Amazon cutting workforce

Stocks had their first gain of the year, now just two trading days old as investors settled in to get back to business as usual: inflation, rates, the economy, and earnings, all offering to serve up surprises in the days ahead. The Fed says, “don’t expect us to cut rates,” and the market says “meh.”

Can we talk? Has the holiday buzz worn off? No, then put this note down and go grab yourself an espresso, tea, bonbon, or whatever you need to get focused. Still waiting. Ok, ready? Here we go. Inflation is unacceptably high, corporations are limping, the tech sector is firing workers, and the Fed is keeping interest rates high. There, you see that was not too difficult. We are just a few trading days into the new year and some of us may have forgotten that all these mostly negative market drivers persisted throughout last year and they did so right up until last Friday’s closing bell.

I write a lot about the Fed and for good reason. The Fed is like the founder of the feast. At the stroke of a keyboard, it can make markets sail high with ease or falter into a steaming heap of rubble. A quick history lesson. It did the former for almost 14 years and the latter for 13 months, not including this one. Now, I am not sure if the Fed is enjoying this recent spate of pain making after so many years of joy creating, but it should be clear that the Fed’s job is not done yet. The last Consumer Price Index / CPI as well as the last PCE Deflator prints indicated that consumer inflation may be slowing. Bravo! The problem is that inflation is still too high. Their last readings were +7.1% and +5.5%. Those numbers may seem meaningless when you look at them, but in December of 2019 they both stood at +2.29% and +1.6%. Moreover, the Fed’s longstanding target for the PCE Deflator is somewhere in the +2.0% range. I say “somewhere,” because the Fed relaxed its hard target in order to keep rates lower for longer in 2021… just before inflation became unbearable. So, what do you think, is the Fed’s job done? I realize that the PCE Deflator was at +7% in June of last year and that it did improve through its last +5.1% release for November. The inflation numbers for December will come out later this month, and while there are no projections for PCE yet, the CPI is projected to have slipped further to +6.7%. Even if that expectation is met, it is around 3 times higher than it was before the pandemic. So, I ask you once again, do you think the Fed’s job is done?

According to Fed Funds futures, traders expect rates to rise by another +50 basis points before falling +50 basis points between now and December. That’s right, the market is expecting Fed easing in the second half of the year. The Fed, according to yesterday's FOMC Minutes release, is unhappy with that expectation. Policy makers made it clear that market expectations were too dovish. Why? Don’t make me re-write the last paragraph. Also in the minutes, the Fed made it clear that it is far too early to consider cutting interest rates. Once again, considering the details I provided above, you should not be surprised. According to futures, the first meaningful probability for rate cuts is in late summer early fall. That is about 6 FOMC meetings from now. Lots can happen between now and then. Should the economy slip into a bona fide recession, this would be a different discussion, but for now the economy continues to limp forward with no assistance necessary. The Fed in its actions and its communications is acting quite rationally given all the numbers. In other words, nothing new, for now.

There are some early signs that supply chains are in markedly better shape than they were last year which should ease some inflationary pressure. The labor market remains tight according to the most recent numbers, but we will have some fresh ones to ponder later this week and there are an increasing number of reports of job cuts. Should the labor market soften somewhat, that too would ease some pressure on inflation. Finally, on inflation itself. Economists from top institutions expect (median forecast) CPI and the PCE Deflator to end 2023 lower at +4.0 and +3.6%. Those are indeed significantly lower than present… yet still higher than they were before the pandemic… and higher than the Fed’s target level. The Fed itself is projecting the PCE Deflator to fall to +5.6% by year’s end. I ask you one final time, is the Fed’s job done?

WHAT’S SHAKIN’

Amazon.com Inc (AMZN) shares are higher by +2.07% in the premarket after it announced, WHILE YOU SLEPT, that layoffs would total 18,000 workers, an additional 8,000 since layoffs were first announced. The stock is down by some -48% in the past year and it will deliver its Q4 earnings on February 3^rd. Potential average analyst target upside: +58.9%.

Walgreens Boots Alliance, Inc (WBA) shares are lower by -1.97% in the premarket despite announcing that it beat EPS and Revenue targets by +1.75% and +1.43% respectively. The company further, announced and reaffirmed its full-year guidance which was well within the range of analysts’ expectations. Dividend yield: 5.12%. Potential average analyst target upside: +14.5%.

YESTERDAY’S MARKETS

Stocks closed higher yesterday after a mixed bag of economic releases. The S&P500 gained +0.75%, the Dow Jones Industrial Average rose by +0.40%, the Nasdaq Composite Index traded higher by +0.69%, and the Russell 2000 Index advanced by +1.25%. Bonds gained and 10-year Treasury Note yields slipped by -5 basis points to 3.68%. Cryptos added +2.6% and Bitcoin climbed by +0.96%.

NEXT UP

• ADP Employment Change (November) may show +150k new hires for the month, slightly more than last month’s +127k additions.
• Initial Jobless Claims (December 31) is expected to come in at 225k, same as the prior week.
• S&P Global Services PMI (December) is expected to come in at 44.4 in line with prior, flash estimates.