in force on Thursday, getting their ducks in a row.
The headline event had to be Fed Governor Lael Brainard, who testified before the Senate Banking Committee as President Biden's nominee for the central bank's open vice chairman position. Brainard was careful in her words and will likely be confirmed. While she did try to bring attention to the Bureau of Labor Statistics unemployment rate of 3.9% (which we all know is as much a product of struggling pandemic-era participation as it is job creation), she did go where she had to: "Inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone."
Elsewhere, Philadelphia Fed President Patrick Harker told the Financial Times, "I currently have three increases in for this year, and I'd be very open to starting in March. I'd be open to more if required." Harker also indicated that he would be open to fewer increases should supply chain issues ease and inflation ease somewhat as well, all on its own. Chicago Fed President Charles Evans backed that sentiment. Evans sees three increases this year for the fed funds rate, but is open to more.
Later on, Fed Governor Christopher Waller told Kathleen Hays at Bloomberg TV that forward-looking policy depends on what inflation does in the second half of the year: "If it continues to be high, the case will be made for four, maybe five hikes. But if inflation falls back in the second half of the year, as many of us think it will... then you could actually pause and not even go the full three." Talk about being noncommittal.
Actually, noncommittal is good. While markets don't like uncertainty, I don't think we want anyone framing policy with a closed mind. I have no tolerance for perma-hawks or perma-doves. Adapting to the environment is the only rule that matters, and it sounds like most of the Fed is getting behind Chairman Jerome Powell on such sentiment.
It is key for economists to draw a distinction between what full employment is and what the public thinks it is. Sure, labor markets are tight, perhaps as tight as they have been in my memory. That has nothing to do with an economy that's humming along at full employment. An economy thirsting to fill more than 10 million open positions with little more than half that number looking for work cannot by definition be nearing "full employment." This economy has much higher potential for performance than we, as a nation, are experiencing right now.
The term "full employment" when used by economists has far more to do with fulfilling this potential than with the unemployment rate. Some pretty high-level economists have failed to understand this. For the record, as members of the Fed's Board of Governors, Brainard and Waller hold permanent voting seats at the FOMC. Evans does not vote this year, and Harker of Philadelphia will be pinch-hitting for Boston as Boston is still without a permanent replacement for Eric Rosengren.
Futures trading in Chicago are currently pricing in an 82% probability of a 25-basis-point increase in the fed funds rate by March, a 74% probability of 50 basis points of hikes by June, a 60% likelihood of 75 basis points of hikes by September, and a 53% chance of a full percentage point of hikes by December.
Are You Ready for Some Football?
The NFL playoffs? Playoffs? Earnings season, friends. Tis the season, and wow, do we ever need something to change the channel.
I think this may be the one time -- well, maybe it happens more often than that -- where fourth-quarter performance will be far less important than what these companies do and say as far as forward guidance and future net interest margins are concerned. We know that WFC has run into earnings, we know that analyst sentiment for JPM has been in decline, and we know that Citigroup, though up so far this year, was the only name in the KBW Bank Index to finish in the red for 2021. Let us rock.
Economics (All Times Eastern)
08:30 - Retail Sales (Dec): Expecting 0.1% m/m, Last 0.3% m/m.
08:30 - Core Retail Sales (Dec): Expecting 0.2% m/m, Last 0.3% m/m.
08:30 - Import Prices (Dec): Expecting 0.3% m/m, Last 0.7% m/m.
08:30 - Export Prices (Dec): Expecting 0.6% m/m, Last 1.0% m/m.
09:15 - Industrial Production (Dec): Expecting 0.3% m/m, Last 0.5% m/m.
09:15 - Capacity Utilization (Dec): Expecting 77.0%, Last 76.8%.
10:00 - Business Inventories (Nov): Expecting 1.1% m/m, Last 1.2% m/m.
10:00 - U of M Consumer Sentiment (Jan-adv): Expecting 70.1, Last 70.6.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 481.
The Fed (All Times Eastern)
11:00 - Speaker: New York Fed Pres. John Williams.