More rate debate. Just a week ago traders were battening down the hatches fearing a recession in the second half of the year. Sure, some of the inflation numbers look like they are easing a bit, but corporations, in the midst of earnings season, are seeing slower sales and are cutting costs to stay buoyant. These are the typical early warning signs of an economic slowdown. With “cost cutting” comes eventual layoffs, increased unemployment, lower consumer confidence, lower consumption… and boom, we have a classical economic contraction.
In that case the Fed would have to quickly pivot from economic squelcher to economic supporter, and that is exactly what futures markets were factoring until last Friday when the Bureau of Labor Statistics announced a walloping monthly jobs number that topped analysts’ estimates on virtually all fronts. The Unemployment Rate sank to lows not seen since the late 1960s, which was definitely part of the Fed’s plans. Before I move on, I have to pay mention to the fact that, despite the hot employment number, there was a very positive backstory that was not really picked up by the news outlets. Average Hourly Earnings, a part of the monthly employment series, showed a continued decline in growth. Early in 2022 the year-over-year growth of earnings hit a high of just under 6%, after which a steady and continued decline ensued and the latest figure came in at +4.4%. However, the figure is still higher than its pre-pandemic average just north of +3%. Progress made is a good thing, and frankly, the Fed is more interested in labor costs than actual employment numbers at the end of the day.
After Friday’s number Wall Street made a quick shift and began to cozy up to the idea that a “soft landing” may be possible. However, it was not celebrated… at least in the markets. Treasury yields quickly jumped and stocks fell. The market began the process of factoring in a less benevolent Fed than the one hoped for last Thursday. Here is what shook out of that process, which continued through yesterday’s session. One more +25 basis-point rate hike in March, another +25 basis-point bump with high probability in May. That is an extra +25 basis points. But, wouldn’t you know it, the market is still factoring in rate cuts by the end of the year, with projected Fed Funds slightly above today’s target. You can see the extreme up-down projection in the following projection chart. What would cause the Fed to make such an extreme pivot even when Fed members continue to be adamant that they have no plans to cut? Some extreme event… like a recession. Someone is going to win this battle of the wills. The market is strong, but the Fed usually wins.
WHAT’S SHAKIN’
Carrier Global Corp (CARR) shares are lower by -2.49% in the premarket after it announced that it beat EPS and Sales targets by +1.15% and +0.46% respectively. The company offered full year guidance which was in line with analysts’ estimates. Analysts have been raising their targets in recent months, though they remain 50/50 split between BUY and HOLD, with no SELL ratings. Dividend yield: 1.60%. Potential average analyst target upside: +4.5%.
Skyworks Solutions Inc (SWKS) shares are higher by +2.49% in the premarket after it announced that it narrowly beat EPS and Revenue estimates by +0.27% and +0.49% respectively. The company provided guidance that was slightly below analysts’ estimates, but analysts are raising price targets due to its resilience in a challenging market; 18 analysts have raised targets, 0 down, 10 unchanged, and 1 dropped. Dividend yield: 2.26%. Potential average analyst target upside: +14.3%.
ALSO, this morning: Oaktree (OCSL), Centene (CNC), Carlyle Group (CG), Ares Capital (ARCC), Jacobs Solutions (J), OneMain (OMF), KKR (KKR), and TransDigm (TDG) all beat on EPS and Revenues. DuPont (DD), Aramark (ARMK), Catalent (CTLT), Fiserv (FISV), and Spirit Aerosystems(SPR) came up short.
YESTERDAY’S MARKETS
Stocks declined yesterday following Friday’s strong employment numbers. The S&P500 Index fell by -0.61%, the Dow Jones Industrial Average slipped by -0.10%, the Nasdaq Composite Index dropped by -1.00%, and the Russell 2000 Index gave up -1.40%. Bonds fell and 10-Year Treasury Note yields gained +1 basis points to 3.63%. Cryptos fell by -1.64% and Bitcoin added +0.06%.
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