A Volks Tesla is in the works

Stocks rallied on Friday in the response to weaker than expected monthly job numbers. The session rally topped off a solid week, chalking it in as the best one yet in 2023, though that isn’t really saying much.

Is it an art or a science? If I were to drive by the Fed’s Washington DC headquarters on Constitution Ave NW, I would want to see if there are any lights on in the building. That might be the only telling sign about what the buttoned-down bankers are up to these days. Last week’s post-FOMC-meeting presser featured a not-so-hawkish-but-definitely-not-dovish-either chairman who, not unexpectedly, certainly did not indicate that he was letting up on the brakes. That said, many on-the-fence FOMC members have been paying homage to high Treasury yields delivered by the bond vigilantes over the past several months. Those higher yields along with depressed equity market bullishness is a form of monetary tightening, which the Fed appreciates.

That is not so much fact nor theoretical, but it is plausible that higher long-maturity yields do have direct impact on corporate and consumer borrowing costs. It is therefore reasonable to assume that those higher yields have had an impact on the amount of extra cash in our pockets and in corporate coffers. The big question is whether those increased costs will cause consumers and companies to let up on their spending. This past Friday’s employment numbers may be a tell tail of that effect. New hires came in lower than expected, the unemployment rate ticked up by +0.1% unexpectedly, and hiring data was revised downward for the past month. That all means that tightness in the labor market may be easing up a bit. That is, in the Fed’s own words, what it would like to see.

Stocks and bonds rallied in the response to the weaker numbers. It was certainly a pleasure to see my screens awash with green for a change, I am sure you will agree. Ten-year Treasury Note yields declined by -8 basis points adding to the -26 basis-point decline in the prior 2 sessions. That’s not trivial, for the record. The S&P500 added +0.94% adding to the nearly +3% in the prior 2 sessions, that is a weekly record dating back to 11/11 of last year. We haven’t even come close to a +5.85% weekly gain in 2023 so far.

So, is that it? Is it over? Um… nope. Not only does the Fed have to say that it is over, but the Fed, technically, has to make some moves to bring the true benefits of a pivot, and, in case you haven’t noticed, we haven’t had either yet. I think there is a biblical reference to the term, but it is much more theatrical to attribute the quote to legendary Chinese General Sun Tzu. In his famous book “The Art of War”, which is at the bottom of every Wall Streeters desk drawer, the author writes “知己知彼+百战不殆“ . Google tells me that translates to “know yourself and know your enemy and fight a hundred battles without danger.” Now, I am not saying that the Fed is our enemy, but no one is arguing that the market’s ability to rally is certainly being constrained by the Fed. In the spirit of knowing your enemy, I must point out that lower bond yields would not be looked upon favorably by the Fed. Similarly, a wild rally in stocks would not be welcomed by the Fed either. Rallying stocks are associated with increased consumption, for obvious reasons. Less obvious, but factual, is that when stock markets rally, all consumers, even those that don’t own stocks, tend to be more confident. I am sure that if I ever really read Sun Tzu’s seminal work cover to cover, I would find at least a few platitudes referencing constraint and patience.

WHAT’S HAPPENING IN THE MARKETS THIS MORNING

Tesla Inc (TSLA) shares are higher by +1.70% in the premarket after it is reportedly going to manufacture a €25,000 EV in Berlin. In the past month, 57% of analysts have lowered their price targets, 1 up, 25 down, 17 unchanged, and 2 dropped. The company is expected to announce earnings next week. Potential average analyst target upside: +10.9%.

Paramount Global (PARA) shares are lower by -3.49% in the premarket, just days after it posted a big EPS beat. This morning’s decline is the result of BofA double-downgrading the company’s stock to UNDERPERFORM from BUY. BofA also cut the stocks target to $9 from $32. Dividend yield: 1.45%. Potential average analyst target upside: +7.5%.

FRIDAY’S MARKETS

NEXT UP

• No economic numbers today, but the week ahead will feature a number of important earnings releases as well as weekly job numbers, and University of Michigan Sentiment. Download the attached, economic and earnings calendars for times and details.
• Fed Governor Lisa Cook will speak today.