Markets JOLTED by strong labor demand

Stocks ticked lower yesterday after an economic release showed strength in the labor market, leaving investors worried that the Fed will not be happy. All investors have their sights set on today’s FOMC announcement… tension is building.

Hope is the strategy of fools. If you were the stock market, what would you wish for in today’s announcement from the Fed? Well naturally, you would like the FOMC to raise rates less than the expected +75 basis points and follow up with a statement like “it may be appropriate to slow the pace of future rate hikes.” If something like that occurred, what we would possibly see is a drop in yields on the front end of the yield curve and a significant drop in yields on the back end of the yield curve (longer maturities). The yield curve would become even more inverted. This would possibly set the stage for the deeply depressed tech sector, and most growthy stocks to slingshot higher. The US Dollar would fall which would encourage investors to buy nearly everything else. Crude oil may gain ground as a cheaper dollar is good for crude, which trades in US Dollars. Gold, yes GOLD, and all its beleaguered minors may even get a boost as the precious industrial metal, too trades in US Dollars. Speaking of minors and mining, Crypto assets may even get goosed, because many investors now trade crypto like a growth asset. If you were smart enough to have bought short-term Treasuries, like T-bills, the fixed income portion of your portfolio will rise in value. Bars around the globe are likely to have more post-market revelers than usual.

By next week, car dealerships are likely to experience higher traffic in their showrooms. Holiday gift buying would pick up pace… 53 days left. Travel will be booked. That eternally filled shopping cart on Amazon.com will FINALLY be purchased. Consumer demand will pick up.

Stop and think about that for a minute. Go on.

Do you really think that the Fed would like that scenario to play out? Please be objective. Of course, the Fed would not like that to occur, because it would only make inflation worse. By the way, just because inflation, according to last Friday’s PCE Deflator, came in lower than expected, it is still high… and higher than it was last month. We know that when stocks are rallying, consumers are more confident. Even consumers who don’t own stocks are more confident when markets are rising. You know what else makes consumers confident? A strong labor market, which the US has at the moment. The Fed has a dual mandate which includes ensuring low inflation (1) and keeping unemployment low (2). It is failing badly on #1 and winning big on #2. The Fed is, therefore, willing to sacrifice a little on the jobs front in order to gain ground on inflation. THIS HASN’T HAPPENED YET. Further, it is important to remember that the Fed’s strategy is to LOWER demand to enable prices to moderate. It does this by making things YET MORE EXPENSIVE by raising borrowing costs. It also accomplishes this by tempering consumer confidence through words. Saying things like “inflation must be dealt with regardless of stock market performance,” may be scary to investors, but it is very much a part of the Fed’s strategy to weaken consumer demand.

Now I know that this missive is not exactly upbeat for investors (my personal portfolio has suffered too), but I think it is important to trade on facts. The market has factored in a +75 basis-point rate hike for this month and +50 basis-point hike in December. That would bring Fed Funds to 4.5% by the end of the year. The market has accepted this and has, in essence, given the Fed a pass to do it. If you are the Fed and STILL nervous about inflation, you would like to raise rates as much as possible until your pass runs out. That pass will run out if the economy falls into a recession or the inflation moves materially lower. Now, all of us would like the markets to become less volatile and begin to trend higher… in an orderly fashion. That will occur, once the Fed does, in fact, pivot. That may occur today, as it has in Canada, Australia, and with a slightly less hawkish ECB, but until that does occur, all bets are pure speculation. Hope is not a strategy. Pay close attention this afternoon.

WHAT’S SHAKIN’

Advanced Micro Devices Inc (AMD) shares are higher by +4.26% after the company announced that it topped EPS estimates by +2.75%. The chip maker credited strong demand from data-center demand which offset weaker PC demand. The company’s forward guidance was slightly less than analysts were expecting but was better than the gloomier forecasts of its competitors. Potential average analyst target upside: +46.4%.

Mondelez International (MDLZ) shares are higher in the premarket after it announced that it beat EPS and Revenue estimates by +7.79% and +4.62% respectively. Mondelez raised its full year guidance and said that consumers continue to “prioritize” food over other spending. This underscores why investors turn to defensive stocks during high inflation and weak economic growth and is consistent with prior admissions by Walmart (WMT) and Target (TGT). Dividend yield: 2.48%. Potential average analyst target upside: +15.1%.

CVS Health Corp (CVS) is higher by +4.63% in the premarket after it announced that it beat EPS and Revenue targets by +4.91% and 5.71% respectively. The company also raised its annual forecast. Dividend yield: 2.32%. Potential average analyst target upside: +25.0%.

The Estee Lauder Cos Inc (EL) shares are lower by -11.49% in the premarket after the company announced solid performance in the past quarter but significantly lowered its full year guidance. The reason for the lowered guidance was ongoing COVID restrictions in China and retailers tightening inventory in anticipation of recession. Dividend yield: 1.27%. Potential average analyst target upside: +39.9%.

Paramount Global (PARA) shares are lower by -8.19% in the premarket after it announced that it missed EPS and Revenue estimates by -14.47% and -1.98% respectively. In the past 30 days 34% of analysts adjusted their price targets for PARA, 0 up, 9 down,16 unchanged, and 1 dropped. Dividend yield: 5.00%. Potential average analyst target upside: +33.9%.

Also, this morning: Generac Holdings (GNRC), Zimmer Biomet (ZBH), Martin Marietta Materials (MLM), Horizon Therapeutics (HZNP), Vulcan Materials (VMC), and Rockwell Automation (ROK) all beat on EPS and Revenues while Scotts-Miracle Grow (SMG) and Yum! Brands (YUM) fell short.

YESTERDAY’S MARKETS

Stocks traded lower yesterday after the JOLTS Job Openings report came in stronger than expected reducing hopes that the Fed might pivot in today’s announcement. The S&P500 slipped by -0.41%, The Dow Jones Industrial Average fell by -0.24%, the Nasdaq Composite Index dropped by -0.89%, and the Russell 2000 Index gained +0.25%. Bonds gained ground and 10-year Treasury Note yields were unchanged at 4.04%. Cryptos inched forward by +0.15% and Bitcoin added +0.36%.

NEXT UP

• ADP Employment Change (Oct) is expected to show 185k new jobs compared to last month’s 208k new hires.
• FOMC Policy Announcement at 2:00 PM Wall Street Time, followed by a press conference at 2:30.
• Earnings announcements after the closing bell: Booking Holdings, Qorvo, Sunrun, Realty Income, Equinix, Fortinet, Zillow, MGM Resorts, Lumen Technologies, Albemarle, Robinhood, Allstate, Fisker, Transocean, eBay, Kyndryl, QUALCOMM, Roku, Etsy, HubSpot, Sarepta, and World Wrestling Entertainment.