Ford is all charged up over EVs

Stocks soared yesterday on a strong earnings outlook and an ever-so-subtle hint that the Fed may slow down its rate-hiking frenzy. The Fed raised its key lending rate by ¾ of a percent – a large move – but largely expected.

And… drop the mic. Yesterday afternoon, Wall Street time, Fed Chair Jerome Powell is the rock star everyone wants to see. Tickets to his show were…FREE! Fans simply had to tune into any financial news station on cable or the web. Yesterday, Powell dropped his latest banger…and it was a huge hit. You are thinking, “What in the world are you talking about, Mark?”

If you checked into the markets while you were preparing dinner, out for your afternoon dog walk, or waiting for your yoga class to begin, you would have surely raised an eyebrow. By then you would have heard that the Federal Reserve raised its key lending rate (the press calls it simply “interest rates”) by ¾ of a percent, or +75 basis points. That is an unusually large move from the Fed which typically raises rates by only 25 basis points at a time. What’s more is that the latest move marks the second consecutive unusually large move. I’ll do the math for you…that is a 1 and ½ percentage point increase in just 2 meetings, June and July. If you read my note often enough, you were expecting the move from the Fed, if not, I am sure that you heard a mention or two in mainstream media. We know why the Fed is tightening financial conditions. It is attempting to tackle the high inflation which has affected us for these past many months. SO, you check the markets expecting some big, ugly red numbers and you see just the opposite, big, beautiful green numbers. You are confused and all at once… happy. Let’s discuss.

First and foremost, indeed markets were expecting the +75 basis-point move. My regulars even knew the probabilities leading up to the announcement. But still, in these unprecedented times, anything can happen, and you are probably aware that low probability events happen all the time in the stock market. Therefore, even though there was just a 10% chance that the Fed would push the expected hike to a full percentage point, there was still that hidden fear that it could happen. At 2:00 PM Wall Street time we got the result which read: “NO NEGATIVE SURPRISE!” In a jittery market, that message led to relief, and a rally – a relief rally.

Next came the Fed Chair’s press conference. He read his carefully crafted statement which described the day’s events. Though there were no outright overtures, the statement sounded like it had a bit less teeth than many expected. That further fueled that rally in stocks. Then, it was time for the Chair to answer questions from the financial press. That is where the real action usually happens. This is what we learned. Powell thinks that the US is not in a recession: good news, but that really means nothing. The Fed believes that we are in the neutral rate. That is a hotly contested level that is thought to neither stimulate nor slow economic growth. That is also good news. The chair further implied, that further hikes would hold even more weight, as they would be restrictive. They would also have to be well thought out, because the Fed recognizes that the economy is already showing some signs of slowing down – good news. Good news because that is exactly what the Fed wants, and what is necessary to tame inflation. In fact, Powell acknowledged that the rate hikes to date are already having an impact and that further impacts would continue to accrue. That is good news, because the Fed feels like it has already done the bulk of what may be necessary to break the inflationary pattern. Jerome Powell was very careful not to give away too much guidance. In fact, he even stated as much, saying that the Fed was not likely to give as much guidance as in the past, as things…everything, is up in the air at this point – there is too much uncertainty. With all of that implying, inferring, interpreting, correlating, and…um, guessing, it appears that the Fed may slow things down in the future. At least the markets think so. How do we know that?

The 2-year Treasury Note attempts to predict where interest rates will be in 2 years from now. Just prior to the policy statement, the 2-year was yielding around 3.05%. Immediately after the Chair’s presser, they were at around 2.97%. An -8 basis-point move in a short maturity in less than an hour is a big move, in case you were unaware. What is more important than the absolute move itself, was the direction of the move – DOWN, meaning bond markets expect a less aggressive Fed. Going over to Fed Funds futures, where we can derive probabilities of future hikes and get an implied future rate. Currently, futures are expecting rates to be at 3.31% by the end of the year, after starting the week around 3.40%. By comparison, the implied rate was more like 3.5% just a few weeks back. What that amounts to is roughly 1 less +25 basis-point hike by the end of the year. That is positive for stocks, particularly growth stocks, which have recently become highly, negatively correlated to interest rates for lots of reasons (some good, some bad), which I will not expound upon now. At any rate (no pun intended), that is why the growth-heavy Nasdaq was up more than +4% yesterday, while the cyclical-heavy Dow was up by just +1.37% (though we can’t complain about that). While we are on the mystical topic of rates and futures, looking out even further into the great unknown, they imply that the Fed will begin to CUT rates in March of 2023! Powell was questioned on that, and he had “no comment”, and said something to the effect of how difficult it is to predict where the economy and markets will be next month, let alone 9 months and 5 Fed meetings from now. We could keep going, but your yoga instructor is about to begin class. Deep cleansing breaths…namaste.

WHAT’S SHAKIN’

Etsy Inc (ETSY) shares are higher by +9.11% in the premarket after it announced that it beat EPS and Sales estimates by +55.87% and +4.87% respectively. Further, the company gave guidance for the current quarter that was in line with analysts’ expectations which, for an internet e-tailer is quite positive in the current environment. Potential average analyst target upside: +26.7%

Ford Motor Co. (F) shares are trading higher by +7.05% in the premarket after the carmaker crushed EPS and Revenue estimates by +52.01% and +15.58% respectively. Ford reiterated full year guidance and announced job cuts which will allow it to put more resources into its EV efforts. Dividend yield: 4.55%. Potential average analyst target upside: +24.7%.

ALSO, this morning: Ares Management (ARES), Thermo Fisher Scientific (TMO), The Southern Co (SO), Honeywell (HON), Carrier Global (CARR), Valero Energy (VLO), Merck (MRK), A O Smith (AOS), Fortive (FTV), Southwest Airlines (LUV), Pfizer (PFE), Martin Marietta Materials (MLM), and American Tower (AMT) all beat on EPS and Revenues. Overstock.com (OSTK), Stanley Black & Decker (SWK), Northrop Gruman (NOC), and Baxter International (BAX)came up short on both fronts. AGCO (AGCO), Altria (MO), and Laboratory Corp (LH) missed Sales targets.

YESTERDAY’S MARKETS

Stocks rocketed higher on a soft-sounding Fed and upbeat earnings. The S&P500 rose by +2.62%, the Dow Jones Industrial Average climbed by +1.37%, the Nasdaq Composite Index jumped by +4.06%, and the Russell 2000 Index traded higher by +2.39%. Bonds rose and 10-year Treasury Note yields fell by -2 basis points to 2.78%. Cryptos leapt by +12.80% and Bitcoin advanced by +8.57%.

NXT UP

• GDP Annualized (Q2) is expected to show a +0.4% growth after contracting by -1.6% last quarter. This is the big one to watch because if it is negative, the US is in a technical recession.
• Initial Jobless Claims (July 23) is expected to come in at 250k, down slightly from last week’s 251k claims.
• After the closing bell earnings: Apple, Digital Realty Trust, Zendesk, US Steel, Intel, Seagen, Amazon.com, First Solar, Roku, Gaming and Leisure Properties, and Exxon Mobile.