Stock futures traded just above breakeven levels, following a weak day of trading in the market yesterday, as Federal Reserve Chairman Jerome Powell testified in the U.S. Senate (more below). This morning, the ADP Payroll report stated around 242,000 jobs were added in February, showing an acceleration in hiring from January. The leisure and hospitality segment added about 83,000 jobs as Americans continue to travel more, and financial activities gained 62,000 during February. Wage growth decelerated slightly, with an average annual wage gain of about 7.2%, and job changers saw an increase of 14.3% as calculated by the payroll giant. These figures will likely be a key part of future inflation and Federal Reserve interest rate policy. Overall, market action suggests a tepid start to the trading day. Still, all eyes will be on Federal Reserve Chairman Powell, who will testify to the U.S. House of Representatives this morning. Elsewhere, the Beige book will be released this afternoon, likely affecting trading.
The stock markets started trading higher yesterday, ahead of Chairman Powell’s testimony in front of the U.S. Senate. During that hearing, he stated that January data suggest “inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee meeting” and that “if the totality of data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes’’. Bond yields quickly traded at a higher level after these statements, as traders now think a 50-basis point hike is possible at the March Federal Open Market Committee meeting. Traders also sold off their stock positions, causing the indices to slide for the rest of the day. Overall, the S&P 500 fell 62 points (down 1.53%), the NASDAQ finished down 145 points (1.25% lower), and the Dow Jones Industrial Average closed off 575 points (down 1.72%). Market breadth decidedly favored decliners, which outpaced advancers by a 3.9-to-1.0 ratio. All 11 market sectors traded lower, with interest rate-sensitive REITs and financial stocks falling the most. Consumer staples held up the best on a relative basis.
In commodity news, oil prices fell yesterday as fears increased about how a tighter interest rate environment would slow the global economy, causing demand expectations to fall. Elsewhere, U.S. Treasury bond yields rose across the board. The yield curve remains heavily inverted, with shorter-term rates trading much higher than long-term ones. Bond traders have also shifted their positions quickly as a growing contingent is now pricing in better odds of a 50-basis point hike at the March Fed Open Market Committee meeting than was previously expected. The Chicago Board Options Exchange Volatility Index, the VIX or “fear index,” rose sharply as demand for options protection increased with greater uncertainty over the direction of the economy and interest rates.
Several economic reports will be released later in the week. These include the initial jobless reports on Thursday, the employment report for February, the unemployment rate for February, and average hourly wages on Friday. Elsewhere, hundreds of mostly smaller-sized companies will report quarterly earnings results, and give guidance for 2023 in the days ahead. That said, the vast majority of the earnings season has already passed. We think most eyes will be looking toward data telling how the U.S. economy is faring, and on hourly wages, which have been a key contributor to inflationary pressures. - John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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