Fed hawks swoop down on vulnerable bulls

Stocks fell yesterday on stronger-than-expected Producer Price Index numbers. Hawkish comments by the Fed’s Chief Hawk nailed the coffin lid shut for nascent bulls.

It aint’ easy. I feel like I have written this story a few times already. St. Louis Fed President James Bullard stepped up to the mic, completely destroyed the dreams of the investing bulls… dropped the mic and walked out. I cannot confirm this, but there are rumors that he was spotted smoking a cigarette at a pub later in the day. Bullard said that he wouldn’t be opposed to a +50 basis-point rate hike at next month's Fed meeting. He doubled down stating that he was in favor of the ½ percentage point bump in the last meeting. Ok, James Bullard is famous for his hawkish comments and has been the founder of several market selloffs in the past. He is known to be the most hawkish FOMC member.

His hawkish comments are understandable given the fact that recent CPI data suggested that inflation is still high. Yes, slowing, but not as fast as in the past few months. Yesterday’s Producer Price Index / PPI data supported the “inflation is not dead yet” narrative with a hotter than expected print. It came in at +6.0%, far above economists’ expectations of +5.4%, though still slightly lower than the prior month’s upward revised +6.5%. That was a busy sentence, but it points to higher-than-expected inflation. The Fed’s job is clearly far from over. Its latest obsession with labor markets is not helping the dove narrative either. The Fed is hoping for the labor market to loosen up and last month’s employment report came in contrary to those hopes. Yesterday’s weekly number showed that new unemployment claims were less than expected, though only slightly, but nonetheless pointing to a resilient labor market. Throw in some strong Retail Sales figures from Wednesday, and you have some members cancelling their summer travel plans.

Yesterday’s hawk talk was not only from James Bullard. Cleveland Fed President Loretta Mester also broke the seal on a +50 basis-point rate hike yesterday, stating that there was a strong case for it given the strength of the demand along with inflation’s persistence. Mester is also considered one of the more hawkish FOMC members, so her comments are certainly not surprising given the latest spate of inflationary numbers.

My regular readers know that the Fed could not be pleased with the recent rally in stocks. A rallying stock market boosts consumer confidence which is a driver of inflation. Even folks who don’t own stocks tend to buy more stuff when they hear that the stock market is rallying. The Fed will stop at nothing, even throwing cold water on a stock rally, to lower inflation. So, there you have it, James Bullard, loved amongst the hawks, hated amongst the bulls, ruined your upcoming holiday weekend. We know what happened with stocks, what about the rates markets? Well, bond yields across the curve certainly climbed this week. Fed Funds futures upped the probability of a third +25 basis-point hike into, what I would refer to as, the “likely” zone by the end of summer. That means that markets are now expecting a terminal rate of around 5.5%, +75 basis points higher than today’s target rate. Wouldn’t you know it though, futures are still counting on a rate hike before the year’s end.

For the record, Bullard and Mester, orchestrators of yesterday’s selloff, are not voting members of the FOMC. They can talk but they have no vote on policy. Jerome Powell certainly has a vote, a heavily weighted one, and though he has not spoken of a +50 basis-point hike, he has made it quite clear that rates are not likely to be cut in 2023. The markets have not taken him seriously yet.

WHAT’S SHAKIN’

Moderna Inc (MRNA) Shares are lower by -5.55% in the premarket after the company announced mixed results in its influenza vaccine trials. Results showed that its mRNA-based vaccine was as effective as currently available vaccines for influenza-A, the most common flu, but not as effective against influenza-B. Further, the study showed that 70% of recipients reported common side effects versus 48% for the existing vaccine. Though the results are somewhat discouraging, the company may still receive FDA approval for the jab. The company will report its Q4 earnings next week. Potential average analyst target upside: +25.0%.

Deere & Co (DE) shares are higher by +3.48% in the premarket after it announced that it beat EPS and Revenue estimates by +18.48% and +1.57% respectively. The company upped its full-year guidance which exceeded analyst expectations. The stock’s 1-year total return of +7.2% is on par with the S&P500 Agg and Farm Machinery Index and outperformed the S&P500 over the same period. Dividend yield: 1.19%. Potential average analyst target upside: +14.3%.

YESTERDAY’S MARKETS

Stocks sank yesterday on stronger than expected inflation figures and super-hawkish commentary by Fed members. The S&P500 fell by -1.38%, the Dow Jones Industrial Average dropped by -1.26%, the Nasdaq Composite Index lost -1.78%, and the Russell 2000 Index declined by -0.96%. Bonds fell and 10-year Treasury Note yields climbed by +5 basis points to 3.86%. Cryptos climbed by +8.25% and Bitcoin rose by +1.47%.

NEXT UP

• Leading Economic Index (Jan) is expected to have slipped by -0.3% after declining by -0.8% in December.
• Next week: Markets are closed on Monday for President’s Day. More earnings next week, along with PMIs, regional Fed reports, housing numbers, FOMC Meeting Minutes, GDP, PCE Deflator, and University of Michigan Sentiment. Check back on Tuesday for calendars and details.