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U.S. equity indexes gain, but off highs: Nasdaq up ~0.9%
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Cons disc leads S&P 500 sector gainers; utilities weakest
group
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Dollar, crude, bitcoin decline; gold gains
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U.S. 10-Year Treasury yield dips to ~3.92%
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HAS THE MARKET GOTTEN TOO HAWKISH ON RATES? (1334 EST/1834 GMT) Better than expected economic data, still high inflation and hawkish comments by Federal Reserve officials have led the market to reprice for higher rates for longer. But has it now gone too far? Jefferies economists Aneta Markowska and Thomas Simons say yes, noting that “since the beginning of the month, the rates market has revised its estimate of the terminal rate by 55 bps, from 4.85% to 5.40%. At 4.85%, we felt that implied forward rates were too low. At 5.40%, we feel they are too high.” The Fed has committed to hiking rates in increments of 25 basis points and “We don't expect them to break that guidance unless inflation expectations become unhinged, which has not been the case thus far. So, by betting on a terminal rate above 5.35%, the market is effectively betting that the recent momentum in both growth and inflation will be sustained throughout the summer.” Jefferies expects a terminal rate of 5.1%, but adds that a June hike taking the rate to 5.35% is also a “realistic possibility.” A July hike, however, "is very unlikely," the bank says, noting that the impact of higher rates on some parts of the economy has not yet been fully felt, but is likely to be in the coming months. This includes employment in the housing sector, where backlogs in housing starts have delayed the impact of higher rates on jobs. Small businesses, meanwhile are highly sensitive to rate increases and are likely to face margin pressure in the first half of this year from higher financing costs, leading to layoffs.
Small businesses account for 78% of all job openings, and nearly 90% of the post-pandemic increase in labor demand. The lagged effects of fiscal stimulus payments, meanwhile, are likely to turn into a headwind, from a tailwind, and the marginal impact on consumption from excess household savings has already peaked.
And monetary policy is only now entering restrictive territory and will be much more restrictive by May, Jefferies said. “By May, the real funds rate will have risen further to 1%, and possibly higher if short-term inflation expectations decline from the current 4.1%. At that point, Fed officials will feel that they are much closer to having achieved a "sufficiently restrictive" policy stance,” the bank said.
(Karen Brettell)
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HAS THE FED PUT GONE KAPUT? (1216 EST/1716 GMT) There is an old Wall Street adage: ‘Don’t fight the Fed.' Indeed, according to Philip Palumbo, founder, CEO and chief investment officer at Palumbo Wealth Management, the Fed tends to get what they want, so fighting them tends to be a losing proposition. As Palumbo sees it, until recently, the stock market was more than willing to fight the Fed. However, he thinks recent weakness is based largely on markets coming into line with the Fed’s outlook. Meanwhile, the 10-year U.S. Treasury yield peaked around 4.25% in October, and then trended down through January ticking a bit below 3.4% several times.
"With the Fed consistently forecasting higher rates for
longer, the bond market simply did not believe the Fed and was
actually forecasting a Fed ‘pivot’ (that is, interest rate cuts)
later in 2023. This pivot is effectively the Fed Put, meaning
that when things get bad enough, the Fed will always cut rates
and save markets," says Palumbo.
While bonds rallied (rates declined), the stock market
followed suit and also advanced for several months:
Palumbo notes that when rates are rising, the stock market
tends to struggle and when rates are falling, the stock market
tends to have the wind at its back.
What happened in January is that rates started to move up
again, moving more in line with the Feds’ view of the world, but
stocks did not follow this time around and both stocks and bonds
were briefly headed in the same direction. Last week, he says
that began to reverse again.
In short, Palumbo believes higher interest rates are a nod
to the Fed's current policy and raises the question of whether
the Fed Put has finally been put to bed.
"Whether the put has disappeared or not, higher rates are a
huge headwind to any further stock market rally. For the time
being, the bond markets’ current acceptance of the Feds’ rate
trajectory creates a ceiling for stocks."
(Terence Gabriel)
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MONDAY DATA: GOODS DEMAND CONTINUES TO SOFTEN, HOUSING FINDS ITS BASEMENT (1105 EST/1405 GMT) Data on Monday treated investors to a double-feature of contrasts, pitting the manufacturing sector's ongoing woes against a surprisingly strong housing print.
New orders for long-lasting, U.S.-made merchandise dropped by 4.5% in January, steeper than the 4.0% decline analysts expected and a reversal from December's downwardly revised 5.1% increase.
Line-by-line, the Commerce Department's durable goods report , which covers everything from air fryers to helicopters, showed a whopping 54.6% plunge in commercial aircraft/parts, but a 5.5% increase in defense aircraft/parts and a 3.8% rise in defense goods ex-aircraft. The drop in commercial aircraft orders can be blamed on Boeing , which reported 55 airplane orders in January, a 78% drop from 250 in December. A healthy 7% rise in computers and related items also helped soften the topline drop. But stripping away the boost of defense-related goods, new orders for durable goods slid by 5.1%. "Looking ahead, we expect durable goods activity to gradually soften in the coming months as consumers cut back on goods spending and businesses restrain investment as high borrowing costs bite and economic jitters stay high," says Oren Klachkin, lead U.S. economist at Oxford Economics. "While it may take time for the downturn to arrive, we maintain our conviction that a recession is on the way." Excluding transportation and defense - typically big-ticket items - new orders eked out a 0.4% gain. Through the lens of consumer, that bit of news could be worse. Astute observers will recall the most recent fourth-quarter GDP revision released last week, which showed consumer spending on durable goods actually detracted 0.2 percentage points from the headline, reflecting a demand shift from goods to services. On the bright side, new orders for core capital goods - which strips out aircraft and defense items and is considered an indicator of U.S. business spending plans - rose by 0.8%, much stronger than the 0.1% consensus. Separately, signed contracts for the pending sale of pre-owned U.S. homes jumped by 8.1% in the opening weeks of 2023, blasting past the 1.0% gain predicted by economists. It marks the index's biggest monthly jump since the onset of the COVID demand boom in June 2020, when buyers started flocking to the suburbs in search of social distance and home office space.
The National Association of Realtors' (NAR) report, which is considered among the more forward-looking housing indicators - signed contracts usually take a month or two to become actual - suggests some truth behind NAR's hopeful remarks upon the release of its existing home sales report on Feb. 21 that "home sales are bottoming out." NAR's Lawrence Yun repeats that mantra with this report. "Home sales activity looks to be bottoming out in the first quarter of this year, before incremental improvements will occur," Yun writes, adding "buyers responded to better affordability from falling mortgage rates in December and January." Indeed, the cost of financing a home purchase has eased in the first weeks of the year.
And hot mortgage rates, along with rising home prices, have pushed monthly home payments beyond the realm of affordability for many potential buyers, especially at the lower end of the market. Even so, the index remains 27.1% below its pre-pandemic Feb. 2020 level. Wall Street was busy bouncing back from Friday's sell-off, with broad gains across the board. Dow transports , considered an economic coalmine canary, was having a better day than most, powered by Union Pacific's surge after the railroad operator announced a leadership change.
(Stephen Culp)
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WALL STREET REBOUNDS AS INVESTORS SNAP UP BEATEN DOWN SHARES (0948 EST/1448 GMT) Wall Street’s main indexes are rebounding on Monday, after posting their worst weekly selloff so far this year last week, as investors are seeking out beaten down shares. The Nasdaq Composite is the best performing major index, rising around 1% on the day, while the S&P 500 and Dow Jones Industrial Average are each gaining by more than 0.5%. Stocks have been hurt by concerns about the impact of higher rates on expectations that the Federal Reserve will need to hike higher and hold rates in restrictive territory for longer in order to bring down inflation.
Data on Monday showing new orders for key U.S.-manufactured capital goods increased more than expected in January. Pending home sales data for January is also due at 1000 EST (1400 GMT). Benchmark 10-year Treasury yields eased from more than three-month highs of 3.978% reached earlier on Monday to 3.912%, likely helping risk sentiment improve. Here is Monday’s opening markets snapshot.
(Karen Brettell)
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S&P 500 INDEX: 50- and 200-DMA FLIRTATION (0900 EST/1400 GMT) The S&P 500 index slid 2.7% last week for its biggest weekly decline so far this year. With this, the benchmark index ended at 3,970.04 on Friday, flirting with some important support levels, including its 50- and 200-day moving averages:
The SPX ended below the support line from its October low as well as its 50-day moving average (DMA) on Friday. The 50-DMA will now present a hurdle at around 3,980 on Monday. The broken support line is resistance at around 4,005. Traders are also eyeing the February 10 low, at 4,060.79, as an important swing level. The index used its 200-DMA as support on Friday. This long-term moving average should reside around 3,940 on Monday. The broken resistance line from the January 2022 record high should be support at around 3,920 on Monday, and the January 19 low was at 3,885.54. Meanwhile, e-mini S&P 500 futures are suggesting an SPX bounce of more than 30 points at the open, so traders will be watching to see how the index acts and ends vs support and resistance for clues into what the next trend may be.
(Terence Gabriel)
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FOR MONDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EST/1400 GMT -
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
