NYSE MAC Desk
Fed Recap:
STRAIGHT FROM THE TRADING FLOOR
by Michael Reinking, Sr. Market Strategist
February 1, 2023 5:00 PM ET
DOW 34,093 (+7), S&P 500 4,119 (+43), Russell 2000 1,961 (+29), NYSE FANG+ 5,503 (+221), ICE Brent Crude $83.03/barrel (-$2.43), Gold $1,967/oz (+$21), Bitcoin ~23.8k (+590)
For the 8th consecutive meeting the Federal Reserve carried out a rate hike. This was the second consecutive downshift as the central bank increased rates by 0.25% bringing the upper-end of the Fed Funds target to 4.75%. The statement was not very controversial, but I would say it was slightly less dovish than expected. There was some expectation that the language describing economic activity would be downgraded however, that language was left unchanged. There was the first acknowledgement of disinflation with the language changing to, “Inflation has eased somewhat but remains elevated” while also removing language calling out pressures created by the pandemic and the war in Ukraine. The potentially big wild card was around forward guidance and that too was unchanged calling for “ongoing increases” to achieve a “sufficiently restrictive” policy stance. As widely expected, the vote was unanimous. By recent standards the moves within financial markets were very muted. Yields ticked up a couple of basis points, but equity markets were pretty much where they were ahead of the release.
Which brings us to the main event. There was some concern that Chair Powell would deliver a very hawkish message and try to temper market enthusiasm. His prepared remarks were standard highlighting the tight labor market and the recent easing of inflation. However, he showed his true colors very early on as he said, “the full effects of rapid tightening are yet to be felt” but he tried to offset that by saying there was more work to do. In discussing developments, he said the “disinflationary process has begun”, called yesterday’s ECI “encouraging” and even re-opened the door for a soft-landing suggesting that inflation could ease without significantly impacting employment.
One of the reasons that investors were concerned we could get a Jackson Hole replay was that financial conditions have been easing, which members of the committee called out in the Minutes recently. He was asked about this in the first question and instead of dropping the hammer he downplayed this by saying the Fed was not focusing on short-term moves, to me this was the blessing of the recent rally. He highlighted that overall financial conditions have tightened since the start of the cycle but reiterated that they were not sufficiently restrictive yet.
Later he provided some guidance as to what it might take to get to there saying, “We're talking about a couple more rate hikes to achieve an appropriately restrictive stance, we are not very far from that level” and never forcefully pushed back against the market expectations for rate cuts later in the year. The most hawkish he tried to be during the press conference was when he once again highlighted that the Fed would ere on the side of doing too much but then once again offset that by saying, “We don't want to overtighten, but we have tools to help us if we do” and he never pushed back against market expectations for rate cuts later this year.
This was clearly better than feared. Yields moved sharply lower, the US dollar index broke to a new YTD low, and equities rallied right after the first question about financial conditions. The S&P recouped the day’s losses and traded right up to the 4,100 level traders have been eyeing. After a brief pause, equities extended the gains closing up ~1% at 4,120 (~2.8% off the low). The risk on switch got flipped with tech, growth stocks and crypto currencies all moving sharply higher. The NYSE FANG+ index closed up ~4%, to be fair this index was higher throughout the day following the AMD report last night. Bitcoin ended higher by 3.5% to 23.7k. Yields closed sharply lower down between 8-12bps across the curve with most tenors testing the YTD lows. The US dollar index ended down ~1% closing at ~$101. The dollar weakness helped commodities reverse the early move lower with gold notably broke out to new highs. The VIX (17.87 -1.53) and the ICE BofA Move Index (97.30 - 2.21) both also closed at new YTD lows.
It was a positive day today, but I wouldn’t say we can sound the all clear. Breakouts can always be tricky and on multiple occasions over the last year we’ve seen a reversal of the initial Fed reaction. The S&P 500 did clear 4.100 but closed the session ~0.75% off the high leaving a little bit of uncertainty and there are still some major catalysts for the remainder of the week.
Quickly looking ahead to tomorrow there are two major rate decisions ahead of the US open with both the BoE and the ECB expected to hike rates by 50bps. The economic data will continue to revolve around the labor market with claims and challenger job cuts. Earnings will move into focus again with a very busy twenty-four hours which includes four of the original FANG. The company that formally was the F in that moniker is up >15% in the after-market following results.
Earnings:
Post-Market: AFL, ALGN, ALL, AVT, CHRW, CLB, CSGS, CTVA, DXC, EGHT, ELF, GHL, GL, HOLX, KLIC, LSTR, MAA, MCK, MET, META, MTH, MXL, NTGR, PTC, QRVO, RRX, RYN, SLM, TBI, UGI
Pre-Market: AME, APD, APTV, ARW, ATI, AVY, BALL, BC, BDX, BERY, BMY, BR, CAH, CNHI, COP, DGX, DLX, EL, GWW, HBI, HOG, HON, HSY, ICE, ITW, JHG, LAZ, LEA, LLY, MRK, PENN, PH, RACE, RGS, SIRI, SNA, SWK, SXC, TT, TW, UI, WEC, WMS, WNC
Post-Market: AAPL, AMZN, BILL, BYD, CLFD, CLX, COLM, CPT, CTSH, DLB, F, GEN, GILD, GOOGL, HIG, HUBG, LPLA, MANH, MCHP, MSTR, NGVC, POST, QCOM, RGA, SBUX, SKX, SYNA, TEAM, WWE, X
Sectors/Other Asset Classes:
- Fed hikes by 25bps as expected
- Can you even call Chair Powell’s press conference hawkish?
- Risk on!
- Yields and US dollar index sharply lower
- 10 of 11 S&P 500 Sectors higher: Tech leads/Energy lower
- Check out some of the recent ICE Data/Content:
- NYSE Data Insight: BOND Transfer to NYSE Improves Market Quality
- ICE Data in Action: Finding Needles in the Bond Market Haystack
- Inside the ICE House 342: Syndio CEO Maria Colacurcio Builds the Technology of Pay Equity
For the 8th consecutive meeting the Federal Reserve carried out a rate hike. This was the second consecutive downshift as the central bank increased rates by 0.25% bringing the upper-end of the Fed Funds target to 4.75%. The statement was not very controversial, but I would say it was slightly less dovish than expected. There was some expectation that the language describing economic activity would be downgraded however, that language was left unchanged. There was the first acknowledgement of disinflation with the language changing to, “Inflation has eased somewhat but remains elevated” while also removing language calling out pressures created by the pandemic and the war in Ukraine. The potentially big wild card was around forward guidance and that too was unchanged calling for “ongoing increases” to achieve a “sufficiently restrictive” policy stance. As widely expected, the vote was unanimous. By recent standards the moves within financial markets were very muted. Yields ticked up a couple of basis points, but equity markets were pretty much where they were ahead of the release.
Which brings us to the main event. There was some concern that Chair Powell would deliver a very hawkish message and try to temper market enthusiasm. His prepared remarks were standard highlighting the tight labor market and the recent easing of inflation. However, he showed his true colors very early on as he said, “the full effects of rapid tightening are yet to be felt” but he tried to offset that by saying there was more work to do. In discussing developments, he said the “disinflationary process has begun”, called yesterday’s ECI “encouraging” and even re-opened the door for a soft-landing suggesting that inflation could ease without significantly impacting employment.
One of the reasons that investors were concerned we could get a Jackson Hole replay was that financial conditions have been easing, which members of the committee called out in the Minutes recently. He was asked about this in the first question and instead of dropping the hammer he downplayed this by saying the Fed was not focusing on short-term moves, to me this was the blessing of the recent rally. He highlighted that overall financial conditions have tightened since the start of the cycle but reiterated that they were not sufficiently restrictive yet.
Later he provided some guidance as to what it might take to get to there saying, “We're talking about a couple more rate hikes to achieve an appropriately restrictive stance, we are not very far from that level” and never forcefully pushed back against the market expectations for rate cuts later in the year. The most hawkish he tried to be during the press conference was when he once again highlighted that the Fed would ere on the side of doing too much but then once again offset that by saying, “We don't want to overtighten, but we have tools to help us if we do” and he never pushed back against market expectations for rate cuts later this year.
This was clearly better than feared. Yields moved sharply lower, the US dollar index broke to a new YTD low, and equities rallied right after the first question about financial conditions. The S&P recouped the day’s losses and traded right up to the 4,100 level traders have been eyeing. After a brief pause, equities extended the gains closing up ~1% at 4,120 (~2.8% off the low). The risk on switch got flipped with tech, growth stocks and crypto currencies all moving sharply higher. The NYSE FANG+ index closed up ~4%, to be fair this index was higher throughout the day following the AMD report last night. Bitcoin ended higher by 3.5% to 23.7k. Yields closed sharply lower down between 8-12bps across the curve with most tenors testing the YTD lows. The US dollar index ended down ~1% closing at ~$101. The dollar weakness helped commodities reverse the early move lower with gold notably broke out to new highs. The VIX (17.87 -1.53) and the ICE BofA Move Index (97.30 - 2.21) both also closed at new YTD lows.
It was a positive day today, but I wouldn’t say we can sound the all clear. Breakouts can always be tricky and on multiple occasions over the last year we’ve seen a reversal of the initial Fed reaction. The S&P 500 did clear 4.100 but closed the session ~0.75% off the high leaving a little bit of uncertainty and there are still some major catalysts for the remainder of the week.
Quickly looking ahead to tomorrow there are two major rate decisions ahead of the US open with both the BoE and the ECB expected to hike rates by 50bps. The economic data will continue to revolve around the labor market with claims and challenger job cuts. Earnings will move into focus again with a very busy twenty-four hours which includes four of the original FANG. The company that formally was the F in that moniker is up >15% in the after-market following results.
Earnings:
Post-Market: AFL, ALGN, ALL, AVT, CHRW, CLB, CSGS, CTVA, DXC, EGHT, ELF, GHL, GL, HOLX, KLIC, LSTR, MAA, MCK, MET, META, MTH, MXL, NTGR, PTC, QRVO, RRX, RYN, SLM, TBI, UGI
Pre-Market: AME, APD, APTV, ARW, ATI, AVY, BALL, BC, BDX, BERY, BMY, BR, CAH, CNHI, COP, DGX, DLX, EL, GWW, HBI, HOG, HON, HSY, ICE, ITW, JHG, LAZ, LEA, LLY, MRK, PENN, PH, RACE, RGS, SIRI, SNA, SWK, SXC, TT, TW, UI, WEC, WMS, WNC
Post-Market: AAPL, AMZN, BILL, BYD, CLFD, CLX, COLM, CPT, CTSH, DLB, F, GEN, GILD, GOOGL, HIG, HUBG, LPLA, MANH, MCHP, MSTR, NGVC, POST, QCOM, RGA, SBUX, SKX, SYNA, TEAM, WWE, X
Sectors/Other Asset Classes:
- US - 2yr -8bps to 4.115%, 5yr -14bps to 3.495%, 10yr -13bps to 3.397%, 30yr -11bps to 3.547%
- USD index: -$0.95 to $100.97
- VIX: -1.53 to 17.87
- Bitcoin: +2.5% to ~23.8k
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