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Market Snapshot
briefing.com
| Dow | 32884.87 | -268.95 | (-0.81%) | | Nasdaq | 11399.52 | -190.88 | (-1.65%) | | SP 500 | 3974.99 | -37.33 | (-0.93%) | | 10-yr Note | -5/32 | 3.95 |
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| | NYSE | Adv 816 | Dec 2118 | Vol 860 mln | | Nasdaq | Adv 1140 | Dec 3366 | Vol 4.3 bln |
Industry Watch
| Strong: Materials, Financials |
| | Weak: Consumer Discretionary, Information Technology, Real Estate, Communication Services |
Moving the Market
-- Core-PCE Price Index reflecting sticky inflation, stoking concerns about the Fed taking rates higher for longer than the market previously expected
-- Profit taking after yesterday's pleasing finish
-- Weakness in the mega cap space weighing on broader market
-- Rising Treasury yields
-- S&P 500 opening below key support level at 50-day moving average (3,981)
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Closing Summary
24-Feb-23 16:30 ET
Dow -336.99 at 32816.83, Nasdaq -195.46 at 11394.94, S&P -42.28 at 3970.04
[BRIEFING.COM] The stock market was decidedly weak today on broad-based selling interest following the hotter than expected inflation data this morning. The Fed's preferred inflation gauge, the core-PCE Price Index, accelerated to 4.7% year-over-year in January versus 4.6% in December.
Real personal spending was up 1.1% month-over-month, real disposable personal income was up 1.4% month-over-month, and the personal savings rate, after revisions, increased to 4.7% from a previously reported 3.4%, suggesting there is more fuel for consumers to keep spending.
The rub of this report was that it showed inflation, not disinflation, and a good bit of spending potential that should keep the economy running above potential. That combination piqued concerns about inflation remaining sticky at higher levels for longer that, in turn, would prompt the Fed to stick to its tightening ways and stick with higher rates for longer than the market previously expected.
The Treasury market had a fairly strong response to the inflation data, creating another headwind for equities. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, rose nine basis points to 4.78% and the 10-yr note yield rose seven basis points to 3.95%. The U.S. Dollar Index also moved noticeably higher today, up 0.6% to 105.23.
The S&P 500 opened below its 50-day moving average (3,981) and quickly headed lower, nearly reaching its 200-day moving average (3,940). This morning's low was 3,943. The main indices were able to recover noticeably, however, from their worst levels of the day despite logging sizable losses by the close. At their lows, the Dow, Nasdaq, and S&P 500, were down 1.5%, 2.2%, and 1.7%, respectively.
The Nasdaq suffered the steepest loss today, dragged down by weakness in the mega cap space. The Vanguard Mega Cap Growth ETF (MGK) fell 1.7% versus a 0.9% loss in the Invesco S&P 500 Equal Weight ETF (RSP) and a 1.1% loss in the S&P 500.
Most of the S&P 500 sectors closed in the red with real estate (-1.8%) and information technology (-1.8%) at the bottom of the pack. Materials (+0.7%) and financials (+0.1%) were alone in positive territory by the close.
- Nasdaq Composite: +8.9% YTD
- Russell 2000: +7.3% YTD
- S&P Midcap 400: +7.0% YTD
- S&P 500: +3.4% YTD
- Dow Jones Industrial Average: -1.0% YTD
Reviewing today's economic data:
- January Personal Income 0.6% (Briefing.com consensus 0.9%); Prior was revised to 0.3% from 0.2%; January Personal Spending 1.8% (Briefing.com consensus 1.3%); Prior was revised to -0.1% from -0.2%; January PCE Prices 0.6% (Briefing.com consensus 0.4%); Prior was revised to 0.2% from 0.1%; January PCE Prices - Core 0.6% (Briefing.com consensus 0.4%); Prior was revised to 0.4% from 0.3%
- The key takeaway from the report is the recognition that there isn't disinflation in this report. There is inflation in it, which is piquing concerns about inflation remaining sticky at higher levels for longer that, in turn, would prompt the Fed to stick to its tightening ways and stick with higher rates for longer than the market previously expected.
- January New Home Sales 670K (Briefing.com consensus 620K); Prior was revised to 625K from 616K
- The key takeaway from the report is that it reflects how rising mortgage rates are impeding sales of higher-priced homes, evidenced by the 46.9% year-over-year decline in the high-priced West region and declines in both median and average selling prices. The 0.7% decline in the median selling price was the first decline since August 2020.
- February Univ. of Michigan Consumer Sentiment - Final 67.0 (Briefing.com consensus 66.6); Prior 66.4
- The key takeaway from the report is the acknowledgment that consumers continue to show considerable uncertainty over short-run inflation.
Looking ahead to Monday, market participants will receive the following economic data:
- January Durable Orders (Briefing.com consensus -3.9%; prior 5.6%) and Durable Orders ex-transportation (Briefing.com consensus 0.1%; prior -0.1%) at 8:30 ET and January Pending Home Sales (Briefing.com consensus 1.0%; prior 2.5%) at 10:00 ET
Breadth remains negative despite recovering from lows
24-Feb-23 15:35 ET
Dow -322.06 at 32831.76, Nasdaq -215.63 at 11374.77, S&P -45.85 at 3966.48
[BRIEFING.COM] The main indices are declining ahead of the close, but the S&P 500 and Dow Jones Industrial Average remain near their best levels of the day.
Market breadth still skews decidedly negative despite the market recovering from session lows. Decliners lead advancers by a roughly 3-to-1 margin at both the NYSE and the Nasdaq.
Looking ahead to Monday, market participants will receive the following economic data:
- January Durable Orders (Briefing.com consensus -3.9%; prior 5.6%) and Durable Orders ex-transportation (Briefing.com consensus 0.1%; prior -0.1%) at 8:30 ET and January Pending Home Sales (Briefing.com consensus 1.0%; prior 2.5%) at 10:00 ET
Energy complex futures settle higher
24-Feb-23 15:05 ET
Dow -268.95 at 32884.87, Nasdaq -190.88 at 11399.52, S&P -37.33 at 3974.99
[BRIEFING.COM] The S&P 500 is quickly approaching its 50-day moving average at 3,980.
A few S&P 500 sectors have been able to reclaim a position in positive territory. Materials (+0.6%) leads the pack, followed by utilities (+0.3%) and financials (+0.2%). The information technology (-1.6%) and consumer discretionary (-1.5%) sectors are at the bottom of the pack.
Energy complex futures moved up this session. WTI crude oil futures rose 1.4% to $76.41/bbl and natural gas futures rose 8.9% to $2.50/mmbtu.
Moderna continues post earnings losses, ETSY fails to hold 50-day SMA
24-Feb-23 14:25 ET
Dow -346.42 at 32807.40, Nasdaq -220.12 at 11370.28, S&P -47.82 at 3964.50
[BRIEFING.COM] The S&P 500 (-1.19%) is in second place at this point on Friday afternoon.
S&P 500 constituents Moderna (MRNA 138.89, -8.68, -5.88%), Etsy (ETSY 124.92, -6.66, -5.06%), and Paramount (PARA 22.22, -1.22, -5.20%) peppers the bottom of the standings. In a bit of a follow-through from yesterday's Q4 earnings, coupled with today's downgrade to Underperform at SVB Leerink, shares of MRNA hit a 16-week low, while ETSY gives back a bit of the post-earnings move after the stock failed to hold the 50-day SMA (131.23), and PARA is reportedly the subject of a lawsuit filed by Warner Bros. Discovery (WBD 15.54, -0.19, -1.21%) related to "South Park" licensing rights.
Meanwhile, Linde Plc (LIN 345.41, +13.52, +4.07%) is atop the S&P; the company confirmed yesterday that the Irish High Court hearings regarding its intercompany reorganization are scheduled for February 27, 2023. Once the reorganization is approved by the Irish High Court, Linde expects its last trading day on the Frankfurt Stock Exchange to be February 28, 2023.
Gold extends losses on Friday
24-Feb-23 14:00 ET
Dow -360.58 at 32793.24, Nasdaq -219.62 at 11370.78, S&P -50.22 at 3962.10
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-1.89%) still holds the steepest losses, on pace to end the week down about -3.53%.
Gold futures settled $9.70 lower (-0.5%) to $1,817.10/oz, ending down about -1.79% this week, continuing recent losses after this morning's PCE price data.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $105.24.
Page One
Last Updated: 24-Feb-23 09:03 ET | Archive
Market cools off as PCE inflation data runs hot in January
The stock market took investors for a ride yesterday, alternating tracks that felt good about NVIDIA's (NVDA) outlook, felt bad about emerging signs of weakness in consumer-oriented companies, and felt uncertain about its technical position.
The roller-coaster, if you will, saw the S&P 500 trade up to 4,028 in early action only to roll over and move quickly downhill to 3,969 by the New York lunch hour, and then regroup to stage an uphill climb, touching 4,021 before closing the session at 4,012.
The move to 3,969 took the S&P 500 below its 50-day moving average (3,980), but the downside momentum soon faded on that breach, emboldening buyers to step in with technical support that facilitated the positive close.
That buying interest, however, has not carried over this morning.
Currently, the S&P 500 futures are down 51 points and are trading 1.3% below fair value, the Nasdaq 100 futures are down 205 points and are trading 1.7% below fair value, and the Dow Jones Industrial Average futures are down 364 points and are trading 1.1% below fair value.
The weakness in the futures market was pretty entrenched before the release of the Personal Income and Spending Report at 8:30 a.m. ET. To that end, the S&P 500 futures were down 28 points, the Nasdaq 100 futures were down 106 points, and the Dow Jones Industrial Average futures were down 214 points shortly before that release.
Factors weighing on the market included weakness in the mega-cap stocks, a 2.6% decline in Boeing (BA) after it suspended deliveries of its 787 Dreamliner due to a documentation issue, festering concerns about rising interest rates and slowing growth feeding a newfound tendency to sell into strength, geopolitical tension with the Ukraine War entering its second year and Bloomberg reporting that the U.S. is increasing its small number of troops in Taiwan to help with military training, and some anxiousness in front of the aforementioned economic report that would include some key inflation data.
As it turned out, the inflation data added to the anxiousness.
First, personal income increased 0.6% month-over-month in January (Briefing.com consensus +0.9%) following an upwardly revised 0.3% increase (from 0.2%) in December. Personal spending jumped 1.8% month-over-month (Briefing.com consensus +1.3%) following an upwardly revised 0.1% decline (from -0.2%) in December. The rub of this report, though, was the PCE and core-PCE Price indexes, which rubbed market participants the wrong way.
The PCE Price Index increased 0.6% month-over-month (Briefing.com consensus +0.4%) following an upwardly revised 0.2% increase (from 0.1%) in December. The core-PCE Price Index, which excludes food and energy and is the Fed's preferred inflation gauge, also rose 0.6% month-over-month (Briefing.com consensus +0.4%) following an upwardly revised 0.4% increase (from 0.3%) in December. These changes left the PCE Price Index up 5.4% year-over-year, versus 5.3% in December, and the core-PCE Price Index up 4.7% year-over-year, versus 4.6% in December.
The key takeaway from the report is the recognition that there isn't disinflation in this report. There is inflation in it, which is piquing concerns about inflation remaining sticky at higher levels for longer that, in turn, would prompt the Fed to stick to its tightening ways and stick with higher rates for longer than the market previously expected.
Separately, the strength in real personal spending (+1.1%) is going to be a boon for Q1 GDP forecasts that won't be skirting anywhere close to a negative/recession-like reading. That's good economic news, but the stock market wants the Fed to be out of the picture and all this report did was ensure the Fed is going to remain front-and-center with a tightening scowl.
The 1-yr T-bill is up five basis points to 5.13%, the 2-yr note yield is up six basis points to 4.75%, and the 10-yr note yield is up four basis points to 3.92%.
-- Patrick J. O'Hare, Briefing.com
Beyond Meat sizzling today after posting better-than-feared results, sparking a short squeeze (BYND)
Beyond Meat (BYND) is sizzling today after the plant-based meat producer reported better-than-feared Q4 results, beating top and bottom-line expectations for the first time since 1Q20. The company's FY23 revenue outlook of $375-$415 mln also fell within expectations, offering some relief and hope that a turnaround may be on the horizon.
However, with sales decreasing by nearly 21% yr/yr to $79.9 mln, it would be a stretch to say that this was a "strong" quarter for BYND.
On that note, we believe that the stock's surge is partly driven by a short squeeze as the upside results caught many on the short side off guard. Approximately 37% of BYND's float resides on the short side, setting the stage for a potent squeeze.
There are some key fundamental positives, though, that drove the improved results and sparked the short squeeze.
- Most notably, the company has made a dramatic U-turn in its priorities, shifting from a "growth at all costs" strategy, to one that emphasizes positive cash flow generation through streamlining and margin expansion.
- One concrete step that BYND made to start moving in the right direction is the reduction of its North American manufacturing footprint from eight co-manufacturers to three as of the end of Q4. This consolidation significantly reduced the underutilization that took place across its network, providing BYND with cost savings and better efficiency.
- Another key factor is BYND's effort to draw down the high level of inventory that has plagued its results. The company reduced its inventory balance by 17% from Q1 to Q4 and it expects to accelerate its reduction efforts in 2023.
- Simultaneously, BYND is removing costs as operating expenses decreased by $12.1 mln, or 16% qtr/qtr, putting it on track to attain the $39 mln in annualized cost savings it committed to last October.
The positive impact from this change in philosophy can be seen across a few different metrics.
- For instance, gross margin improved by fourteen percentage points sequentially to -3.7%. Accordingly, adjusted EBITDA loss shrunk to ($56.5) mln from ($73.8) mln in Q3.
- And, finally, while cash flow from operations worsened in Q4 to ($51.7) mln from ($34.7) mln last quarter, BYND reiterated that it expects to achieve positive cash flow within 2H23.
These are encouraging data points, but plenty of questions remain -- especially surrounding demand. In Q4, all of BYND's markets and channels experienced soft demand, as reflected in the 17% decline in total pounds sold. BYND did lower its prices in order to better compete against animal-based proteins, which helped work down inventory, but the general enthusiasm surrounding plant-based proteins has clearly dissipated. The reasons for that are debatable, although its higher relative price points in this inflationary environment certainly aren't helping.
The main takeaway is that BYND's newfound focus on positive cash flow and improved margins is resonating quite well with investors, while also igniting a short squeeze. With yr/yr comps looking very favorable this year, BYND may be poised for a bit of a comeback, but the magnitude of that comeback could be constrained by persistently sluggish demand.
Block tacks on healthy gains today on encouraging trends and a decent adjusted EBITDA forecast (SQ)
Block (SQ +3%), the payments platform provider for small businesses and consumers, is cashing in on some gains today despite posting a miss on its bottom line in Q4. A series of highlights from the quarter are proving more than enough to overcome this minor blemish.
- Top-line growth was solid; revenue jumped 14.0% yr/yr in Q4 to $4.65 bln, toppling consensus. Meanwhile, gross profits climbed 40% yr/yr to $1.66 bln, a good acceleration from the +38% growth delivered in Q3.
- SQ's Buy Now, Pay Later (BNPL) offering contributed to its solid sales growth and accelerated gross profit growth. BNPL's Gross Merchandise Volume (GMV) expanded by 14% yr/yr in Q4, representing an improvement from the +10% growth in Q3.
- Although these numbers pale compared to rival Affirm (AFRM), which advanced its GMV by 27% in DecQ, SQ saw GMV accelerate from the previous quarter, whereas AFRM's GMV growth slowed considerably from the +62% recorded in SepQ.
- At the same time, through January and February, SQ expects GMV growth to accelerate even further to 19% yr/yr, while AFRM's outlook implies additional deceleration over the next few quarters.
- Management's continued focus on cost-cutting is also igniting enthusiasm today. Last quarter, investors applauded SQ's plans to trim expenses amid a broad slowdown in consumer spending. The company outlined two components of its cost-cutting measures: moderating the pace of hiring and pulling back on marketing and more experimental sides of the business.
- As a result of these initiatives, SQ is confident in reaching $1.3 bln in adjusted EBITDA in FY23, an over 30% gain, and at least 1 pt of margin expansion yr/yr.
- SQ's near-term outlook was also upbeat. The company commented that it was seeing stable-to-improving trends thus far in Q1. Gross profits are improving in January and February compared to Q4 and should land around 33% on a reported basis for the quarter.
- It is worth pointing out that SQ is lapping its acquisition of BNPL firm Afterpay, which closed on January 31, 2022, making its January growth rate greater than February and March.
Overall, SQ's Q4 numbers checked out, helping keep its shares trending positively. Since October lows, the stock has gained around 50% but still sits over 70% below highs set in 2021. The company has had a few rough patches over that timeframe, mainly driven by a drop-off in gross payment volume (GPV) and revenue after the height of the pandemic. However, its past few earnings reports have contained several bright spots. With a heightened focus on expense management and improving trends, SQ may be amid a steady turnaround.
Adobe's designs on acquiring Figma take a major hit as deal lands in crosshairs of DoJ (ADBE)
When Adobe (ADBE) announced its intention to acquire Figma for $20.0 bln last September, the response from investors was anything but positive as shares tumbled by 17% that day. A disappointing Q3 earnings report added some fuel to that fire.
- The unpopular acquisition is under the spotlight again today, sending ADBE shares lower, but this time the news is creating a cloud of uncertainty over the deal. Specifically, Bloomberg reported that the U.S. Department of Justice is preparing a lawsuit to block ABDE's purchase of Figma due to anticompetitive concerns. According to the report, a lawsuit could be filed as early as this March.
- For some quick background, Figma provides a platform that's mainly used to design website interfaces or applications, although it can be used to create many other items like logos, product prototypes, and social media posts.
- As a private company, there's only limited data available regarding its financials and growth. However, ADBE did provide some metrics when it announced the acquisition, disclosing that Figma was on track to add $200 mln in net new ARR this year, bringing its total ARR beyond $400 mln exiting 2022. Additionally, Figma boasts very high gross margins of about 90% and is generating positive operating cash flows.
- It's easy to see why ADBE was attracted to Figma as the company would be a natural fit, greatly expanding on ADBE's existing collaborative design product called XD. In essence, ADBE would be taking its largest competitor off the map in this market, which is why the deal is under scrutiny from regulators. ADBE argues that Figma doesn't compete against its largest applications, such as Photoshop and Acrobat, suggesting that the overlap between the two companies is minimal.
- The U.S. Department of Justice apparently isn't the only agency that may disagree with that assertion. Overseas, the European Union antitrust agency and the UK Competition and Markets Authority are also taking a closer look at this deal. ADBE tried to offer a reassuring tone this morning, stating that it continues to expect the acquisition to close in 2023, but that is looking increasingly unlikely.
- Given that this deal could very well far apart, it's a bit surprising that the stock is reacting so poorly to this development. Investors understandably balked at the $20 bln price tag last September. At that valuation, ADBE is paying about 50x trailing ARR.
- Not only did it seem like ADBE was overpaying for Figma -- which was valued at about $10 bln earlier in 2022 -- but the company also planned to finance half of the deal with stock. Unsurprisingly, the transaction is expected to be dilutive to EPS in the first two years due to the lofty price tag and the new stock issuance.
We believe it's the uncertainty and the prospects of a long, drawn-out legal process that's hanging over the stock today. The concerns and implications regarding the acquisition were already baked into the stock. Now, investors need to go back to the drawing board and reconsider what ADBE's prospects look like without Figma in the mix. Although ADBE is coming off a pretty solid Q4 earnings report, its growth rates have been sputtering, slipping to 10% from 13% in Q3 and 14% in Q2. As much as the purchase price rubbed investors the wrong way, at least Figma would provide a major shot in the arm for ADBE's growth.
Intuit trades modestly higher following mixed earnings report; Credit Karma remains a concern (INTU)
Intuit (INTU +2%) is trading higher on a down day in the market following its Q2 (Jan) earnings report last night. With its focus on small businesses and consumers (TurboTax, QuickBooks, Mint, Credit Karma, Mailchimp), we had some concerns that its clients may pull back on subscriptions as they face macro headwinds. However, its business seems to be performing well overall with the notable exception of Credit Karma. Let's get...."Intu-it."
- Just like in Q1, Intuit reported a huge EPS beat for Q2. The guidance was more of a trouble spot with EPS in Q3 (Apr) below analyst expectations. This was a bit of a letdown because Q3 is tax season, which is big business for Intuit. The good news was that the mid-point of Q3 revenue guidance was above analyst expectations and Intuit reaffirmed FY23 EPS and revenue guidance. Although given the big EPS upside in Q2, a reaffirm is not great.
- Let's start with the positives. In the Small Business and Self-Employed Group, revenue grew 20% and online ecosystem revenue grew 24%. QuickBooks Online accounting revenue grew 27%, driven by customer growth, higher effective prices and mix shift. Intuit says small business continues to be very strong despite macro uncertainty. In particular, growth of its online mid-market customers are contributing to strong subscription revenue.
- Turning to tax, Intuit is focused on both extending is lead in the do it yourself category and transforming the assisted category. Specifically, INTU is evolving its TurboTax brand to increase awareness about its assisted tax service. Its new campaign Come to TurboTax and Don't Do Your Taxes is resonating with customers. Intuit is also pushing customers to connect to experts virtually. This tax season will benefit from deeper TurboTax and Credit Karma platform integrations like instant tax refund cash.
- The main problem again was Credit Karma, which saw revenue decline 16%, slightly ahead of internal expectations. Headwinds include personal loans, home loans, auto insurance and auto loans, partially offset by growth in credit cards. In credit cards and personal loans, partners are tightening eligibility. The silver lining is that Intuit reaffirmed FY23 segment guidance of a -15% to -10% decline. At least it was not cut further like last quarter.
Overall, we view the quarter as generally mixed. It had big EPS upside in Q2, but the downside Q3 EPS guidance was a letdown, especially considering that tax season is so important for Intuit. We were also disappointed to see a reaffirm for FY23 EPS despite the huge upside in Q2. But again, we suspect Intuit's view on Q3 is why management chose not to guide higher. We are impressed to see Intuit's small business cohort holding up well despite macro headwinds. Credit Karma remains a concern, but this segment represented just 14% of FY22 revs, so it's not an enormous part of the business.
Autodesk's reduced confidence in achieving its initial FY26 financial goals rocks shares (ADSK)
Autodesk (ADSK -11%) shares are succumbing to intense selling pressure today despite the CAD software provider for industrial end markets edging past its earnings and sales forecasts in Q4 (Jan). Today's sell-the-news reaction stems mainly from ADSK's discouraging FY24 and long-term financial targets. ADSK's FY24 sales outlook of +7-9% just missed analyst expectations, while its projected adjusted EPS range of $6.98-7.32 was mostly below consensus.
Furthermore, ADSK's FY26 goals look more flimsy than last quarter, when management remained confident in achieving its long-term growth potential. ADSK is targeting sales growth in the +10-15% range, consistent with its prior double-digit goal. However, on margins, even though the firm expects to stay in its previously mentioned 38-40% range, macroeconomic and FX headwinds are pushing ADSK toward the lower end of that range. Additionally, although the company is still working toward double-digit annualized free cash flow growth through FY26, it noted that this milestone looks less likely due to FX impacts and other minor setbacks.
- What happened? Foreign currency fluctuations continue to weigh on ADSK's numbers. Leading into ADSK's Q4 report, we cautioned that its meaningful exposure to overseas markets could again drag down otherwise decent numbers; ADSK derives roughly 60% of its revenue from markets outside of the Americas. Specifically, regarding FY24, a relatively strong U.S. dollar is expected to clip 4 pts off revenue growth, meaning that ADSK easily surpassed analyst sales estimates for the year on an FX-neutral basis.
- ADSK's switch from upfront to annual billings for multi-year contracts creates another obstacle. The company has been transitioning its larger customers from multi-year paid upfront to annual billings since late 2021, targeting an end date of March 27. After that, ADSK will only sell multi-year contracts in mature countries for certain customers. This move is causing a short-term headwind to free cash flow as customers no longer pay upfront but over time.
- For example, ADSK expects the change in deferred revenue to reduce FY24 free cash flow by approximately $300 mln, a $1.1 bln swing compared to FY23.
- The global economy is also facing elevated levels of uncertainty. In Q4, usage rates grew modestly, reflecting a cautiously optimistic customer base. ADSK noted that it is mindful of the tension in the global economy and cautioned that its business will grow somewhat slower during more volatile environments.
The main takeaway is that ADSK's outlook for the year and beyond is becoming shaky. With the stock trading at around 29x forward earnings after appreciating roughly 20% leading into Q4 results, ADSK was open to pronounced profit-taking activity on a lackluster earnings report. At the same time, expectations were raised after rival Procore's (PCOR) positive DecQ results last week. Although ADSK is in the early innings of a beneficial global shift to the cloud, paving the way for profitable long-term growth, the near term may continue to be marred with persistent obstacles.
The Big Picture
Last Updated: 24-Feb-23 13:47 ET | Archive
Inflation is sticky business
First, the relatively good news: core-CPI, which excludes food and energy, moderated to 5.6% year-over-year in January from 5.7% in December. That was the smallest 12-month increase since December 2021 and down from the peak rate of 6.6% seen in September 2022.
Second, the relatively bad news: the core-PCE Price Index, which excludes food and energy and is the Fed's preferred inflation gauge, increased to 4.7% year-over-year in January from 4.6% in December.
Third, the bad news: services inflation, seen in the CPI report, is still rising, up 7.6% year-over-year and sitting at its highest level since August 1982.
That's a problem and the Fed knows it because services inflation can be sticky. It is a principal reason why the Fed is keen on seeing wage growth moderate more since higher wages often drive higher prices as companies aim to protect profit margins.
That worry is also a principal reason why the Fed has been sticking it to the market with rate hikes.
At Your Service(s)
The stock market is anxious to see the Fed pause its rate hikes. The Fed, however, isn't making any promises. The only implied promise now from the Fed is that it will raise rates again at its March FOMC meeting.
There also seems to be an implied promise from the Fed that it won't be cutting rates anytime soon. The chart below is the Fed's sticking point on that front.
The inflation rates for total services, services less rent of shelter, and services less energy services are all north of 7.0%. The Fed's overall inflation target is 2.0%, so when inflation in the services sector, which comprises the largest swath of the U.S. economy, is north of 7.0%, it is little wonder that the Fed isn't communicating an inclination to cut rates anytime soon.
The Treasury market was a lot quicker than the stock market to process that position following the much stronger-than-expected January employment report, which was followed by a stronger than expected ISM Services PMI, and January CPI, PPI, and PCE Price Index data that exuded signs of stickiness on the inflation front.
The 2-yr note yield, sitting at 4.10% in front of the employment report, is at 4.80% today, up 38 basis points for the year.
The stock market finally looks to be falling in-line with this reality. The S&P 500 is down 3.0% in February, recognizing that it got ahead of itself with a January rally that was predicated on the Fed pausing its rate hikes soon and then cutting rates once, if not twice, before the end of the year.
Eye on Wages
One Fed official after another has conceded that inflation is still too high, that more work needs to be done to get it back down to the 2.0% target, and that the Fed is committed to doing that.
An area that is being watched closely is wage growth. There has been some moderation in wages but not enough yet in Fed Chair Powell's view that would be consistent with a 2.0% inflation rate. He hasn't specifically quantified the wage growth he would like to see, but if the chart below were any guide, we would venture to guess it is in the neighborhood of average hourly earnings growth being up 2-3% year-over-year. In January, average hourly earnings were up 4.4% year-over-year.
The sticking point in this desire is that, when the core-PCE Price Index was stuck between being up 1.0-2.0% year-over-year, there was also globalization, more immigration, and more workers in the workforce.
Now, there is a trend of de-globalization, tighter restrictions on immigration, and fewer workers in the workforce given retiring baby boomers, COVID complications, and the opioid crisis. Hence, there is a huge number of job openings and a seeming scarcity of workers to fill those jobs, which threatens to keep wage growth sticking at higher levels for longer as employers compete to fill those openings.
What It All Means
Consumers and businesses are stuck with inflation. Granted overall inflation pressures aren't as pronounced as they were last year, but services inflation is and then some.
That's a sticking point on the road to the Fed's 2.0% target, which is a road we expect the Fed to drive in a committed manner knowing it allowed inflation to go off road by waiting too long to remove its policy accommodation. The Fed doesn't want to make another driving mistake, which in its mind means doing too little right now rather than doing too much.
This approach is going to create some bumps for the stock market and bond market alike. It already has. There are likely more bumps ahead, though, because the Fed is not done sticking it to the market with rate hikes. Furthermore, with services inflation as high as it still is, the market looks poised to be stuck with higher rates for longer than it previously expected.
-- Patrick J. O'Hare, Briefing.com
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