I've heard it said that Fed Chair Jerome Powell softened his tone a bit on Wednesday. I don't quite see it that way. I thought he remained the same hawk that he had been the day before. The man is a human being.
The fact is that when we have these two days of testimony (which occurs twice a year) before the appropriate legislative committees, the market reaction is almost always more pronounced on the first day. That's the day that the headlines are made and the tone is set.
I did not feel that the Fed Chair really walked anything back that he had said on Tuesday. I guess his admission that "We have not made any decision about the March meeting" was seen as mildly dovish. That would be a foolish takeaway. I don't know what else he could have said two weeks ahead of the outcome of a meeting that has not started yet.
Powell did repeat the message that rates are likely to end up higher than previously thought and that the pace of tightening could re-accelerate. He also acknowledged that there are some key data points to the Fed's and the investing public's immediate front -- that being the BLS Employment surveys for February tomorrow morning and February CPI, PPI, Retail Sales and Industrial Production next week.
Fuel for the Fire
"They" also say that Wednesday's child is full of woe. While that may or may not be true, it might be true that after yesterday's economic data, that Thursday's child has further to go.
Policy hawks pointed toward the ADP Employment Report on Wednesday morning as further proof of an already tight labor market. The ADP report showed private sector job creation of 242K for February, well above the 200K or so that economists were looking for. This was also a significant rebound from January's upwardly revised print of just 119K.
Wait. What? Oh, you forgot. That's right. For January, you know the "blowout" month where the BLS reported Non-Farm Payroll growth of 517K positions, ADP reported job creation that was downright anemic. I do not automatically assume that the ADP and BLS headline prints have anything to do with each other, except maybe when averaged out over a long enough timeline. I also reject the idea that either one is more accurate over time.
The fact is that if one accepted the BLS print for January, then one had to reject the ADP number for that month. So, why get so excited about the ADP Print for February when by Friday morning, regardless of outcome, your brain will immediately discard the ADP print as meaningless?
Meanwhile, the BLS posted its monthly JOLTS data for January on Wednesday. Job openings for that month did decrease from December, but not as significantly as expected, while Job quits also contracted from December, but not by as much as projected. This was taken as a sign of labor market strength. I call it "baloney."
Markets felt as though they didn't know what to do on Wednesday. The U.S. Dollar Index hit resistance that held as support for the U.S. 10-Year Note, which has held firm at 4% since last week. That battle has continued overnight. The yield spread between the 10-Year Note and the 2-Year Note (-107 bps) and 3-Month Note (-108 bps) remains at extremely uncomfortable levels.
Turning to equities, two moving parts made interesting moves. The Philadelphia Semiconductor Index rallied hard (+2.87%) off of Tuesday's close, led by On Semiconductor ( ON
) , Marvell Technology ( MRVL
) and Advanced Micro Devices ( AMD
) . The KBW Bank Index continued to move lower (-0.76%), this time owing more to lack of a bid side than to overt selling pressure. As for broader large cap indexes, the S&P 500 gained 0.14% for the session, while the Nasdaq Composite posted a gain of 0.4%.
Trading volume and breadth, however, did not support the mild strength seen across a number of indexes. Winners beat losers by just a smidge at the NYSE, as losers beat winners by something close to a 9 to 8 margin at the Nasdaq Market Site. Advancing volume took a 49.1% share of composite NYSE-listed trade and a 47.1% share of Nasdaq-listed action. Aggregate trading volume contracted significantly on a day-over-day basis for shares listed at both of New York's major equity exchanges, as well as across the constituencies of both the S&P 500 and Nasdaq Composite.
Put succinctly, traders were done moving on Powell's Tuesday testimony and will need a bit of provocation in order to get moving again ahead of Friday's job creation data.
Not Really a Plan
President Biden will release his budget request to our nation's legislators on Thursday. The president's plan is loaded with increases in taxes that will have little chance of passing in both houses of Congress, now that the two houses are divided. A lot of this plan is either a revision of the Biden "Build Back Better" package or a simple unwind of the Trump-era tax cuts.
The "new" plan will include a 25% minimum tax on billionaires, an increase in the top income tax rate to 39.6% from 37%, while increasing the capital gains tax for those making $1M-plus per year to 39.6% from 20%.
Long-time readers know how I feel about capital gains taxes. I feel that capital gains should not be taxed as ordinary income as they are simply not ordinary. Capital gains come with inherent risk. Those who work eight hours a day are usually paid for eight hours of work. Not traders. Not investors. I have worked my longest hours in my worst years. Working for negative income? Does happen.
This is a risk that the government wants no part in partnering in unless it comes at the expense of net gains made elsewhere. What if one loses money (net) on their investments for a period of time? If you want to partner in the wins, then you have to partner up on the losses as well. Be willing to take on (subsidize) 39.6% of lost capital and then we'll talk about a tax of like size when there are victories. The president also wants to take the corporate tax rate up to 28% from 21%.
Now, You Have My Attention...
The president's budget will include a "top line" number for the Defense Department that will exceed $835B, which is up from the $816B that Congress appropriated for the current fiscal year. The request will include $170B for weapons procurement, and is up $8B from what Congress appropriated, while also including $145B for research and development. That's up $5B from what Congress approved.
The president will request 83 Lockheed Martin ( LMT
) F-35 Lightning II fifth generation fighter aircraft. That is up from the 80 that Congress planned for and up from just 61 for the year-ago period. There will also be a sizable request for R&D funds for the new intercontinental ballistic missile that Northrop Grumman ( NOC
) is working on.
My view is that defense spending has to go higher even than this as the funding of Ukrainian military operations in their defense against Russian armed forces inside their borders has depleted U.S. stockpiles and as the U.S. must remain ever-vigilant and mission-capable should a crisis arise anywhere else in the world that threatens national security while the conflict in Eastern Europe is ongoing.
Readers may recall that we last touched on Advanced Micro Devices ( AMD
) a little bit more than a month ago. The shares were breaking out of a downward-sloping Pitchfork at that time, and have since built up a new, upward-facing trend.
To this point, the central trendline of the newer Pitchfork has acted as resistance as Relative Strength builds and the daily Moving Average Convergence Divergence (MACD) appears set for another bullish crossover with all three components in positive territory.
Advanced Micro Devices (AMD)
Price Target: $104 (up from $94)
Pivot: $90 (up from $79)
Add: down to $78 (200-day SMA)
Panic: break of 50-day SMA ($75)
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 195K, Last 190K.
08:30 - Continuing Claims (Weekly): Last 1.655M.
10:30 - Natural Gas Inventories (Weekly): Last -81B cf.
13:00 - Thirty Year Bond Auction: $18B.
The Fed (All Times Eastern)
10:00 - Speaker: Reserve Board Gov. Michael Barr.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open
: ( BJ
) (0.86), ( TTC
After the Close
: ( DOCU
) (0.52), ( ORCL
) (1.20), ( ULTA
) (5.54), ( MTN
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