Wall Street has a lot of news to digest today. Since the close of trading yesterday afternoon, a number of important quarterly reports were released, and this morning brought a few publications on the U.S. economy. Today’s session is again likely to be driven by the latest monetary policy decision from the Federal Reserve, which came at 2:00 P.M. (EST) yesterday.
The Federal Open Market Committee’s (FOMC) decision to raise the benchmark short-term interest rate by a quarter-point, to a range of 4.50%-4.75%, and the press conference from Federal Reserve Chairman Jerome Powell after the release of the Fed statement, produced a whipsaw performance in both the U.S. stock and bond markets during the final few hours of yesterday’s trading session.
The market’s initial reaction to the Federal Reserve’s statement was dour and equities sold off sharply. In addition to raising the federal funds rate by 0.25%, the Fed said that it sees ongoing rate hikes as appropriate to push interest rates to a “sufficiently restrictive” level likely needed to stamp out inflation and return pricing growth to the central bank’s desired target rate of 2% in time. That, along with an increase in the number of job openings and labor turnover (the JOLTS survey was released yesterday morning) produced some selling. (This morning, the Bank of England raised its benchmark short-term interest rate by a half-point.)
However, the market rallied forcefully on Chairman Jerome Powell’s commentary, which most pundits viewed as more dovish than expected. Mr. Powell noted that the 450-basis-point increase in the federal funds rate over the last 12 months is starting to have the desired effect on inflation, with the prices of goods coming down notably in recent months. Chairman Powell also noted that future decisions by the central bank policymakers will be data-driven. With many market watchers thinking that the reports on consumer and producer prices to be issued before the March FOMC meeting will likely show a decline in inflation, the market believes that the data will push the Fed to slow the rate hikes and possibly even pause.
The stock and bond markets also appear to be pricing in the possibility of a rate cut later this year, especially if economic conditions continue to weaken. In his question-and-answer session with reporters, Chairman Powell did not seem to fight back against the market’s notion. As noted, the U.S. stock market rallied notably, with the biggest gains recorded by the higher-growth areas. This was reflected in the outsized advances by the technology-driven NASDAQ Composite and the small-cap Russell 2000 stock indexes. There was clearly an increased appetite for riskier assets after Mr. Powell’s press conference yesterday afternoon.
Meantime, the economic news, save for the still healthy data on the job market, has been weakening. After last week’s disappointing reports on retail sales, industrial production, and personal income and spending, we learned yesterday from the Institute for Supply Management (ISM), a trade group, that manufacturing activity again contracted in January. This morning, the Labor Department reported that initial jobless claims for the week ending January 28th totaled 183,000, down 3,000 from the previous week. Meanwhile, fourth-quarter nonfarm productivity climbed 3.0% last month, which was better than expected. It also is worth noting that unit labor costs rose 1.1%, which was below the consensus expectation. Both were positive signs for the economy during a stretch that has not produced many upside surprises. Treasury market yields retreated further on the economic data.
Tomorrow morning at 8:30 A.M. (EST), we will get the much-anticipated report on January employment and unemployment, which also has the potential to be a market-moving event. Likewise, at 10:00 A.M. (EST), we will receive the latest reading on nonmanufacturing activity from ISM. This report may be more scrutinized than normal, as Chairman Powell said the Fed has not yet seen disinflation in the core services sector, which excludes the housing component.
On the earnings front, the big report came from Meta Platforms (META) after yesterday’s closing bell. The social media giant reported adjusted earnings per share of $1.24, on much better-than-expected revenue of $32.17 billion. The top-line figure was down 4% versus the prior-year period, but the Street was looking for an even bigger decline. Meta Platforms also reported better daily active user growth and raised its full-year revenue forecast on an expected recovery in digital advertising. The company also focused more on its efforts to expand its Artificial Intelligence (AI) capabilities and talked less about the Metaverse, the virtual reality universe, which Wall Street seemed to like. Shares of the company, which had rallied 27% year to date into the earnings release, are up notably (nearly 20%) in pre-market action.
However, not all the quarterly reports are being greeted with the same fanfare this morning. Indeed, shares of drug maker Merck (MRK) and industrial giant Honeywell (HON) are pointing to lower openings today after both companies reported results and issued full-year outlooks that disappointed investors. Nevertheless, we are looking at a higher opening stateside, with the Dow futures turning positive, and the NASDAQ expected to add to yesterday’s gains. The broader S&P 500 Index is pointing to a higher opening as well.
This afternoon, all eyes will be on the technology sector with the latest results from technology behemoths Alphabet (GOOG), Amazon.com (AMZN) and Apple (AAPL) due after today’s closing bell. – William G. Ferguson
At the time of this article’s writing, the author had positions in one or more of the companies mentioned.
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