DOW 32,960 (-310), S&P 500 3,817 (-36), Russell 2000 1,758 (-15), NYSE FANG+ 4,321 (-81), ICE Brent Crude $78.65/barrel (+$0.81), Gold $1,838/oz (-$21), Bitcoin ~16.8k (+55)
MAC Desk Commentary:
Yesterday was another choppy session with equities rallying in the final twenty minutes of trade helping the S&P 500 end higher by 0.75%. For those of you keeping track, that bounce left the Santa Clause Rally intact with the S&P 500 ending up ~0.8% over the defined time-frame. The fact that there was a rally, albeit smaller than the average return over this time frame historically (1.3%), avoids at least one negative predictor of returns. This Blog Post by Jeff Hirsch of the Stock Trader’s Almanac does a good job of explaining the predictive powers of the SRC combined with the other January indicators (first 5 days and full month).
Yesterday, equities were able to fend off two bouts of intraday weakness - the first following employment data that continued to suggest the labor market remains tight and the second following the release of the FOMC Minutes. The minutes were hawkish but were very much in line with the communication that we have heard from officials over the last month. Futures were modestly higher overnight but turned lower ahead of the open. Strong labor market data and hawkish Fed commentary were once again the culprits for the weakness. Major indices were under pressure throughout the morning holding right around Tuesday’s low but we have bounced following comments from Fed Bullard which were perceived as slightly less hawkish as he highlighted the recent improvement in inflation data, that inflation expectations have remained well anchored and that rates are “getting closer” to being at a sufficiently restrictive rate. As we head to print, the S&P 500 is down 36pts to 3,817 (-0.9%), the Dow is down 302pts to 32,968 (-0.9%), while the Russell 2k is down 15pts to 1,758 (-0.8%).
Going through this morning’s data. Challenger layoffs dropped on a m/m basis to 43.6k from 76.8k last month. Initial and continuing claims also fell from last week’s levels. Lastly, the ADP job survey came in well ahead of estimates up 235k vs. 150k cons. Nela Richardson, ADP’s Chief Economist, highlights the labor market is “fragmented” with small and medium sized business hiring creating just under 400k jobs which was offset by a decline of ~151k at large companies. Leisure and hospitality added 123k jobs followed by professional services and education while transportation, mining and manufacturing saw declines. The data sent yields higher and equities lower as we are clearly in the good-is-bad feedback loop at the moment. There was one “silver lining” in the report as December had the largest decline in pay growth for job stayers in the 3yr history of the data series. This all comes ahead of the BLS Employment Report tomorrow. This week’s data suggests that tomorrow’s number will once again prove to be stronger than current expectations which currently sits at ~200k down from 263k last month. We have seen a steady stream of companies announcing layoffs recently. At this point that has been pretty contained to areas of technology which had over hired over the last two years. This is a small percentage of the workforce and the numbers won’t meaningfully impact the government data unless this begins to spread to other sectors. I think the key for tomorrow’s data will ultimately be in wages. Yields had come off the earlier highs ahead of Bullard’s comments but there continues to be a flattening of the curve with the 2yr up ~9bps while the 10/30yr are around unchanged.
There is broad based weakness within the equity markets. Energy is the only sector that is higher up ~2% bouncing after the weakness over the last two days. ICE Brent retested yesterday’s low (~$77.75) right around the open and has since bounced modestly up ~1.5% to $79.00. US natural gas prices continues to move lower down another 10% to ~$3.70. Prices in Europe have bounced after the recent selloff. Interest rate sensitive sectors (REITS, Utes) are underperforming down 2.7%/1.8%, respectively. Communication services is the best performing sector down only 0.3% with cable/telecom stocks posting modest gains.
Tomorrow the jobs data will set the tone. After the open ISM services will also get some attention. Overnight the EU CPI data will be released but we’ve already seen the country level data come in better than expected so there shouldn’t be much of a surprise. The stream of Fed speakers will also continue.
Other Asset Classes:
- Government Yields -
- US - 2yr +10bps to 4.458%, 5yr +4bps to 3.913%, 10yr +1bps to 3.718%, 30yr -3bps to 3.793%
- USD index: +$0.81 to $104.84
- VIX: +0.60 to 22.61
- Bitcoin: +0.3% to ~16.8k
- Yesterday’s FOMC Minutes were somewhat hawkish but really were not out of sync with what officials have been saying for the last month a couple of the highlights were that no participants anticipated rate hikes next year. There was also a specific warning about the easing in financial conditions complicating the Fed’s objectives - Statement
- IMF’s Gita Gopinath sides with the Fed pushing for additional rate hikes despite some moderation in inflation given the tight labor market - FT
- Next week the US will send a trade delegation to Taiwan - FT
- Challenger Layoffs: 43.65k prior 76.835k
- ADP Jobs Survey: 235k vs. 145k cons,. prior 127k
- Initial claims: 204k vs. 230k cons,. prior revised to 223k from 225k
- Continuing claims: 1.694ml vs. 1.716ml cons., prior 1.71ml
- Trade Balance: -$61.5B vs. -$72B cons., prior -$78.2B
- Final Services PMI: 44.7 vs. 44.4 cons., prior 44.4
- Natural Gas inventories: -221B, prior -213B
- Oil Inventories: 1.7M, prior 0.72M
- China Caixin Services PMI: 48.0 vs. 48.0 cons., prior 46.7
- Japan Consumer Confidence: 30.3 prior 28.6
- Eurozone PPI: -0.9%/27.1% m.m/y.y vs. -2%/27.3% cons., prior -3.0%/30.5%
- Germany exports: -0.3% vs. 0.65% cons., prior 0.8%
- Germany imports: -3.3% vs. 1.7% cons., prior -2.4%
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