Brace for landing

Stocks closed higher yesterday after failing to jump decisively after last week’s deep losses. Economic numbers show that the US economy continues to plod on despite the Fed’s best efforts to squelch growth.

Maybe she is onto something. “She”, being Janet Yellen, the now Secretary of the Treasury and former Federal Reserve Chair. One would think that Ms. Yellen, a Yale-educated economist, advised by none other than Joseph Stiglitz, married to Nobel-winning economist George Akerlof, would know a thing or two about the economy. Yellen worked at the Fed as an FOMC member in one form or another from 1994 through 2018 when she was replaced by the current Head Fed Jerome Powell. She now holds the second most powerful job in finance the world over. Her signature is on your cash! Yellen presides over the budget of the US Government. All of her history and responsibility puts her in a place where her opinion on the economy, inflation, etc. should be a pretty convincing one.

It should be understood that Yellen is on President Biden’s cabinet, so she is expected to serve the Commander, meaning she is not likely to come out and criticize policy and tell the country the economy is going to crash and burn. However, given her experience and her integrity, one would hope that she would give us, at least, a reasonable accounting of the situation. Let’s hear what Madam Secretary has to say.

Oh, before we start, Yellen warned of the possibility of a severe recession just a month ago. Let’s get started.

“I see a soft landing as being a possible outcome, and the one that I hope we will be able to achieve.”

She made this reversal remark last Friday just as we received that unexpectedly high inflation figure. “The economy is fundamentally in good shape, and inflation is coming down if you measure it on a 12-month basis.” Yellen was referring to the strong labor market as being a key factor in economic health. Markets have been focused on the strong labor market as being a driver for more Fed rate hikes, but the reality is that a weak labor market could make any potential recession far worse. Recent PMI data, though weak, still points to modest expansion, and consumption continues to remain strong. Just yesterday, the Census Bureau released its preliminary Durable Goods Orders number for January and the topline number showed a -4.5% decline for the month. However, if you remove transportation (which includes aircraft orders), orders climbed by +0.7% for the month after declining by a downward revised -0.4% in December. This stronger than expected number is a sign that the economy may not be spiraling into a contraction just yet.

Adding to Yellen’s “fundamentally… good” claim may also be yesterday’s Pending Home Sales, which grew by +8.1% in January, though economists were expecting a smaller +1.0% gain. Before you get nervous that the inflation is off the rails, it is important to note that Pending Home Sales were still -22.4% lower than they were a year ago. So, the Fed’s raising interest rates causing mortgage rates to spike may be getting the job done, right? Well, kind-of-sort-of. New Home Sales released last week showed that while home sales grew in January, the number is far lower than it was when it was elevated significantly from mid-2020 through mid-2022. The number of new home sales is now just around where it was in the years prior to the pandemic. The question remains, why then is inflation still high with mortgage rates at 7%? The answer is that rate hikes would only affect new mortgages. Those of us who were lucky enough to lock in lower rates prior to November of 2021 will enjoy those rates for the remainder of the mortgage, some 15-30 years, so the impact on spending may be muted. That also means that the Fed’s job is far from over and will remain tricky for some time. But for now, I am happy with Janet Yellen’s assessment that we are in a good place. She should know. Oh, and by the way, Yellen also said that core inflation is a continued challenge, and that “there’s still work to do to get it down.” Sounds like she is toeing the Fed line… as we would expect.

WHAT’S SHAKIN’

Target Corp (TGT) shares are higher by +2.00% in the premarket after it announced that they beat EPS and Sales estimates by +27.61% and +3.00% respectively. The company also provided full year guidance that was lower than analysts were expecting. The company said that significant gains in food/beverage and H&BA offset weaknesses in hard and soft lines. This is consistent with prior messaging and shows that consumption of higher priced necessities is taking away from discretionary spending. It also shows that retailers are benefiting from food inflation. Dividend yield: 2.58%. Potential average analyst target upside: +8.3%.

Norwegian Cruise Line Holdings Ltd (NCLH) shares are lower by -6.06% in the premarket after the company announced that it missed EPS targets by -20.00% despite record bookings coming into 2023. The company gave full year guidance that was weaker than analysts were expecting. Potential average analyst target upside: +24.2%.

ALSO, this morning: Advance Auto Parts (AAP), AutoZone (AZO), and Builders FirstSource (BLDR) all beat on EPS and Revenues.

YESTERDAY’S MARKETS

Stocks gained yesterday as investors searched for positives… and bargains in the wake of last Friday’s higher than expected inflation numbers. The S&P500 climbed by +0.31%, the Dow Jones Industrial Average traded higher by +0.22%, the Nasdaq Composite Index gained +0.63%, and the Russell 2000 Index traded higher by +0.31%. Bonds advanced and 10-year Treasury Note yields gave up -2 basis points to 3.91%. Cryptos slipped by -0.43% and Bitcoin declined by -0.75%.

NEXT UP

• FHFA House Price Index (Dec) is expected to have declined by -0.2% after slipping by -0.1% in the prior month.
• MNI Chicago PMI (Feb) is expected to have climbed to 45.5 from 44.3.
• Conference Board Consumer Confidence (Feb) may have increased to 108.5 from 107.1.
• Chicago Fed President Austan Goolsbee will speak today.
• After the closing bell earnings: Rivian, HP Inc, Axon, Rogers Corp, Virgin Galactic, Blink Charging, AMC Entertainment, First Solar, Figs, Rocket Cos, Ross Stores, Monster Beverage Corp, Sarepta Therapeutics, and Luminar.