The month of February will kick off with the attention of the investment community on the Federal Reserve and its ongoing battle to tame inflation. That is because at 2:00 P.M. (EST) yesterday, the Federal Open Market Committee (FOMC) made its first monetary policy decision of 2024. As expected, policymakers kept the federal funds rate at 5.25% to 5.50%. In the accompanying statement, the central bank said that although inflation has eased, it still remains elevated. Later, Chairman Jerome Powell in his press conference said that he would like to see more progress on the inflation front and threw some cold water on sentiment that the Fed will pivot at the March FOMC meeting and begin cutting rates. The lead bank also noted that the economy was expanding at a solid pace, which was a positive change from the bank’s assessment at the December FOMC meeting.
The equity averages, which were lower on earnings news heading into the Fed statement, took a step down as the Fed statement and commentary suggested that the market, as noted, may have gotten ahead of itself with regard to the timing and breadth of interest-rate cuts in 2024. The Dow Jones Industrial Average, the S&P 500 Index, the technology heavy NASDAQ, and the small-cap Russell 2000 fell 0.8%, 1.6%, 2.2%, and 2.5%, respectively. This morning, the equity futures are pointing to some selective retracement of yesterday’s selloff, particularly in the NASDAQ market. It should be noted that the bond market’s outlook for Federal Reserve interest-rate cuts has not changed much, with Treasury market yields falling after the Fed’s statement.
We still think that the stock market is pricing too many interest-rate cuts in its 2024 monetary policy outlook. With inflation still running above the Fed’s target rate of 2% and the economy not showing signs of distress, the Fed will likely not be pressured to lower rates before the second half of this year. Chairman Powell said the Fed will need to balance the goal of bringing the rate of inflation down versus causing the economy to weaken. If the Fed is perceived to be less dovish than expected this year, it could potentially increase the volatility in this year’s equity market.
This morning, we also got some more news on the economy. Of note, the Labor Department reported that initial jobless claims for the week ending January 27th totaled 224,000. This was up from the prior-week’s revised 215,000 figure. Likewise, continuing claims rose more than expected. In another report, the Labor Department reported that productivity rose 3.2% in the fourth quarter, which was better than expected, and the report included a sharp drop in unit labor costs. This data put some more downward pressure on Treasury market yields. At 10:00 A.M. (EST), we will get the latest reading on manufacturing activity from the Institute for Supply Management, a Tempe, Arizona-based trade group. Manufacturing activity has contracted for 14 consecutive months and that was not expected to have changed in January. Manufacturing activity has been hurt by the Federal Reserve’s restrictive monetary policies designed to reduce demand for goods and ultimately put downward pressure on prices.
Tomorrow will bring the January employment report, which is expected to be closely watched by the Federal Reserve and Wall Street. Chairman Powell said the Fed still seeks to bring inflation down toward the level of 2%, while keeping the labor market strong. This puts the spotlight on the Labor Department’s report, which has the potential to trump this week’s remaining earnings news and move the market. That said…
Earnings season is now in full gear, with a number of reports from the prominent technology companies this week. The market sold off initially yesterday after investors were disappointed with the latest results from industry behemoths Microsoft (MSFT) and Alphabet (GOOG), the parent company of Google. As we warned heading into earnings season, with price-to-earnings multiples elevated, those companies that fail to impress Wall Street with their results and/or prognostications may be punished. Conversely, the shares of those entities that surpass expectations should be in demand.
Since the close of trading yesterday afternoon, we received some notable earnings releases. Qualcomm (QCOM) reported fiscal first-quarter (ended December 24th) sales and adjusted profit of $9.94 billion and $2.75 per share, above estimates of $9.52 billion and $2.37 per share. The chipmaker also raised its near-term guidance, citing the growth potential of a new line of AI-enabled chips. Shares of the semiconductor company are trading higher in pre-market action. This morning, the headline reports came from Merck & Co. (MRK) and Honeywell (HON). The pharmaceutical giant beat Wall Street’s forecasts and its stock is moving higher in response, while the industrial giant reported weaker-than-expected revenues in the latest quarter and its shares are looking at a lower start. After today’s closing bell, we will hear from three of the “Magnificent Seven” members, with Amazon.com (AMZN), Apple (AAPL), and Meta Platforms (META) reporting their latest quarterly results. - William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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