The Fed knows what’s up

Stocks sold off yesterday in the wake of a stronger than expected inflation figure. Hawkish Fed comments spooked the markets as bets on more aggressive rate hikes increased.

Just give me a reason.  It has been a cold winter in NYC. I must admit, I have not done the quantitative research on my opening statement, so to be consistent with my normal operating procedures, I will recant my statement and replace it with “it has felt quite cold this winter in NYC.”Yesterday was a balmy day and temperatures were in the low 50s, which prompted me to think of the warm summer days that await us. My mind slipped, instantly to last summer…ahh, the hot sun, the barbecues, the shore (that’s what we call the beach in New Jersey), the singing birds in my garden…[insert record scratch sound effect here]…wait, what happened to my daydream? It was Friday June 18^th, the day before my birthday.  It was a warm day, topping 85 degrees and partly cloudy. After a late spring surge, the stock rally was losing steam. We were on the back end of Q1 earnings season, and many wondered if stocks could continue to turn in such spectacular growth.  Wednesday was a tough session for stocks and Thursday proved that investors were resilient, managing a solid close. Friday should have been a nice rally day and I was looking forward to spending time with family and friends over the weekend. And then it happened. St. Louis Fed President James Bullard, in a CNBC interview said that he saw initial rate hikes in 2022. The market did not take kindly to his statement. It was possibly the most forward hawkish statement to date. The S&P500 fell by -1.31% on that day. 

Much has happened since that summer day.  Inflation continued to…well, inflate. Stocks continued to rally, but for an early fall swoon, leading to a recovery which would be dashed by the Fed Chair shifting his language into the hawk camp. Coming into the new year, one would be hard-pressed to find anyone who was not expecting the Fed to hike interest rates in the year ahead. The big question was how many and by how much. The Fed had to weigh the risk of letting inflation continue with the risk of slowing down a recovery in the labor markets. Last Friday’s monthly employment figures showed a greater than expected number of new hires for January, raising the speculation that the Fed was cleared to be more aggressive. Some economists began to ponder a +50 basis point hike in March, though a more typical hike would be +25 basis points. Fed Funds futures are used to anticipate where the key lending rate might be in the future. According to those futures on Wednesday, there was a 24% chance of a +50 basis point rate hike in March.  Yesterday mornings’ CPI release came in slightly hotter than expected, but still, by no means a blow-out number, despite the ominous headlines.  Still, with inflation on everyone’s minds, one would expect the number to illicit some speculation that the Fed might act more aggressively. Traders began to wonder if the Fed might even act before its March meeting. And then it happened… AGAIN. St. Louis Fed President James Bullard, in a CNBC interview said that he would favor a +50 basis point hike in March, at least a 1% Fed Funds rate by July, and that he would be open to inter-meeting rate moves. That was the most hawkish statement by a Fed official to date. Stocks did not like the sound of that, and the S&P ended the day lower by -1.81%. After the hot inflation number and hawkish admission by Bullard, Fed Funds futures gave a 98.6% chance of a +50 basis point March hike. 

Now, it is important to recognize, that Bullard is not the only Fed member to vote on policy. Indeed, yesterday San Francisco Fed President Mary Daly and Richmond Fed Head Thomas Barkin both admitted skepticism about a half point hike and inter-meeting policy changes. One cannot ignore the reality that inflation is here and not going away so fast. One cannot also ignore that Bullard did correctly predict that rate hikes would come in 2022 on that hot summer Friday, so many months ago. This morning, Fed Funds futures predict an 87% chance of a +50 basis point hike in March.  Happy Friday!

WHAT’S SHAKIN’

Under Armour Inc (UAA) shares are under water by -1.56% in the pre-market after it warned that supply chain snags will lead to “material impacts” on its spring and summer seasons. The admission overshadowed the company’s impressive EPS and Revenue beat of +116% and +2.36%, respectively.  Potential average analyst target upside: +37%.

Expedia Group Inc (EXPE) is trading higher by +4.29 after it announced that it had turned a second quarter of profit despite the OMICRON-variant surge. Expedia beat analysts’ EPS estimates by +77.5% while it missed Revenue targets by -0.46%. In the past 30 days, 64% of analysts have changed their price targets 18 up, 0 down, and 10 unchanged.  Potential average analyst target upside: +6.5%.

ALSO, this morning:  Ares Management (ARES) and Newell Brands (NWL) beat on both EPS and Revenues. Dominion Energy (D) and Cleveland-Cliffs missed on both EP and Revenues.

YESTERDAY’S MARKETS

Stocks sold off on higher-than-expected inflation and hawkish comments by a regional Fed president. The S&P500 fell by -1.81%, the Dow Jones Industrial Average traded lower by -1.47%, the Nasdaq Composite Index dropped by -2.10%, the Russell 2000 gave up -1.55%, and the S&P500 ESG Index was off by -1.85%. Bonds were lower and 10-year Treasury Note yields gained +8 basis points 2.02%. Cryptos were off by -3.61% and Bitcoin traded lower by -1.62%.

NXT UP

• University of Michigan Sentiment (Feb) may have slipped to 67.0 from 67.2.
• Next week, we have more earnings, PPI, Retail Sales, Industrial Production, housing numbers, regional Fed reports, FOMC Meeting Minutes, and Leading Economic Index.  Check in on Monday for calendars and details.