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Major U.S. stock indexes end higher: Nasdaq out front, up
~1.7%
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All major S&P sectors close green, materials gains most
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Dollar slips; gold, crude, bitcoin gain
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U.S. 10-Year Treasury yield edges down to ~3.5%
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U.S. STOCKS TAKE COMFORT IN LABOR COST DATA AHEAD OF FED
(1415 EST/2115 GMT)
Shares on Wall Street ended higher on Tuesday, bolstered by
declining employement cost index data, which suggested that
inflation was trending lower ahead of a Federal Reserve policy
decision that is likely to further slow the pace of tightening.
The ECI, which is the broadest measure of labor costs, rose
1.0% last quarter, the Labor Department said. That was the
smallest advance since the fourth quarter of 2021 and followed a
1.2% gain in the July-September period.
The index is viewed by policymakers as one of the better
measures of labor market slack and a predictor of core inflation
because it adjusts for composition and job-quality changes.
Investors also dealt with a slew of earnings reports,
including share-price gains in Exxon Mobil Corp and
United Parcel Service Inc following their results,
countered by declines in Caterpillar Inc and McDonald's
Corp .
The S&P 500 posted its first increase for the month of
January since 2019, following a brutal 2022 in which the
benchmark index sank 19.4%.
All eyes are focused on the Fed, which is widely-expected to
raise interest rates by 25 basis points on Wednesday. The Fed
has projected it will raise its key policy rate to between 5%
and 5.25% and keep it there at least until the end of the year,
The rate currently stands between 4.25% and 4.50%.
Here's a closing snapshot of key financial markets:
(Gertrude Chavez-Dreyfuss)
*****
EARNINGS STILL EXPECTED TO HAVE DECLINED IN Q4 (1330
EST/1830 GMT)
With results in so far from 165 of the S&P 500 companies,
earnings are still projected to have declined year over year in
the fourth quarter of 2022, according to IBES data from
Refinitiv.
Based on the actual results and estimates for the rest of
the companies, S&P 500 fourth-quarter earnings are expected to
have fallen 2.4% from the year-ago quarter.
It would be the first U.S. quarterly earnings decline since
the third quarter of 2020, when companies were still grappling
with the start of the coronavirus pandemic.
But strategists say the numbers could shift this week, with
key results from Apple , the largest U.S. company by
market value, and Google-parent Alphabet due Thursday
after the closing bell.
About 70% of the earnings reports so far have beaten
analysts' expectations.
(Caroline Valetkevitch)
*****
JANUARY TURNS THE TABLES ON 2022, MOSTLY (1230 EST/1730 GMT)
After a dreary 2022, equity investors appear resolved to be
more optimistic in 2023. Or at least the casual observer of
equities year-to-date performance on the last day of the first
month of 2023 could be forgiven for harboring such hopes.
On Tuesday Jan 31, 2023, 8 of the S&P 500 11 major industry sectors are showing gains for January with only three defensive sectors down a few percentage points YTD.
In comparison 10 of the benchmark's 11 sectors lost ground in 2022 with communication services , consumer discretionary , information technology and real estate falling the hardest with their declines ranging from a shocking 40.4% to a miserable 28.5%.
At least for January the tables have turned with
discretionary showing the biggest gain at ~14%, followed by
communication services, up ~13%, and then real estate, up ~9%,
followed by tech, up ~8%.
The weakest performers so far in 2023 are utilities, down ~3%, healthcare also down ~3% and consumer staples down ~2%. In 2022 utilities had been the second strongest performer, falling just 1.4% compared with the benchmark S&P's 19% drop. By Monday, however, LPL Financial strategists Adam Turnquist and Jeffrey Buchbinder were looking dubiously at the speed of January's gains.
"The pace and composition of the rally have left many investors skeptical over its sustainability, especially amid a lackluster earnings season thus far. Of course, the market is also forward-looking, with expectations for falling inflation and a less hawkish Federal Reserve (Fed) as we progress into 2023," they wrote.
"And although the trajectory of the rally will likely slow,
seasonal indicators point to a path higher for U.S. equity
markets by year-end."
========================================================
Here is a table comparing Jan 2023 to FY 2022:
Sector Jan. 23 % FY 2022 %
change change
Consumer +14 -37.58
Discretionary
Communications +13.4 -40.4
Services
Real Estate +9 -28
Information +8.4 -28.9
Technology
Materials +8 -14
Financials +5.5 -12.4
Industrials +2.7 -7
Energy +2.3 +59
Consumer Staples -1.9 -3.2
Healthcare -2.8 -3.5
Utilities -3 -1.44
========================================================
(Sinéad Carew)
*****
TUESDAY DATA DEALS THE FED A FLUSH: DEMAND SOFTENING, PRICES COOLING (1210 EST/1710 GMT) Today, as the Federal Reserve convenes for its two-day policy potluck, market participants are reminded that Chairman Powell is fond of saying the central bank will remain agile as it responds to economic data. Tuesday brought with it several bits of economic data for Powell & Co to be agile about. First, the employment cost index (ECI) , which combines wages and benefits, increased by a tidy 1% in the fourth quarter, 0.2 percentage points cooler than the previous quarter and a hair below the 1.1% consensus. Year-over-year, the ECI grew by 5.1% in the closing months of 2022.
The Labor Department's ECI report, widely viewed as a measure of labor market slack, can be tossed atop the growing pile of evidence that inflation is indeed slowing. In fact, adjusted for inflation, wages and salaries actually dropped by 1.2% and benefit costs slid by 1.4%.
"The key message here is that Chair Powell's oft-expressed fear of the risk of a wage-price spiral is no longer realistic," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The Fed should not tighten further. The 25bp hike tomorrow is a done deal, but we are raising the chance of no hike in March to 70% from 60%." Next, the mood of the American consumer defied analyst expectations by souring in the opening weeks of the new year. The Conference Board (CB) delivered a January consumer confidence index number of 107.1, down 1.9 points from December and landing south of the 109 level economists predicted. While the "present situation" component brightened by 3.5 points, the "expectations" index plunged 5.6 points to 77.8, and according to CB, when that measure dips below 80, it "often signals a recession within the next year."
The dimming expectations element is "reflecting (consumers')
concerns about the economy over the next six months," says
Ataman Ozyildirim, CB's senior director of economics. Consumers
were less upbeat about the short-term outlook for jobs. They
also expect business conditions to worsen in the near term.
Next on the docket, U.S. home price growth is cooling significantly. The S&P Core Logic/Case-Shiller 20 city composite showed average home prices growing at a still-toasty 6.8% year-over-year, down a sizeable 1.9 percentage points from October. That's the index's coolest print in more than two years. Over those two years, home price growth, along with rising mortgage rates, have jacked up the cost of monthly home payments beyond the realm of affordability for many potential buyers, especially at the lower end of the market. But that appears to be changing. "As the Federal Reserve moves interest rates higher, mortgage financing continues to be a headwind for home prices," says Craig Lazzara, managing director at S&P DJI. "Economic weakness, including the possibility of a recession, would also constrain potential buyers." "Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken." If investors need another reason to fret about an economic downturn, the present situation/expectations gap widened this month - a phenomenon which is often a recession harbinger. Finally, the contraction of midwest factory activity unexpectedly accelerated in January. The Chicago purchasing managers' index (PMI) , courtesy of MNI Indicators landed at 44.3,
A PMI reading below 50 signifies a monthly slowdown, and a number below 43 is widely considered recessionary. The Institution for Supply Management's (ISM) broader, national PMI data is due on Wednesday, and is seen inching deeper into contraction, shedding 0.4 point to an even 48.
Wall Street got greener as morning trading progressed, with
a few of the usual suspects - Amazon.com , Microsoft - putting the Nasdaq out front.
All three major indexes are homing in on monthly gains.
(Stephen Culp)
*****
TIME TO KICK EM's TIRES? (1126 EST/1626 GMT)
The bear market may have taken a disproportionately large
bite out of emerging market (EM) securities. However, Saira
Malik, chief investment officer at Nuveen, doesn't expect them
to be left behind when global markets eventually rebound.
According to Malik, so far in 2023, returns for both
emerging markets debt and equity have outperformed their U.S.
peers thanks to a number of tailwinds, including China's
re-opening, improved risk sentiment, and dollar weakness.
And with EM GDP growth rates poised to outpace those of
advanced economies over the next several years, Malik believes
the EM landscape appears appealing.
Within EM debt markets, Nuveen is focused on countries that
raised rates earlier, and is some cases, more extensively than
the U.S. Fed.
As for equities, Malik says that EM valuations are "well
below their long-term averages and remain inexpensive relative
to the U.S., while forecasted EPS growth estimates over the next
few years are notably more attractive than developed market
counterparts."
Malik admits that as 2023 kicks off, EM companies carry
negative earnings estimates. However, she believes that with
renewed optimism over China, and the potential for improvement
along the geopolitical front, consensus forecasts may prove to
be too conservative.
(Terence Gabriel)
*****
U.S. STOCKS TEPID IN EARLY TRADE (1010 EST/1510 GMT)
U.S. stock indexes are posting small changes early on
Tuesday after wage growth data pointed to easing inflation ahead
of the Federal Reserve's decision on interest rates.
Additionally, since the open, both Chicago PMI and consumer
confidence both missed estimates.
The Nasdaq is posting the biggest rise, up around
0.5%, while the DJI is around flat. This, as traders may
be in wait and see mode ahead of the results of the latest FOMC
meeting at 2 pm EST Wednesday. That said, according to the CME's
FedWatch Tool, markets essentially see a 25 basis point hike as
a done deal at 99.8%.
Meanwhile, the S&P 500 and Nasdaq are both on
track for their biggest January rises since 2019.
(Terence Gabriel)
*****
MARKETS IN FOR A SUCKER PUNCH? (0912 EST/1412 GMT)
The S&P 500 has bounced back nearly 5% in the first month of
2023, the question is - does this rally have legs?
J.P.Morgan global strategists believe the year-to-date rally
is likely to fade as recession risks are merely postponed and
not diminished.
"Fundamental confirmation for the next leg higher might not
come, and instead markets could encounter an air-pocket of
weaker earnings, activity, and capex," JPM strategists, led by
Marko Kolanovic, wrote in a note.
This week is packed with catalysts - including the U.S.
Federal Reserve's rate-setting meeting, earnings from mega-cap
companies Apple , Alphabet and Amazon.com , and the pivotal monthly jobs report - that could
dictate market moves in the near-term.
Positioning in options markets isn't pointing to a very
bright outlook either, according to analytics firm Spotgamma.
The recent market climb has been driven by the short dated
options trade and short stock covering which generates a lot of
pretty 'breakout charts' as it adds to an illusion of
fundamental strength, said Brent Kochuba, the founder of
SpotGamma.
Traders were net sellers of U.S. equity call options last
week, with most of the flow concentrated in very short dated
activity, Spotgamma noted.
"There seems to be a perception that this giant bull market
is about to launch, but we feel a lot of that is ultra-short
term momentum," Kochuba added.
For example, traders buying calls in Tesla are in
for the daily momentum chase and therefore closing positions
shortly after buying. Traders do not appear to be trying to
position for the second quarter and beyond, Kochuba explained.
Further, it appears the tail that is not being hedged is
hawkishness from the Fed, Kochuba added.
"From an options positioning perspective the market seems
prone to a real sucker punch. This does not mean (Fed Chair
Jerome) Powell delivers one, but it seems that outcome is
underpriced."
(Medha Singh)
*****
CRUDE OIL FUTURES: IS TRADER JOE STILL EYEING HIS FILL?
(0857 EST/1357 GMT)
The U.S. House of Representatives passed a bill last Friday
limiting the ability of the energy secretary to tap the
strategic petroleum reserve (SPR) except in emergencies.
Republican backers of the bill said the Biden administration
acted recklessly in selling 180 million barrels from the reserve
last year, in the biggest release ever. That drawdown and others
Biden approved have pushed the level of the SPR to its lowest
level since 1983.
The Biden administration had said it acted to counter high
gasoline prices in the wake of Russia's invasion of Ukraine.
Earlier last week, energy Secretary Jennifer Granholm said that President Biden will veto the bill if it ultimately passes Congress. On December 9, NYMEX crude futures hit a low of $70.08 before snapping higher. A week later, on December 16, the U.S. Energy Department said it would begin buying back oil for the SPR. More specifically, last October, The White House said it would buy back oil at or below about $67-$72 per barrel. On December 9, the futures bottomed at 1.09x the value of their 200-week moving average (WMA). Since the early 1990s, this long-term moving average has acted as a powerful magnet in crude sell offs:
Crude futures are now trading around $77.00, with the disparity at 1.17x.
It may remain an open question whether crude hits President
Biden's buy level. However, traders are still focused on whether
the 200-WMA, which now resides just below $66.00, and is rising
around 5-10 cents per week, will continue to work its magic as a
powerful magnet.
Meanwhile, the S&P 500 energy sector is just over 7%
below its 2014 record intraday high.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
