Red from Fed

Stocks fell yesterday, prompted by a less-than-upbeat earnings release from super-retailer Target. Contrary to Targets big miss, The US Census Bureau’s Retail Sales figure came in above Economists’ estimates.

The many faces of the Fed. Have you noticed that the Fed likes to be the center of attention. We all have that annoying friend or family member that always dictates the mood in the room, sometimes positively but others negatively. The Fed has been like both. Way back (seems like way, way back) in 2018 the Fed rescued what felt like the worst holiday season since The Great Depression. Yeah, it was bad enough to warrant the use of a capital “T” and a capital “D”. The market loved the Fed for that, and it was the toast of the town… er, the markets throughout 2019 leading up to The Pandemic (notice use of capitals). When the COVID crisis crippled markets and the economy, the Fed took its appeal to new heights as it enacted what some now refer to as the “kitchen sink” monetary stimulus, meaning the Bank threw in all it had. The Fed’s activity combined with the massive fiscal stimulus packages from Congress managed to not only turn the sinking economy around, but also usher in unprecedented market returns. One unfortunate side effect of all that stimulus is the also-unprecedented inflation that now grips the US and similarly, many other economies around the globe. To be clear, today’s high inflation is not solely due to fiscal stimulus. The war in Ukraine, Mother Nature, and certain cyclical factors have also hit prices in a period of hot consumer demand all coming together to cause a superstorm of sorts. The once-revered Fed ultimately turned into the now-reviled enemy of the markets.

My regular readers know that I like charts, and it is Thursday, so straighten your specs and have a look at the following chart. Don’t worry about the details, I only inserted it for effect. The chart depicts how Fed Funds rose slowly after The Great Recession (with a capital “R”), lowered slowly in 2019, slammed to 0% in The Pandemic, and rocketed in the past 9 months.

Ok, so now we have taken our medicine and inflation has shown some hints that it might be letting up somewhat. We would like to catch our collective breaths, and once again sharpen our pencils and plan for our financial futures. BUT THE FED IS NOT HAVING IT! Starting with the Fed Chair himself, all but maybe 2 Fed officials over numerous speaking engagements have made it clear using terms like “a long ways to go,”“… not done yet,” “possibly another full point,” and “pause off the table,” that the Fed is still very much still the “Debbie Downer” center of attention and not the “Pollyanna” one which the markets want so dearly. With each statement equity markets falter, deflating our hopes of a stable market recovery. Despite all the trash-talk, however, not much has changed in what the markets are expecting in the months ahead. The numbers from both Fed Fund Futures and Overnight Index Swaps show that the Funds Rate target will peak around 5% next year in late spring / early summer. That has not changed much recently and, based on the chart above, you may notice that the pace of the hiking will be significantly slower over the next 9 months. Stay hopeful, “responsible Fed” is coming soon, and that will likely be followed by “Fun Fed” once again. Remain patient.

WHAT’S SHAKIN’

Bath & Body Works Inc (BBWI) shares are higher by +21.4% in the premarket after the company announced that it beat EPS and Revenue estimates by +80.79% and +2.75% respectively. The company also raised full year guidance and remains focused on “innovation” and “cost cutting”. Dividend yield: 2.55%. Potential average analyst target upside: +61.0%.

Cisco Systems Inc (CSCO) shares are higher by +4.26% in the premarket after the networking gear manufacturer announced that it beat EPS and Revenue targets by +2.78% and +2.39% respectively. Over the past 30 days 22% of analysts have revised their targets, 5 up, 1 down, 20 unchanged, and 1 dropped. Dividend yield: 3.42%. Potential average analyst target upside: +21.0%.

Also, this morning: Macy’s (M) and BJ’s Wholesale Club (BJ) topped estimates.

YESTERDAY’S MARKETS

Stocks slumped yesterday in the wake of unfriendly Fed comments and a bad earnings announcement by Target. The S&P500 fell by -0.82%, the Dow Jones Industrial Average traded off by -0.12%, the Nasdaq Composite Index dropped by -1.54%, and the Russell 2000 Index declined by -1.91%. Bonds gained and 10-year Treasury Note yields fell by -7 basis points to 3.68%. Cryptos fell by -2.69% and Bitcoin relinquished -2.12%.

NEXT UP

• Housing Starts (Oct) are expected to have fallen by -2.0% after dropping by -8.1% in the month prior.
• Building Permits (Oct) may have slipped by -3.2% after climbing by +1.4% in September.
• Initial Jobless Claims (Nov 12) is expected to come in at 228k, slightly higher than last week’s 225k claims.
• Today’s Fed talk: Bullard, Nowman, Mester, Jefferson, Kashkari, Powell, Daly, Williams, and Evans.
• After the closing bell earnings: Applied Materials, Palo Alto Networks, Ross Stores, Williams-Sonoma, and The Gap.