Fed expected to ease the pain

Stocks rallied yesterday to close out a banner month as bets mounted on a Fed pivot in today’s announcement. If January felt like a time warp, it was of sorts, as 2001 was the last time the Nasdaq started off a year this positively.

Piano piano. You have read it in this very publication many a time. You know that I have a tee-shirt and maybe even a baseball cap with the saying. Don’t fight the Fed! Oh, and those of you that watch a lot of prime-time, financial cable news, have also surely heard it. Why? Because it is quite literally on the first page of every Wall Streeter’s book of sayings. Whether there is a technical reason (there is) or not, history has shown us that when the Fed offers free money, capital markets perform better than when the Fed is tightening credit. Ok, fair enough, the most powerful central bank in the world can move economies and markets. If you still don’t believe me, just open up your 401k statement from last year… ah, don’t do that, actually, there is no need to go through that again, because you know. The Fed was, indeed, the founder of last year’s misery feast, and that is precisely why we, all of us everyone, would like to have the Fed pivot and start to cut rates. The S&P500 closed out January up by +6.18% while the recently beaten-up Nasdaq Composite jumped by +12.35%, a feat not accomplished since 2001! Even bonds gained in January, up by +2.44%. Those numbers look pretty clearly like a market that is counting on a Fed pivot. That would also be fighting the Fed, as the FOMC is still expected to continue raising rates through, at least, springtime.

It is clear that the Fed is downshifting its monetary tightening. Though most Fed governors have maintained their hard-lined stances in the past few months of speeches, some have softened their tones somewhat, though they are in the minority. Inflation has eased and the economy, though slowing, still appears to be deftly treading water, increasing the chances of a softish landing. Yesterday, I highlighted the importance of the Employment Cost Index, which came in lower than expected, and lower than the prior month. I even showed you a chart of the number’s history and its correlation to inflation. I won’t add another, but even with the weaker print, the number is still elevated over its long-term average… as is, LET ME REMIND YOU, inflation.

This morning we will get ADP Employment change which is considered a precursor to Friday’s “official” Nonfarm Payrolls release. Not that it will affect the Fed’s decision, but it does come out prior to the announcement and has the possibility of inserting some market volatility. This morning we will also get JOLTS Job Openings. This number is not historically an A-lister, but it has gained popularity since the pandemic as it gives us an idea of the magnitude of job vacancies. You can see by the following long-term chart that job openings are just below a 30-year high. What does that mean, exactly?

A tight labor market is associated with inflation. So, when unemployment is low, as it has been, and job openings are at highs, we assume that employers are scrambling to pay higher wages to fill open positions. That is exactly the current conditions we are under, and a real good reason why the Fed is not likely to pivot too sharply, too quickly. Sure, yesterday’s number was encouraging, but labor conditions remain tight and inflation, while lower, is still higher than the Fed’s target. That doesn’t mean that the Fed won’t pivot later in the year if the trends continue. So, will the Fed lay out a plan to do so in today’s policy statement or mention it in the press conference? There doesn’t seem like a lot of benefit in doing so.

WHAT’S SHAKIN’

Electronic Arts Inc (EA) shares are lower by -11.7% in the premarket after it announced that it missed EPS and Revenue estimates by -8.23% and -4.17% respectively. The company also lowered full-year guidance citing the “macro environment” and a delay in a long-awaited, upcoming release. Dividend yield: 0.059%. Potential average analyst target upside: +7.4%.

Match Group Inc (MTCH) is getting no love in the premarket with its shares off by -9.51% after the company missed EPS and Sales targets by -43.95% and -0.30% respectively. The company further updated current quarter guidance which was below estimates. Potential average analyst target upside: +17.2%.

Stryker Corp (SYK) shares are higher by +4.41% in the premarket after it announced that it beat EPS and Revenue targets by +5.75% and +4.96% respectively. The company raised its full-year guidance above analysts estimates. In the past month, 65% of analysts have changed their price targets: 17 up, 0 down, 8 unchanged, and 1 dropped. Dividend yield: 1.18%. Potential average analyst target upside: +6.7%.

Advanced Micro Devices Inc (AMD) shares are up by +3.94% in the premarket after it beat EPS and Sales estimates by +3.59% and +1.50% respectively. The company also raised current quarter guidance above analyst expectations. Potential average analyst target upside: +16.0%.

ALSO, this morning: Thermo Fisher Scientific (TMO), Otis Worldwide (OTIS), Dynatrace (DT), AmerisourceBergen (ABC) all beat on EPS and Revenues while Boston Scientific (BSX) came up short.

YESTERDAY’S MARKETS

Stocks rallied yesterday after economic data showed employment costs may be easing. The S&P500 Index gained +1.46%, the Dow Jones Industrial Average climbed by +1.09, the Nasdaq Composite traded higher +1.67%, and the Russell 2000 Index jumped by +2.45%. Bonds gained and 10-year Treasury Note yields slipped by -2 basis points to 3.48%.Cryptos advanced by +2.41% and Bitcoin added +0.89%.

NEXT UP

• ADP Employment Change (Jan) is expected to show a +180k gain, lower than last month’s +235k increase.
• ISM Manufacturing (Jan) may have declined to 48.0 from 48.4.
• JOLTS Job Openings (Dec) is expected to be 10.3 million, a decline from November’s read of 10.458 million vacancies.
• FOMC RATE DECISION followed by press conference at 2:00 PM Wall Street Time. The Fed is expected to raise rates by +25 basis points, but the real action will come from the statement and the press conference.
• After the closing bell earnings: McKesson, Meta, Align, Hologic, Corteva, MetLife, Qorvo, Allstate, and DXC Technology.