This morning, the attention of Wall Street, which has been focused on Corporate America and another round of quarterly earnings reports this week, turned to the performance of the U.S. economy and the evolving picture on inflation. At 8:30 A.M. (EST), the Labor Department reported that the Consumer Price Index (CPI) climbed 0.6% in January, versus the expectation calling for a more modest 0.4% increase. Likewise, on a 12-month basis, prices were still running very hot, with a jump of 7.5% last month, compared with the December year-to-year advance of 7.0%. The equity futures, which were mixed, but none too far removed from the neutral line heading into the much-anticipated CPI release, are now heading lower and indicating some selling at the start of the trading day stateside.
The Labor Department also reported that initial weekly jobless claims for the week ending February 5th came in at 223,000, which was another week-to-week improvement. Perhaps, the significant decline in COVID-19 Omicron cases is bringing more workers back into the labor market and fostering an increase in hiring as well. Last week, we learned that January nonfarm payrolls increased by a much better-than-expected 467,000 positions, and the average hourly wage continued to rise. Today’s pricing data and the recent labor market figures are unlikely to give the central bank any pause in its attempt to rein in inflation this year. The economy also seems to be on good enough footing to withstand more-restrictive monetary policies, which may include as many of three to four interest rate hikes by year’s end and eventually a reduction in the central bank’s bloated balance sheet.
Meantime, we received some more news from Corporate America since yesterday’s closing bell, and it has made for good reading. The headline report came from Walt Disney (DIS), as the entertainment giant posted strong top- and bottom-line results, with notable growth in subscriptions for its Disney+ streaming service and strong visitation rates at its theme parks driving the outperformance. Likewise, Uber (UBER) reported better-than-expected results, including a revenue beat; casino operator MGM Resorts International (MGM) delivered a quarterly profit, versus expectations of a loss; and toymaker Mattel (MAT) posted a 10% sales advance and issued strong guidance for 2022. Shares of all four companies are trading higher in pre-market action. In general, after the broader market selloff in January, it appears that the stocks of companies that have reported strong quarterly results and overall encouraging operating fundamentals are making up some ground that was lost during the first month of the year.
The earnings news, which also included better-than-expected results from beverage giant PepsiCo (PEP) and cloud communications company Twilio (TWLO), speaks volumes about the health and resiliency of the U.S. consumer sector and about the continued reopening of the domestic economy. Over the last few trading sessions, the cyclical stocks, including the hotel and leisure and travel issues, have done well on signs of strength in the U.S. economy, and sentiment that the negative impact of the COVID-19 Omicron variant is lessening.
Wall Street also is keeping an eye on rising Treasury-security market rates, with the yield on the benchmark 10-year Treasury bond topping the 1.98% mark this morning in reaction to the consumer pricing data. The higher yields may lead to increased interest in the stocks of the financial companies. In particular, the earning power of the banks should get a boost from higher lending rates, as they are generally able to increase what they charge more than the rates they have to pay on deposits and their own borrowings. Conversely, the worry of higher rates going forward has already hurt the shares of the homebuilding stocks, on the thought that higher borrowing costs may slow the pace of home sales. The homebuilding stocks sold off when Federal Reserve Chairman Jerome Powell, following the January FOMC meeting, discussed the likelihood of more-hawkish monetary policies from the central bank in the coming months.
The prospect of a less accommodative Federal Reserve in the coming months may keep investors on edge, which has been the case so far this year. Historically, stocks have not performed as well during a period of monetary tightening. The last time the central bank hiked short-term interest rates, in the second half of 2018, equities sold off. Thus, we think investors may be wise to keep some cash on the sidelines heading into next month’s Federal Open Market Committee decision, which, if the central bank raises rates, may lead to some volatility, particularly in the higher-growth sectors.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
