*
U.S. equity indexes slide; Nasdaq off almost 2%
*
Tech weakest S&P 500 sector; materials sole gainer
*
Dollar, crude gain; gold off; bitcoin down >3%
*
U.S. 10-Year Treasury yield rises to ~3.95%
Welcome to the home for real-time coverage of markets brought to
you by Reuters reporters. You can share your thoughts with us at
BANKING ON HIGHER RATES (1352 EST/1852 GMT)
While investors shied away from equities on Friday as they
braced for the likelihood of higher interest rates for longer
after too-hot economic data, they were less averse to bank
stocks, with the S&P bank index up 0.1% compared with
the benchmark S&P 500's 1.3% drop.
This was at least in part due to the data's suggestion that
the economy was nowhere near a recession at least for now, as
well as the fact that bank profits benefit from higher rates.
Higher rates do put banks under some pressure to pay more
interest on customer deposits, offseting some of the profits
from higher lending fees.
But Oliver Pursche, senior vice president at Wealthspire Advisors in Westport, CT notes that "the spread on what banks are able to charge for loans compared to what they have to pay on deposits is still very favorable."
And he adds that at least in the short term "the expectation of further rate hikes continues to give banks pricing power for loans."
Also, Pursche suggests that the prospect of higher rates
down the road may spur some home buyers to get their skates on.
"While there was some speculation late last year and even
early January that the Fed would stop its rate hike cycle in
March, that's clearly off the table," he said so, "if you were
thinking about buying a home and hoping the Fed would stop
raising and might even lower rates, you're rethinking that now
and more likely to take the loan sooner rather than later. That
would be beneficial for bank earnings."
"Rates are much higher than they were two years ago but if
you go to the pre-financial crisis era they're basically where
they were then," he said noting that buyers will want to lock in
more favorable rates as prime home-buying season commences.
Almost 2 months into the year, the SPXBK has given up some
earlier gains, but is still up 6% while the SPX's gain has
narrowed to ~3%.
(Sinéad Carew)
*****
INDIVIDUAL INVESTORS CROWD THE NEUTRAL CAMP -AAII (1235 EST/1735 GMT)
Neutral sentiment gained, continuing its streak of above-average readings in the latest American Association of Individual Investors (AAII) Sentiment Survey. With this, bullish sentiment plummeted, while bearish sentiment jumped.
AAII reported that neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, rose 2.7 percentage points to 39.8%. Neutral sentiment is above its historical average of 31.5% for the eighth consecutive week. This is the longest streak of above-average readings since a nine-week stretch between April and June 2021.
Bullish sentiment, or expectations that stock prices will rise over the next six months, dove 12.5 percentage points to 21.6%. Optimism is "unusually low for the first time since January 12, 2023." Bullish sentiment is also below its historical average of 37.5% for the 64th time out of the past 66 weeks.
Bearish sentiment, or expectations that stock prices will fall over the next six months, surged 9.8 percentage points to 38.6%. Pessimism is above its historical average of 31.0% for the 61st time out of the past 66 weeks.
With these changes, the bull-bear spread to plunged by 22.2 percentage points to -16.9 percentage points from +5.3 percentage points last week. There have been more bears than bulls in 62 of the past 66 weeks: AAII noted that optimism over this year’s market rebound faded following the recent pullback, saying "concerns about the economy, inflation, corporate earnings and monetary policy are also playing a role."
(Terence Gabriel)
*****
SIMMER DOWN, NOW: FRIDAY DATA SHOWS FED-DEFYING ECONOMIC
VIGOR (1126 EST/1626 GMT)
The parade of data that marched across investors' screens on
Friday defied expectations, showing an economy and an
inflationary cycle - not to mention the intrepid American
consumer - that are refusing to cooperate with the Fed's best
efforts to cool them down.
The star attraction of the Commerce Department's
wide-ranging personal consumption expenditures (PCE) report was,
of course, the price index , which rudely
contradicted four other January inflation indicators which
showed annual price growth slowing down.
On a monthly basis, topline and core PCE prices both rose by
0.6%, sailing above the 0.4% core consensus.
Year-on-year, the main price index heated up to 5.4%, and
excluding volatile food and energy, rose to 4.7%.
Adding insult to injury, all of these numbers stand on the
shoulders of upwardly revised December data.
All of which douses any remaining hope that Powell & Co will
break into their pause-and-pivot dance any time soon.
"These are ugly numbers, and this is the Fed’s preferred
index, so we should expect hawkishness until the second half of
the year," says Peter Cardillo, chief market economist at
Spartan Capital Securities. "We are likely to see three more
rate hikes and the tightening cycle is likely to end in the
second half of the year."
The graphic below shows core PCE breaking formation with the other four major inflation yardsticks, all of which have a long way to go before approaching the Fed's average annual 2% target: Elsewhere in the report, personal income rose by 0.6%, falling well short of the 1% growth economists predicted, while personal consumption jumped by a robust 1.8%, overshooting expectations by a hefty half a percentage point. Even so, the saving rate, often seen as a barometer of consumer expectations - see UMich, below - continued to climb back from historic lows.
Savings as a percentage of disposable income hit 4.7%, bringing it inline with the pre-pandemic "normal." Speaking of consumers, who account for more than two-thirds of the economy, their mood is sunnier this month than originally thought. The University of Michigan's (UMich) final take on consumer sentiment upwardly revised its initial by a not-insubstantial 0.6 point to an even 67. And while the "current conditions" component soured a bit, "expectations" improved this month, a seeming contradiction to the above-mentioned increase in the saving rate. Still, "rosier" is not the same as "rosy." Noting that the index remains 20 points below its historical average, Joanne Hsu, director of UMich's consumer surveys says "consumers continued to exhibit considerable uncertainty over short-run inflation, and thus their expectations may be unstable in the months to come." Hsu provides a convenient introduction to the graphic below, which shows long-term inflation expectations held steady at 2.9% while the near-term figure cooled a smidgeon to 4.1%.
Here, we compare those expectations with core PCE:
And finally, some upbeat data from the housing market.
Sales of freshly constructed U.S. homes jumped
7.2% in January, to 670,000 units at a seasonally adjusted
annualized rate (SAAR).
That number is 8.1% higher than the 620,000 units SAAR
economists predicted, and stands on the shoulders of December's
upwardly revised 7.2% increase.
This returns new home sales to its pre-pandemic level and
sends inventories down to 7.9 months supply.
It's too soon, however, to call this bounce a comeback for
the sector.
More recent data - particularly the ascent of mortgage rates
this month and last week's 18.1% plunge in applications for
loans to buy homes - suggests the recent uptick in new home
sales could be a fluke.
While the data paints a portrait of economic resilience,
investors were having none of it.
All three major U.S. stock indexes were sharply lower as the
"higher for longer" mantra shouted down the doves.
(Stephen Culp)
*****
U.S. STOCKS START FRIDAY IN A FUNK ON HOT CONSUMER
SPENDING (1033 EST/1533 GMT)
Wall Street's major averages started the day bright red with already fading hopes for any let-up in Federal Reserve rate hikes turning even dimmer after data showed inflation accelerating in January and easing less than hoped. After already erasing its year-to-date gains on Thursday, the Dow industrials is down more than 1% YTD. The S&P 500 after opening below its 50-day moving average for the first time since January 20, is now nearing its 200-DMA.
With a surge in wage gains, U.S. consumer spending increased by the most in nearly two years in January at 1.8% compared with economist expectations for 1.3% and December's revision to a 0.1% dip vs previously reported 0.2% dip. The Commerce Department report was the latest indication the economy is nowhere near a much-dreaded recession.
But the flip-side of that is trader bets that the Federal Reserve is far more likely than not to raise its target range from 4.5%-4.75%, to 5.25%-5.5% by June, with a better than one in three chance seen if it lifts rates at least one more quarter-point by July.
So a year-end rate range of 5.25%-5.5% is now seen as most
likely, mocking any remaining hopes for a rate cut in 2023.
While Bill Adams, Chief Economist for Comerica Bank in
Dallas, TX said the data allayed "verge of recession" fears, he
noted that "sticky inflation and a higher-for-longer path of
interest rates increase the downside risk to the 2024 growth
outlook."
Of the S&P 500's 11 major industry indexes, tech and consumer discretionary are both down more than 2%,
while financials , which benefits from higher rates, is
the best performer, down only ~0.9%.
Here is a market snapshot for ~1030 EST:
(Sinéad Carew)
*****
U.S. STOCK FUTURES WEAKER AFTER HOTTER-THAN-EXPECTED
INFLATION DATA (0900 EST/1400 GMT)
U.S. equity index futures are lower in the wake of the
release of the latest data on inflation.
The January core PCE price index month-over-month and
year-over-year were both above estimates. Personal income
month-over-month, however, came in below the estimate:
The data has decreased the market's perception that the Fed
delivers another modest interest rate increase at its March
21-22 FOMC meeting slightly. According to the CME's FedWatch
Tool, the probability of a 25 basis point rate hike is now at
67% from 70% just prior to the numbers being released. There is
now a 33% chance that the Fed raises rates 50 basis points at
its next meeting vs 30% just before the data came out.
E-mini Nasdaq 100 futures are now off more than
1.5%. That's vs a decline of about 1% from just before the
numbers were released.
All S&P 500 sector SPDR ETFs are quoted down in premarket
trade. Tech and consumer discretionary are
taking the biggest hits.
With the weakness, the S&P 500 index , which ended
Thursday at 4,012.32, can threaten a number of support levels.
The support line from the October low is now around 3,996, while
the 50-day moving average (DMA), will be around 3,980. The
January 25 low was at 3,949.06, and the 200-DMA should reside
around 3,940.
Regarding the inflation data, Gene Goldman, chief investment
officer at Cetera Investment Management, said "The market
reaction is appropriate. The 2-year Treasury yield is rising and
stocks are falling because this suggests the Fed will be hawkish
for longer than the market had hoped."
Goldman added, "The big surprise was that while the personal
spending was higher than expected but the savings rate picked
up. Although its old data it continues to confirm that the
economy was strong. If the Fed knew this they would've been more
aggressive."
"I'd say 50 basis point is on the table but we get a lot of
data between now and the March meeting. The dot plot will be
higher."
Here is a snapshot of where markets stood shortly before
0900 EST:
(Terence Gabriel, Sinéad Carew)
*****
FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400 GMT
- CLICK HERE
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
PCEdata02242023 premarket02242023 Wall Street goes red on hot PCE data Inflation Personal consumption UMich inflation expectations New home sales AAII02242023B ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
