Stocks fell yesterday in the wake of hawkish testimony by the Fed Chair on Capitol Hill. The testimony caused traders to rethink their bets on rate hikes later this month.
En garde! You don’t hear that term too often anymore, but I will make an assumption that most of you can, at least, recall Morticia Addams exclaim it as she raised her saber in the 1960s TV sitcom The Addams Family. There was certainly no comedy however, on Capitol Hill yesterday when Fed Chairman Jerome Powell came out swinging big. The man was on a mission to let senators… and the markets know that the Fed is anything but done with inflation.
In true form, the Chair did not expressly tell lawmakers what he or his colleagues would do at this month’s policy meeting. What he did do was open the door to a larger rate hike. Up until yesterday’s testimony, the odds were in favor of a +25 basis-point rate hike later this month. However, once Powell uttered the words “… we would be prepared to increase the pace of rate hikes,” the markets took note and the floor dropped out for equities as the rates market quickly adjusted.
Powell’s testimony made it pretty clear, at this point at least, that the strong data from January would require a higher terminal rate than was originally expected. The terminal rate is the peak at which the Fed would stop raising the Funds rate, essentially lowering the saber. That was somewhere around 5 1/8% according to the Fed’s December forecast. The market has been adjusting its expected terminal rate throughout February in response to hawkish comments by FOMC members and the persistently strong economic data. After Powell’s testimony, markets adjusted that terminal rate expectation yet higher to around 5.6% by September. For all intents and purposes that would mean a full percentage point higher than where we are today.
Now, the probability of that +50 basis-point bump is around 65%, which can be classified as probable. May is even more likely to bring another +50 basis points and another +25 basis-points are likely in store for late summer. You can see by the chart that follows how expectations for the terminal rate has changed over time. Today, Powell heads to the lower chamber for another day of expectation setting and his message is not likely to walk back yesterday’s stern one. This morning we will get 2 important employment figures, one from ADP on new jobs created and the JOLTS Job Openings number. JOLTS is where the challenge lies for inflation. We have been hearing a lot about job cuts which seem to be announced daily. That leaves us all confused, expecting those to show up in the monthly numbers. The problem is that there are still many job openings and folks who are laid off are likely able to find new work quickly. I suspect that if companies would announce new hires, we would likely get a more realistic picture of the labor market. Of course, that is not likely because an announcement like that would not be good for the company’s stock. The really important numbers will come this Friday when the Bureau of Labor Statistics releases its monthly employment situation number. That is the one that will give the Fed a pass for the bigger March hike if it comes in strong.
WHAT’S SHAKIN’
Campbell Soup Co (CPB) shares are higher by +1.67 in the premarket after the company announced that it beat EPS and Sales estimates by +8.57% and +1.95% respectively. The company raised its full year net sales and EBIT guidance as well. The company attributes the strong results to what it called “favorable net price realization,” which means that the company was able to raise prices to consumers making it more profitable. Dividend yield: 2.83%. Potential average analyst target upside: +0.1%.
Occidental Petroleum (OXY) shares are higher by +2.88% in the premarket after a Berkshire Hathaway regulatory filing showed that the company added another 5.8 million shares to its already large position earlier this month. Dividend yield: 1.18%. Potential average analyst target upside: +16.2%.
YESTERDAY’S MARKETS
Stocks dropped yesterday in response to Powell’s hawkish testimony to lawmakers… it was unexpected. The S&P500 fell by -1.53%, the Dow Jones Industrial Average declined by -1.72%, the Nasdaq Composite Index traded lower by -1.25%, and the Russell 2000 Index slid by -1.11%. Bonds declined and 10-year Treasury Note yields gained +1 basis point to 3.96%, while the 2-year jumped by +12 basis points to 5.0%, flattening the yield curve yet further. Cryptos gave up -1.19% along with a -0.52% decline for Bitcoin.
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