Investors are again feeling extremely uncertain about the central bank's end point for it interest rate hiking campaign, which in turns makes it tough to gauge what kind of room stocks have to push higher. The central bank has hiked its benchmark interest rate eight times since March 2022.
Many bears are thinking the current stock market rebound and rally is well overdone. Several Wall Street banks and insiders are saying they have not seen any type of immediate slowdown in the economy but inflation is remaining well above trend, which is a scenario that could force the Fed to push rates even higher and keep them elevated longer than the market is currently anticipating.
Goldman and a few other investment banks are now talking about the Fed perhaps raising rates three more times in 2023 at a rate of at least a quarter-point each time.
Wall Street is mostly expecting the Fed at its next two meetings in March and May to lift rates by 25 basis-points at each meeting, which would bring its target rate to 5.00-5.25%. After that it starts to get a bit more uncertain.
Some traders are thinking the Fed will hike rates again in June, with the odds of another 25 basis-point hike now at 54% versus just under 4% at the beginning of February.
Keep in mind, recent data has been unexpectedly strong which is prompting some concerns that the Fed could return to lifting rates by 50 basis-points.
There is another month of data between now and then which bulls are of course are hoping will indicate that the inflation is dying off.
Key reports to watch include the PCE Prices Index this Friday (2/24), the Job Openings and Labor Turnover report on 3/8, the February Employment Report on 3/10, and the Consumer Price Index on 3/14.
Economic data today includes Existing Home Sales and the PMI Composite Flash reading for February.
Housing trends are being watched pretty closely now as soaring "shelter" costs have become a key factor behind stubbornly elevated inflation. Existing Home Sales today are expected to increase for January, breaking the recent down trend after falling for 11 consecutive months.
Year-over-year, Existing Home Sales were down -34% in December but outside of some frothy regional markets, home prices have continued to rise. Single-family median home prices increased +4% in Q4 from a year ago to $378,700. Prices have declined in just 20 of the 186 individual cities tracked by the National Association of Realtors.
At the same time, several cities are still registering double-digit gains, including Sarasota, Florida, (+19.5%); Naples, Florida, (+17.2%); and Greensboro, North Carolina, (+17.0%), just to name a few.
Turning to earnings, about 80% of S&P 500 companies have now delivered results, with earnings on track to contract -2.2% for Q4, the first quarterly decline since 2020's third quarter.
Insiders expect earnings declines for the first half of 2023, but earnings growth for the second half of 2023. For Q1 2023 and Q2 2023, analysts are projecting earnings declines of -5.4% and -3.4%, respectively.
Home Depot, Ingersoll Rand, Medtronic, Molson Coors, Palo Alto Networks, Public Storage, Coinbase, and Walmart announce earnings today.
Nvidia, eBay, Teladoc Health, Etsy, and TJX Companies report tomorrow.
Turning to geopolitics, headlines over the weekend indicate that China may be ready to provide "lethal" aid to Russia, meaning supply them with weapons and ammunition for the war in Ukraine. Such a move could obviously have huge implications for the already shaky US-China relationship, as well as China's relationship with other Western countries allied with the US.
China is now insisting that they are trying to help broker a peace deal between Russia and Ukraine which some insiders say includes a cease fire as well as a plan to halt military shipments to Ukraine from the West. Some believe Russia supports a similar plan and think the country could offer a draft peace proposal to the United Nation's this week.
Most Western military experts say any plan that would cut off support to Ukraine would not be acceptable as Russia can't be trusted to keep its end of any bargain. What's more, Russia is likely to insist on keeping land it now claims in Eastern Ukraine's Donbas region, something Ukraine has already said it will not concede.
US Concerned China Is Weighing Lethal Aid to Russia: US Secretary of State Antony Blinken warned China against providing lethal support such as weapons and ammunition to Russia’s war effort in Ukraine. “The concern that we have now is based on information we have that they’re considering providing lethal support,” Blinken said in an interview with CBS’s “Face the Nation” shortly after meeting China’s top diplomat, Wang Yi, in Munich late Saturday. “And we’ve made very clear to them that that could cause a serious problem for us and in our relationship.” Asked what that support would look like, Blinken said “there’s a whole gamut of things that fit in that category for everything from ammunition to the weapons themselves.” Notably, China's top foreign policy official, Wang Yi, told other leaders at the Munich Security Conference this week that China is working on a peace proposal to end the conflict. That public position runs contrary to what US intelligence has indicated. NATO Secretary-General Jens Stoltenberg warned at the conference that Beijing "is watching closely to see the price Russia pays — or the reward it receives — for its aggression," according to Politico. Blinken also said that Iran and Russia are expanding their military relationship. Source CBS News
64% of Americans Are Now Living Paycheck to Paycheck: Prices continued their upward momentum in January, rising +0.5% for the month and 6.4% over the past 12 months and to make ends meet, 27% of Americans said they’ve had to take money out of savings and more than half, or 54%, said they used that money to pay for everyday expenses, such as groceries and rent, the recent Country Financial Security Index reported. Roughly 64% of Americans are now living paycheck to paycheck, according to a LendingClub report, up from 61% a year earlier and in line with the historic high first hit in March 2020. Even though wage growth is high by historical standards, it isn’t keeping up with the increased cost of living as average hourly earnings fell 0.2% in January and were down 1.8% from a year ago, according to a separate BLS report that adjusts wages for inflation. Source CNBC
Construction Industry is Still in Hiring Mode and Will Be... It's not supposed to be like this, typically, when interest rates rise, or when the economy slows down construction hiring contracts. The industry is incredibly sensitive to the business cycle, as Axios' Courtenay Brown and Neil Irwin recently explained, but in a tight labor market, things are different. The construction industry needs to attract +546,000 new workers this year on top of the normal pace of hiring in order to meet its expected demand for labor, according to projections from the Associated Builders and Contractors. Even if the economy slows down in 2024, the industry will still need to hire +342,000 workers on top of normal hiring to meet demand. A few things are happening here, while single-family home construction is slowing, there are a growing number of mega-projects that still need workers, including things like chip-making plants and clean energy facilities. Crucially, nearly 1 in 4 construction workers are older than 55 and not enough younger construction workers are coming into the industry to replace them. Source Axios
Layoffs are Spreading but Some Employers Can't Hire Fast Enough: Job cuts are rising at some of the biggest U.S. companies, but others are still scrambling to hire workers, the result of wild swings in consumer priorities since the Covid pandemic began three years ago. In total, U.S.-based employers cut nearly 103,000 jobs in January, the most since September 2020, according to a report released earlier this month from outplacement firm Challenger, Gray & Christmas. Meanwhile, employers added 517,000 jobs last month, nearly three times the number analysts expected. This points to a labor market that’s still tight, particularly in service sectors that were hit hard earlier in the pandemic, such as restaurants and hotels. Some of the recent layoffs have come from companies that beefed up staffing over the course of the pandemic, when remote work and e-commerce were more central to consumer and company spending. Industries that fell out of favor with consumers and other businesses, such as restaurants and aerospace, are rebuilding workforces after shedding workers. Boeing, for example, is planning to hire 10,000 people this year, many of them in manufacturing and engineering. Airlines are still scrambling for pilots, a shortage that has limited capacity, while demand for experiences such as travel and dining has surged. Chipotle alone is planning to hire 15,000 workers as it gears up for a busier spring season and to support its expansion. Source CNBC
America's Productivity Engine is Sputtering: Since 2005, productivity growth in the US has been lackluster, averaging 1.4% a year, compared to the post-World War II average of 2.2%. That is a problem. Increasing productivity–economic output per unit of input–maintains US competitiveness and improves our quality of life. It is also essential to meet challenges like inflation, debt loads, entitlements, and the energy transition. Regaining historical rates of productivity growth could generate a total of $10 trillion for US GDP by 2030, or $15,200 per US household that year. Productivity is growing fast in some sectors and geographies. There are two separate but linked workforce challenges. One is the lack of workers. US workforce participation rate has fallen to 62.3%, down from 67% in the late 1990s. Only part of this is due to an aging population: More than 5 million Americans are not in the workforce but say they want to work. The second challenge is that too many current workers do not have the skills they will need to succeed. Digitization also helps individual firms grow more productive. In manufacturing, for example, leading firms are more than five times as productive as the laggards. However, many firms that have invested in digitization are not seeing the benefits. Source Fortune
Rail Safety Scrutinized After Ohio Derailment Disaster: A Norfolk Southern train carrying hazardous chemicals derailed in East Palestine, Ohio, a town of approximately 5,000 people, on Feb. 3. The train consisted of three locomotives, nine empty cars and 141 loaded cars, with 50 of those cars derailing. The incident has put railroad safety and federal regulations of the railroad industry under a microscope. Immediately following the derailment, there was speculation as to what caused the accident and if it could have been prevented. One major issue being discussed is electronically controlled pneumatic (ECP) brakes, which stop the entire train all at once versus air brakes that stop cars one by one. Besides the ECP braking rule issue, there is also concern by the public and even rail workers that some unit trains are just too long and not safe. Source DTN
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