Peloton on the climb

Stocks had a mixed close on Friday after the Government released a blowout employment number. A solid earnings announcement by tech heavyweight Amazon.com helped tech stocks gains despite a jump in bond yields.

Denial.  37 days 5 hours 56 minutes and 57 seconds. That is the countdown clock until the next meeting of the Fed’s Federal Open Market Committee. You can wait and hear what they have to say on that 38^th day or you can simply look at the markets and get a flavor of what traders are expecting. Let’s start by setting the stage. There is no denying that inflation has set in. Just about every earnings announcement to date has touched upon the topic. Ford Motor Co’s last Thursday announcement was a perfect example. The company has beaten revenue estimates by +9% but missed on EPS by -42.06%. Looking more closely at the company’s income statement, we see that its Cost of Revenue was more than +5% higher than analysts were expecting. In other words, though prices of autos are going up, the costs of making them are going up faster. Indeed, the company has relayed that raw material costs are on the rise. Steel prices have declined somewhat from their late summer spike, but they still remain more than +100% higher than they were just prior to the pandemic. In fact, looking back to just before The Great Recession, steel prices have never even approached their current levels. In addition to all those semiconductors we have been hearing about recently, auto manufacturers need steel to make the bones and the skins of those shiny autos, electric, gas, or whatever. High demand for cars has enabled companies like Ford to raise sticker prices, but supply chain problems have made it difficult for them to translate those hikes into profits. As you might guess, Ford is going to have to do something to get those margins healthy once again, and what might the company do to achieve those goals? If you answered “raise prices” you are correct. It simply has no choice if it wants to stay viable. Steel prices are higher because of high demand but also because, similarly to manufacturers, labor costs are on the rise, pinching the profits of steel manufacturers. On that note, a review of last Friday’s Bureau of Labor Statistics release showed that hourly wages have grown by +5.7% from a year earlier. That growth is a hallmark of a tight labor market in which employers must raise wages to attract reluctant workers. A tight labor market is typically associated with low unemployment rates and a late stage, expanding economy, and according to some theorists, a prelude to recession. That is clearly not the case here as last Friday’s number relayed an unemployment rate of 4.0%, which is trending lower, but still higher than prior to the pandemic. Yes, there is a very different dynamic at play at the moment, and there are social considerations impacting the tightness of the labor market in this gray, extended, pandemic cycle.  Whatever the reason, labor costs are going up, which simply confounds an already challenging environment for manufacturers. Inflation is troubling for consumers and manufacturers alike. 

Enter the Fed, whose job is to keep inflation in check. It has promised to come to the rescue with quantitative tightening and interest hikes. The conventional wisdom with those hikes is that consumers will buy less due to the increase in the price of financing. I suppose, higher auto loans rates, which will surely result, will dampen demand for cars. Less demand for cars means less demand for steel, and at the end of the day prices will recede for both the finished product and its raw material inputs. Those rate hikes will certainly not cause labor costs to go down, however, so it is not so cut and dried. Aside from the Fed’s clear signaling, last week’s employment numbers certainly support a rate hiking case for the Bank.  So, what can we expect in the 38 days?  According to Fed Funds futures, there is now a 34.7% chance of a +50 basis point rate hike. That same probability stood at just 8.5% earlier last week…prior to the release. Additionally, 2-year Treasury Note yields, which are closely tied to monetary policy, spiked by +10 basis points on Friday’s news. Finally, futures show that there is only an 18.9% chance that Fed Funds will be 125 basis points or less by the end of the year.  Meaning, traders are now expecting at least five 25 basis point hikes. There are 7 FOMC meetings between now and December and we know that a lot can happen between now and then. 

WHAT’S SHAKIN’

Hasbro Inc (HAS) shares are trading higher by +1.68% in the pre-market after it announced, this morning, that it beat EPS and Revenue estimates by +34.23% and +7.54% respectively. The company stated that sales had exceeded estimates in the holiday season. Forward guidance for 2022, however is lower than analyst’s estimates.  Dividend Income: 2.98%.  Potential average analyst target upside: +21.3%.

Zimmer Biomet Holdings Inc (ZBH) is trading lower by -5.56% in the pre-market after it announced that it had missed EPS and Revenue targets by -1.38% and -1.40% respectively. In the past 30 days 18% of analysts have changed their price targets, 1 up, 5 down, 18 unchanged, and 1 dropped.  Dividend Income: 0.78%.  Potential average analyst target upside: +23.7%.

Peloton Interactive Inc (PTON) shares are spinning higher by +32.33% in the pre-market after The Wall Street Journal reported last Friday that the company was in talks to be acquired by Amazon (AMZN). The rise in the stock will be welcome news to shareholders that have suffered an 83% loss from a year ago.  Potential average analyst target upside: +78.9%.

FRIDAY’S MARKETS

Stocks had a mixed close on Friday after a surprisingly high Nonfarm Payroll number for January. Good can be bad these days, but Amazon’s solid earnings from the night before kept traders bullish. The S&P500 rose by +0.52%, the Dow Jones Industrial Average slipped by -0.06%, the Nasdaq Composite Index gained +1.58%, the Russell 2000 climbed by +0.57%, and the S&P500 ESG Index added +0.65%. Bonds fell and 10-year Treasury Note yields gained +7 basis points to 1.90%. Cryptos rose by +12.25% and Bitcoin traded higher by +9.96%.

NXT UP

• We have a quiet numbers day today but plenty coming up in the days ahead. In addition to more earnings, we are due to receive the Consumer Price Index and University of Michigan Sentiment.  Please refer to the attached earnings and economic calendars for details.
• After the closing bell: Earnings from Take-Two Interactive, Principal Financial, Chegg, Nuance Communications, Simon Properties, Tenet Healthcare, and Amgen.