Unheard of... Well, not exactly, but what you heard was true.
The major domestic equity indexes actually fell in value for a second consecutive trading session on Monday. The 2023 record is three straight "down" days for the S&P 500 (Jan. 17-19), but this two-day losing streak ties the year-to-date record for the Nasdaq Composite. This is the third time for the Composite that this occurrence has happened this calendar year. Both of these majors have "backed" off of just barely technically overbought territory going into Tuesday.
It was not just equities that moved in a counter-2023 to date direction on Monday. U.S. Treasuries continued to surrender ground as the U.S. Dollar Index showed some strength.
Can these counter-moves continue? Of course they can. Earnings are still sloppy. The blowout January jobs report does not exactly "undo" all of the lousy looking macro that preceded it, but it probably does make a central banker or two think twice about letting up on short-term rate hikes, and as the Fed does slow those rate hikes, competitor central banks are at least keeping pace, while a couple of the majors (such as the Bank of England and European Central Bank) are doing more.
Meaningful?
Not terribly. All of your favorite equity indexes, unless you just love the Dow Utilities, retreated on Monday. Tech and smaller caps were hit the hardest.
Nine of the 11 S&P sector-select SPDR ETFs traded lower, led by Technology ( XLK) and Communication Services ( XLC) . Those two funds were off 1.22% and 1.2%, respectively. Within those sectors, the Philadelphia Semiconductor Index was slapped around for a loss of 1.7%, as the Dow Jones U.S. Internet Index lost 1.42% and the Dow Jones U.S. Software Index gave up 0.98%.
As for those smaller caps, the Russell 2000 closed down 1.4%, the S&P SmallCap 600 was down 1.62%, and the S&P MidCap 400 was down 1.07%. The Dow Transports also gave up a full 1%, giving the day a general feeling of a market betting against economic growth.
The Atlanta Fed's GDPNow model for the fourth quarter is tracking at +0.7% (q/q, SAAR) at the moment, but that snapshot is stale. The model has not been updated since last Wednesday, but will have to be revised after this morning's report on December's balance of trade and then again tomorrow (this Wednesday) after Wholesale inventories (advance report: +0.1% m/m) for December are themselves revised.
Though Monday's breadth was decisively negative, the trading volume just was not there in a way that would convince me that the bulls had turned tail. At least not yet. Losers did beat winners at the Nasdaq by about 2 to 1 and at the NYSE by roughly 3 to 1. Advancing volume took a 41.4% share of composite Nasdaq-listed trade and a 31.1% share of that metric for names domiciled down on Wall Street. Trading volume dropped significantly on a day-over-day basis for securities listed at both of New York's exchanges. Aggregate trading volume was also lighter across both the S&P 500 and Nasdaq Composite than it had been for recent "up" days.
In short, professionals were not especially active on Monday, but did take some profits in the wake of the market's recent risk-on behavior, and ahead of both Fed Chair Powell's speech this afternoon and the President's address later on.
Bostic Speaks
On Monday, Atlanta Fed President Raphael Bostic, who does not vote on policy this year, spoke publicly. He addressed the robust-looking December jobs report and what he thinks it means for the economy and for policy. This was one reason that the pressure on markets that began on Friday, did extend into and through Monday.
On the strong payrolls number, Bostic commented, "I've said for a long time that I thought there's a lot of momentum in the economy and that there was a good chance that that momentum was going to be sufficient to absorb our policy tightening in ways that could help us avoid a recession." That's rather optimistic.
As for policy, Bostic saw the report as something of a setback: "It'll probably mean we have to do a little more work, and I would expect that that would translate into us raising interest rates more than I have projected right now." This is the comment that weighed on risk assets.
Bostic added: "Those last few tenths of a point (in the fight against inflation) can take a long time to be realized, and so I want to make sure that we are in the right place before we start easing off our policy because the most important thing at this stage is to get our price stability measure as close to target as possible."
Of course, Fed Chair Powell is expected to participate in a moderated discussion at the Economic Club of Washington D.C. this afternoon. Last Wednesday, though sounding quite pragmatic in his delivery, Powell did indicate that he expected more increases to have to be made to short-term interest rates before the FOMC could start an expected pause at a terminal rate later this year.
Meanwhile in Russia...
Russia's Ministry of Finance reported on Monday that the national budget deficit had ballooned in January. Revenue from oil and gas has dropped 46% year over year as defense spending has been increased. Russian oil, or more specifically "Urals," had been sold at an average price of $49.48 per barrel for the month of January, which is down 41% y/y and far below the $70 or so that had originally been the assumption made in Russia's budget. This and a dramatic reduction in natural gas exports all as western sanctions ramp up for February come as expenditures for classified reasons have increased 59%.
The Kremlin has been selling Chinese renminbi and physical gold from its National Welfare Fund in order to reduce the deficit and will issue local bonds at some point during the first quarter as its funding needs have increased significantly. Let's not forget that Ukrainian officials have been warning that they believe Russian forces are preparing to launch a major offensive in the coming weeks. I don't think that this is very difficult to foresee. Most of us have assumed a "Spring Offensive" would be attempted this year... perhaps by the Russian army in the North and by Ukrainian forces simultaneously in the south as winter fades and both sides try to gain the initiative after a long period of stalling.
As this goes on, and ahead of President Biden's State of the Union address this evening, news breaks that the U.S. is supposedly considering a 200% tariff on Russian-made aluminum in an attempt to keep the pressure on Moscow going into the one-year anniversary of the Kremlin's invasion of Ukraine.
There is no indication at this time that the European Union would join in this plan, which would be crucial. As Russia is the world's second largest producer of aluminum behind only China, it has traditionally accounted for just 10% of U.S. aluminum imports and that number has in recent months dropped down to 3%. In fact, imports of Russian aluminum into the U.S. "officially" dropped to near zero in October of 2022, so this would be largely geopolitical posturing in the hope that others join in.
Rumble Out West
On Monday, Microsoft ( MSFT) announced a surprise news event for Tuesday (today). The event starts at 13:00 ET with the rumor mill rampant that the tech giant will be sharing updates concerning the firm's integration of OpenAI's ChatGPT into its Bing search engine as well as other consumer products. This announcement came just days after Microsoft had extended its partnership with OpenAI in a deal that will position Microsoft as the exclusive cloud partner for the smaller firm. Microsoft's cloud will power all of OpenAI workloads and research.
Interestingly, this announcement came just minutes after Alphabet's ( GOOGL) Google unit had announced its own experimental rival to ChatGPT known as "Bard." Bard is currently in testing but is expected to be rolled out to a broader level of public availability in coming weeks. Google is also planning its own artificial intelligence event on Wednesday (tomorrow).
In advance of the Google event and now ahead of both events, I had already been long high-end semiconductor name Nvidia ( NVDA) , and had initiated small longs in two money-losing data intensive, AI-focused names, C3.ai, Inc ( AI) and BigBear.ai Holdings ( BBAI) . At this moment, I am seeing these two names as short-term (less than a week) trades as both have moved more rapidly than expected. Long-term readers know that I am usually long some NVDA and expect to remain so.
Economics (All Times Eastern)
08:30 - Balance of Trade (Dec): Last $-61.5B.
08:55 - Redbook (Weekly): Last 4.9% y/y.
15:00 - Consumer Credit (Dec): Last $27.96B.
16:30 - API Oil Inventories (Weekly): Last +6.33M.
The Fed (All Times Eastern)
12:40 - Speaker: Federal Reserve Chair Jerome Powell.
14:00 - Speaker: Reserve Board Gov. Michael S. Barr.
