Market Recap - Sharp decline on Powell testimony and SVB Financial problems

It was a losing week for the stock market as investors digested Fed Chair Powell’s testimony before Congress, the February employment report, and news of SVB Financial’s Silicon Valley Bank being shut down.

Downside moves this week had the S&P 500 slice through support at its 50-day moving average, then its 200-day moving average. 

The market started to get a bit shaky after Fed Chair Powell's remarks to the Senate Banking Committee and House Financial Services Committee had investors rethinking the possibility of a 50 basis points rate hike at the March FOMC meeting. 

Participants took notice of the following remarks from his prepared testimony:

"Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time."

Mr. Powell, in the Q&A portion of his testimony, acknowledged that it is likely that the ultimate rate the Fed writes down in its Summary of Economic projections at the March meeting is likely to be higher than what was written down at the December meeting. He also added that the economic data thus far suggests that the Fed has not overtightened and still has more work to do.

Notably, the fed funds futures market saw an abrupt turn in expectations for the March FOMC meeting, pricing in a 78.6% probability of a 50 basis points rate hike versus just 31.9% before Fed Chair Powell's testimony. 

The reaction to Fed Chair Powell's remarks was jarring enough for the capital markets, but things would get even more challenging in the wake of news on Thursday that SVB Financial (SIVB) was seeking to raise capital after it saw elevated cash burn from its clients. That news was disconcerting for market participants knowing that something typically "breaks" when the Fed is in an aggressive tightening cycle, and that the banks, whether they are the specific problem in that regard, will likely get pulled into it nonetheless given their lending role.

Around 12:30 p.m. ET Friday, it was announced that SVB Financial Group's Silicon Valley Bank was shut down as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. That news contributed to added flight to safety interest in the Treasury market and further prompted market participants to rein in their risk exposure amid concerns about a possible contagion effect. 

The 2-yr note yield declined 27 basis points this week to 4.59% while the 10-yr note yield dropped 26 basis points to 3.70%.

With the fallout surrounding SVB Financial, the fed funds futures market pivoted back to thinking that the Fed is likely to raise rates by only 25 basis points at the March FOMC meeting. To that end, the CME FedWatch Tool indicates only a 39.5% probability now of a 50 basis points rate increase.

The SVB Financial situation largely overshadowed a relatively pleasing February employment report on Friday that was accented with stronger than expected nonfarm payrolls and weaker than expected average hourly earnings growth. 

The S&P 500 settled Friday near its lowest levels of the week with losses in all 11 sectors. 

For the week, the worst performing sector was the financial sector, which declined 8.5%, followed by a 7.6% decline in the materials sector, a 7.0% drop in the real estate sector, a 5.6% decline in the consumer discretionary sector, a 5.4% decline for the energy sector, and a 4.5% drop for the industrial sector. The best performing sector this week was the consumer staples sector, which was down 1.9%.

·   Nasdaq Composite: -4.7% for the week / +6.4% YTD

·   Russell 2000: -8.1% for the week / +0.7% YTD

·   S&P Midcap 400: -7.4% for the week / +0.9% YTD

·   S&P 500: -4.6% for the week / +0.6% YTD

·   Dow Jones Industrial Average: -4.4% for the week / -3.7% YTD

Market Recap - Technicals and rates dictating price action

The stock market was able to break its losing streak this week despite ongoing concerns about sticky inflation and the Fed raising rates higher for longer.

The upside bias was supported by technical buying interest, along with a drop in market rates by the end of the week.  

There may have also been a feeling that the market was oversold on a short-term basis driving this week's gains. Entering Monday's session, the S&P 500 had declined 5.0% from its close on February 2 (the day before the January employment report was released). 

Inflation concerns were stoked this week by data releases, including the February ISM Manufacturing Index, the weekly initial jobless claims, and the revised Q4 productivity. Weekly claims remained remarkably low, reflecting a tight labor market, while Q4 unit labor costs rose 6.3% from the same quarter last year, reflecting stubbornly high wage-based inflation. The sticking point from the ISM Manufacturing Index was that the Prices Index rose to 51.3% from 44.5%, marking the first price increase in four months. This price data, we would add, followed a higher-than-expected February CPI reading for Germany. 

The Treasury market responded strongly to this week's data. The 10-yr note yield surged past 4.00%, hitting 4.07% at its high, before pulling back to 3.96% by Friday's close. The 2-yr note yield, which is more sensitive to changes in the Fed funds rate, rose eight basis points this week to 4.86%. 

Despite the rising market rates, the main indices held up okay thanks to technical support. Buyers stepped in when the S&P 500 breached its 200-day moving average, and by Friday's close the index was comfortably back above its 50-day moving average.  

Most of the S&P 500 sectors logged a gain this week led by materials (+4.0%), communication services (+3.3%), and industrials (+3.3%). The materials and industrials sectors may have been reacting to China reporting stronger-than-expected Manufacturing PMI and Non-Manufacturing readings for February. 

The only sectors to decline this week were utilities (-0.7%) and consumer staples (-0.4%).  

The U.S. Dollar Index fell 0.7% for the week to 104.50. 

WTI crude oil futures rose 4.6% this week to $79.79/bbl and natural gas futures surged 28.7% to $3.14/mmbtu.  

·   Nasdaq Composite: +2.6% for the week / +11.7% YTD 

·   Russell 2000: +2.0% for the week / +9.5% YTD 

·   S&P Midcap 400: +1.8% for the week / +9.0% YTD 

·   S&P 500: +1.9% for the week / +5.4% YTD 

·   Dow Jones Industrial Average: +1.8% for the week / +0.7% YTD 

Market Recap - Short Week Brings Sizable Losses

This Holiday-Shortened Week Was Another Losing One For The Stock Market. Investors Were Still Saddled With The Same Issues That Drove Last Week's Downbeat Price Action.  

Those issues included a lingering sense that the market was due for consolidation, another jump in Treasury yields, and a growing belief that the Fed is likely to keep rates higher than expected for longer than expected. 

The latter point was drawn to the forefront midweek when investors received the FOMC Minutes for the Jan. 31-Feb. 1 meeting. They weren't overly hawkish-sounding and they weren't overly-dovish sounding. That doesn't mean, however, that they were just right. That's because they weren't really dovish at all. The default position continues to be a rate-hike position.

Market participants are cognizant that many of the data releases following the last FOMC meeting are not likely to change members' mindsets. Namely, a stronger than expected January employment report, the stronger than expected ISM Services PMI, the January CPI and PPI reports, all capped off by this week's stronger than expected core-PCE Price Index, which is the Fed's preferred inflation gauge.

Some anxiousness surrounding rate hikes may have been tempered on Friday by St. Louis Fed President Bullard (not an FOMC voter), who is generally a more hawkish Fed official. Mr. Bullard, after the hotter than expected core-PCE Price Index was released, remarked that "it appears that the Fed may be able to disinflate in an orderly manner and achieve a relatively soft landing." 

There were some upside moves in the market following NVIDIA's pleasing earnings and guidance before the positive bias was overshadowed by rate hike concerns. The downside bias this week had the S&P 500 take out support at its 50-day moving average before flirting with its 200-day moving average, which ultimately held up. 

Price action in the Treasury market was another headwind for equities this week, creating valuation concerns and worries about competition for stocks. The 2-yr note yield rose 17 basis points to 4.78% and the 10-yr note yield, which tested the 4.00% level, rose 12 basis points to 3.95%. The U.S. Dollar Index also rose noticeably this week, up 1.4% to 105.26. 

Only one of the 11 S&P 500 sectors registered a gain this week -- energy (+0.2%) -- while the consumer discretionary (-4.4%) and communication services (-4.4%) sectors suffered the steepest losses. 

WTI crude oil futures fell 0.1% this week to $76.41/bbl. Natural gas futures surged 10.1% to $2.50/mmbtu.  

• Nasdaq Composite: -3.3% for the week / +8.9% YTD

• Russell 2000: -2.9% for the week / +7.3% YTD

• S&P Midcap 400: -2.5% for the week / +7.0% YTD

• S&P 500: -2.7% for the week / +3.4% YTD

• Dow Jones Industrial Average: -3.0% for the week / -1.0% YTD

Market Recap - Grappling with lingering rate hike concerns

The S&P 500 And Dow Jones Industrial Average Closed Lower For The Week As Investors Reacted To This Week's Economic Releases, Along With Comments From Several Fed Officials. 

Month over month inflation data in the January Consumer Price Index (CPI) was not pleasing, but the report reflected continued deceleration on a year over year basis. Services inflation, less energy services, was a notable exception, having accelerated to 7.2% year-over-year from 7.0% in December. 

On the heels of the CPI report, market participants received a much stronger than expected January retail sales report, higher-than-expected producer price data for January, and another remarkably low level of weekly initial jobless claims. 

The positive economic news, along with accelerating services inflation, fueled concerns about the possibility of the Fed raising rates more than previously expected and keeping them higher for longer than previously expected.

On a related note, Fed officials made comments corroborating the market's concerns. Cleveland Fed President Mester (non-FOMC voter) said she advocated for a 50-basis point rate hike at the February 1 FOMC meeting,  St. Louis Fed President Bullard (non-FOMC voter) said he wouldn't rule out supporting a 50-basis point rate hike at the March FOMC meeting, and Fed Governor Bowman (FOMC voter) said that rate hikes should continue until "a lot more progress" has been made on inflation.

Rate hike concerns were evident in Treasury market action this week, creating some headwinds due to valuation constraints and increased competition for stocks. The 2-yr note yield reached a high of 4.71% before settling up ten basis points to 4.61%. The 10-yr note yield reached a high of 3.92% before settling up nine basis points to 3.83%. Notably, the 1-yr T-bill yield hit 5.00% this week and settled at 5.06%. 

The U.S. Dollar Index rose 0.2% for the week to 103.88. 

Roughly half of the 11 S&P 500 sectors logged a gain this week led by consumer discretionary (+1.6%) and consumer staples (+0.9%). Meanwhile, the energy sector (-6.9%) was the worst performer by a wide margin amid falling oil prices. WTI crude oil futures fell 4.0% this week to $76.57/bbl. 

·    Nasdaq Composite: +0.6% for the week / +12.6% YTD

·    Russell 2000: +1.4% for the week / +10.5% YTD

·    S&P Midcap 400: +1.0% for the week / +9.7% YTD

·    S&P 500: -0.3% for the week / +6.2% YTD

·    Dow Jones Industrial Average: -0.1% for the week / +2.1% YTD

Below are truncated summaries of daily action:

Monday: 

Market participants were still willing to buy into weakness on Monday coming off last week's losses, which has been the case since the start of 2023. A quick dip right out of the gate had the S&P 500 slip below the 4,100 level before buyers stepped in and a rally effort took root, helped along by some short-covering activity and a fear of missing out on further gains.

Upside leadership from the mega cap space was an important driver of index level gains. Meta Platforms and Microsoft each rose more than 3.0% on Monday with no specific news catalysts and helped drive a 1.5% gain in the Mega Cap Growth Index.

There was no U.S. economic data of note on Monday, but participants received the NY Fed's Survey of Consumer Expectations. The survey showed that inflation expectations are mostly stable, but household income growth expectations have dropped. Some of the key findings from the survey included:

"Median inflation expectations remained unchanged at the one-year-ahead horizon, decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively. The survey's measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased slightly at the one-year horizon, remained unchanged at the three-year horizon, and increased at the five-year horizon.

After increasing each month since September of last year, the median expected growth in household income dropped by 1.3 percentage point to 3.3%. This is the largest one-month drop in the nearly ten-year history of the series. The January reading, however, is only slightly below its 12-month trailing average of 3.5%, and the series remains well above its pre-pandemic levels. January's decrease was more pronounced among respondents with no more than a high school education, respondents older than 60, and those with annual household incomes below $50k."

Tuesday:

Tuesday's trade was mixed as investors digested the January Consumer Price Index (CPI). 

Briefly, total CPI increased 0.5% month-over-month (Briefing.com consensus 0.5%) following last month's upwardly revised 0.1% increase (from -0.1%) and core-CPI, which excludes food and energy, increased 0.4% month-over-month (Briefing.com consensus 0.4%) on top of last month's upwardly revised 0.4% increase (from 0.3%). On a year-over-year basis, total CPI was up 6.4% -- the smallest 12-month increase since the period ending October 2021 -- and core-CPI was up 5.6% -- the smallest 12-month increase since December 2021.

The year-over-year levels were not as low as expected; and it didn't escape notice that services inflation, less energy services, accelerated to 7.2% year-over-year from 7.0% in December. 

The stock market moved higher shortly after the open with investors seemingly still willing to buy on weakness before the early gains faded and the S&P 500 briefly slipped below the 4,100 level. The major indices were able to bounce somewhat, though, as Treasury yields back off their highs. The main indices ultimately closed the session well above their intraday lows.  

The Treasury market was more resolute with its reaction to the CPI data. The 2-yr note yield, which stood at 4.50% just before the report, surged to 4.66% before settling the session at 4.63%. The 10-yr note yield, at 3.68% before the report, surged to 3.79% before settling the session at 3.76%.

Reviewing Tuesday's economic data:

·    Total CPI increased 0.5% month-over-month (Briefing.com consensus 0.5%) following last month's upwardly revised 0.1% increase (from -0.1%) and core-CPI, which excludes food and energy, increased 0.4% month-over-month (Briefing.com consensus 0.4%) on top of last month's upwardly revised 0.4% increase (from 0.3%). The index for shelter accounted for nearly half of the monthly all items increase.

·    On a year-over-year basis, total CPI was up 6.4% -- the smallest 12-month increase since the period ending October 2021 -- and core-CPI was up 5.6% -- the smallest 12-month increase since December 2021. Still, the year-over-year levels were not as low as expected.

·         The key takeaway from the report is that there has been a clear deceleration from peak inflation; however, the inflation rates are not nearly low enough to suggest the Fed would even be thinking about cutting rates this year.

Wednesday: 

Market participants received a much stronger than expected January retail sales report ahead of Wednesday's open, which reflected continued strength in the economy, but left the market concerned that the Fed will raise rates more than expected. Briefly, total sales in January were up 3.0% month-over-month (Briefing.com consensus 1.7%) and sales, excluding autos, up 2.3% (Briefing.com consensus 0.8%).

Equities started the day in retreat mode, but true to 2023 form, investors stepped in to buy the early weakness. The main indices all closed the session at or near their best levels of the day. The rebound in the stock market, in spite of rising market rates, suggests perhaps that buyers were influenced more by the hopeful economic implications of the January retail sales data than its potentially adverse implications for monetary policy.

High-beta stocks, uplifted by the positive earnings news and guidance from the likes of Airbnb, Roblox, and Analog Devices, paced Wednesday's gains.

Reviewing Wednesday's economic data:

·    Weekly MBA Mortgage Applications Index -7.7%; Prior -7.4%

·    January Retail Sales 3.0% (Briefing.com consensus 1.7%); Prior -1.1%; January Retail Sales ex-auto 2.3% (Briefing.com consensus 0.8%); Prior was revised to -0.9% from -1.1%

·         The key takeaway from the report is that consumers were spending freely on goods in January despite the ongoing inflation pressure; in fact, every single sales category showed a month-over-month increase, led by a 7.2% surge in sales at food services and drinking places.

·    February Empire State Manufacturing -5.8 (Briefing.com consensus -19.0); Prior -32.9

·    January Industrial Production 0.0% (Briefing.com consensus 0.5%); Prior was revised to -1.0% from -0.7%; January Capacity Utilization 78.3% (Briefing.com consensus 79.1%); Prior was revised to 78.4% from 78.8%

·         The key takeaway from the report is that the soft reading for January can be attributed entirely to a drop in the output of utilities. Otherwise, there was some welcome rebound strength in both mining and manufacturing output, the latter of which saw advances in durable, nondurable, and other manufacturing activity.

·    December Business Inventories 0.3% (Briefing.com consensus 0.3%); Prior was revised to 0.3% from 0.4%

·    February NAHB Housing Market Index 42 (Briefing.com consensus 37); Prior 35

Thursday:

The stock market started, and ended, Thursday's session on a decidedly downbeat note. The negative bias was in response to a higher-than-expected Producer Price Index (PPI) number for January, paired with another remarkably low level of weekly initial jobless claims, which fueled concerns that the Fed will not pause its rate hikes in the near future.

The main indices sank shortly after the open, but there was a fairly strong recovery effort taking place throughout most of the session. The recovery coincided with buyers stepping in when the S&P 500 breached the 4,100 level, along with Treasury yields backing down from their post-data release highs.

There was a sharp reversal in the last hour of trading that had the major indices close the session at or near their worst levels of the day, which took the S&P 500 below 4,100 again. The late afternoon plunge was precipitated by St. Louis Fed President James Bullard (not an FOMC voter) saying that he wouldn't rule out supporting a 50-basis point rate hike at the March FOMC meeting, adding that he advocated for a 50-basis point rate hike at the February 1 meeting, according to Bloomberg.

To be fair, the initial recovery effort happened after Cleveland Fed President Mester (not an FOMC voter) said earlier today that she, too, was advocating for a 50-basis point rate hike at the February 1 meeting. Nonetheless, the stock market used Mr. Bullard's position as an excuse to rein in some of its recovery enthusiasm.

Reviewing Thursday's economic data:

·    January Housing Starts 1.309 mln (Briefing.com consensus 1.355 mln); Prior was revised to 1.371 mln from 1.382 mln; January Building Permits 1.339 mln (Briefing.com consensus 1.350 mln); Prior was revised to 1.337 mln from 1.330 mln

·         The key takeaway from the report was the lack of growth in both single-family starts (-4.3%) and permits (-1.8%), which is a reflection of the adverse impact of rising interest rates and ongoing inflation pressures that are crimping builders' willingness to build new homes and buyers' willingness to purchase new homes due to affordability constraints.

·    January PPI 0.7% (Briefing.com consensus 0.4%); Prior was revised to -0.2% from -0.5%; January Core PPI 0.5% (Briefing.com consensus 0.3%); Prior was revised to 0.3% from 0.1%

·         The key takeaway from the report for the market is that headline inflation was hotter than expected on a monthly basis. That will stoke worries about inflation pressures persisting at higher levels for longer than expected -- and the Fed keeping rates higher for longer -- even though there was improvement on a year-over-year basis.

·    Weekly Initial Claims 194K (Briefing.com consensus 203K); Prior was revised to 195K from 196K; Weekly Continuing Claims 1.696 mln; Prior was revised to 1.680 mln from 1.688 mln

·         The key takeaway from the report is that the persistence of initial claims below 200,000 reflects a very tight labor market, and a reluctance on the part of most companies to cut their workforce, which will continue to drive worries at the Fed about tight labor market conditions feeding into stickier wage-based inflation pressures.

·    February Philadelphia Fed Index -24.3 (Briefing.com consensus -8.0); Prior -8.9

Friday: 

The stock market opened decidedly weak, carrying over Thursday's downside momentum, as investors looked to take some money off the table after a big run recently. Concerns about the Fed raising rates higher than expected for longer than expected also contributed to the early weakness.

The general tone started to shift, however, as market rates backed down from overnight highs. The 2-yr note yield, which hit 4.71% overnight, settled the session down two basis points to 4.61%. The 10-yr note yield, which hit 3.92% overnight, also fell two basis points today to 3.83%.

Ultimately, the main indices closed the session near their best levels of the day, which had the Dow Jones Industrial Average and Russell 2000 sporting slim gains. The S&P 500 and Nasdaq had their upside moves limited somewhat by downside pressure from the mega cap space.

Reviewing Friday's economic data:

·    January Import prices -0.2%; Prior was revised to -0.1% from 0.4%

·    January Import Prices ex-oil 0.3%; Prior 0.4%

·    January Export Prices 0.8%; Prior was revised to -3.2% from -2.6%

·    January Export Prices ex-ag. 0.8%; Prior was revised to -3.3% from -2.7%

·    January Leading Indicators -0.3% (Briefing.com consensus -0.3%); Prior was revised to -0.8% from -1.0%

Market Recap - Market pulls back in consolidation trade

The stock market lost some ground this week due to a sense that the market was due for a period of consolidation on the back of rate-hike and valuation concerns.

Coming off last Friday's much stronger than expected January employment report, there wasn't a great deal of conviction on the sell side or the buy side this week. Ultimately, the major indices all registered losses, which had the S&P 500 settle Friday's session below the 4,100 level.

Monday:

Market participants were hesitant in front of Fed Chair Powell's "Conversation with David Rubenstein" at the Economic Club of Washington, D.C. on Tuesday and there was also some increased geopolitical tension after the U.S. shot down China's suspected spy balloon off the South Carolina coast last Saturday.

The indices started the session in a southerly direction, and while they rebounded from their early lows that saw the S&P 500 slip below 4,100, they could never sustain any upward momentum. Instead, they spent much of Monday's session moving laterally in a relatively tight trading range below their flatlines. The Dow Jones Industrial Average briefly scooted above its flatline in late afternoon trading before fading again into negative territory.

There was no U.S. economic data of note on Monday.

Tuesday:

The stock market kicked off Tuesday's session on a mixed note. The main indices oscillated around their flat lines in the first half of the day as investors awaited Fed Chair Powell's "Conversation with David Rubenstein" at the Economic Club of Washington, D.C. at 12:40 p.m. ET.

Mr. Powell didn't say anything too surprising, but the market responded with some volatile price action nonetheless. The main indices initially shot higher, a move that was attributed to Mr. Powell's relatively calm demeanor when asked about Friday's stronger than expected January jobs report.

That initial upside momentum quickly gave way to selling pressure, though, after Mr. Powell said that the Fed will react to the incoming data and will do more rate hikes if the data suggest that is necessary. That disclaimer has been provided by him in the past, however, so it was not surprising either. He also said that the Fed has a significant road ahead to get inflation down to 2.0% and that he doesn't think it will be a quick move to 2.0%.

The aforementioned reversal in the major indices saw the S&P 500 breach support at the 4,100 level, where buyers stepped in (again) and a technical rebound effort took root, supported by short-covering activity. Ultimately, the main indices closed near their best levels on Tuesday.

Also helping late Tuesday was a ramp in Microsoft and other AI-related stocks after Microsoft announced its new AI-powered Microsoft Bing search engine and Edge browser.

Participants received the following data on Tuesday:

·    December Trade Balance -$67.4 bln (Briefing.com consensus -$68.5 bln); Prior was revised to -$61.0 bln from -$61.5 bln

·         The key takeaway from the report is that it reflected a slowdown in global trade, evidenced by a $2.1 billion decline in the three-month moving average for the goods and services deficit to $68.6 billion that resulted from a $2.6 billion decrease in average exports and a $4.7 billion decrease in average imports.

·    Consumer credit increased by $11.6 bln in November (Briefing.com consensus $24.5 bln) following an upwardly revised $33.1 bln (from $27.9 bln) in November.

·         The key takeaway from the report is that total consumer credit expansion slowed in December, with higher interest rates crimping loan demand. Nonrevolving credit saw its smallest expansion ($4.3 billion) since August 2020.

Wednesday:

Equities spent Wednesday's session in retreat mode largely due to concerns that the market got overextended and was due for some consolidation. Selling efforts were broad based but generally modest in scope from a sector and index standpoint. 

A notable exception was Alphabet, however, which plunged 7.4% on Wednesday. Shares of GOOG were reeling on concerns the company is behind in the AI space -- a concern that was magnified by a report that its Bard AI bot provided an incorrect answer at the company's launch event.

Wednesday's weakness followed on the heels of President Biden's State of the Union address in which he called for a billionaire minimum tax, a quadrupling of the tax on corporate stock buybacks, and raising the debt limit without conditions. He also made a case for more antitrust regulation of technology companies.

Given the divided Congress, the market wasn't overly concerned about new tax policies being passed, but it was certainly interested in what happens with the debt limit discussions and the possibility of increased regulations.

Participants received the following data on Wednesday:

·    Weekly MBA Mortgage Applications Index 7.4%; Prior -9.0%

·    December Wholesale Inventories 0.1% (Briefing.com consensus 0.5%); Prior was revised to 0.9% from 1.0%

Thursday:

The stock market started Thursday's session with a distinct bullish bias, yet the bulls were soon corralled and the major indices spent nearly the entire session retracing their opening steps in what became a trend-down day. The selling that took place was broad based, but orderly; nonetheless, it left the S&P 500 below 4,100 at the closing bell.

A favorable response to Walt Disney's better-than-expected fiscal Q1 earnings report and restructuring announcement, falling Treasury yields, and another weekly initial jobless claims report that was supportive of the soft landing scenario provided the fuel for the opening bid.

The market's footing started to slide when Treasury yields began moving up from their overnight lows. The jump in market rates compounded the selling pressure that had already taken root.

Separately, Thursday's early rally effort also fostered some pressing concerns about the market trading at a premium valuation despite declining earnings estimates. Those concerns triggered renewed selling interest that was fairly unrelenting over the course of Thursday's session.

Participants received the following data on Thursday:

·    Initial claims for the week ending February 4 increased by 13,000 to 196,000 (Briefing.com consensus 194,000). Continuing jobless claims for the week ending increased by 38,000 to 1.688 million.

·         Notwithstanding the jump in initial claims, the key takeaway is that claims remain below 200,000, which is indicative of a very tight labor market and a reluctance on the part of most companies to cut their workforce.

Friday:

Friday's trade was decidedly lackluster ahead of key data releases next week, including the Consumer Price Index, Retail Sales, Industrial Production, Housing Starts, and Producer Price Index reports all from January.

There was a lack of conviction from both buyers and sellers, which left the S&P 500 and Dow with modest gains while the Nasdaq logged a modest loss. Lagging mega cap stocks kept pressure on index level performance. Tesla was a losing standout among the mega cap stocks amid investors' concerns that a potential Department of Transportation order could force Tesla to make its charging stations available to other electric vehicles.

Oil prices reclaimed some lost ground on Friday, which also pressured the equity market, in response to Russia saying it is going to cut production by 500,000 barrels per day in March in response to international sanctions. WTI crude oil futures rose 8.7% this week to $79.66/bbl.

Participants received the following data on Friday:

·    February Univ. of Michigan Consumer Sentiment - Prelim 66.4 (Briefing.com consensus 65.0); Prior 64.9

·         The key takeaway from the report is the understanding that the year-ahead inflation expectation increased versus January, raising concerns, along with angst over rising unemployment, about consumers' future discretionary spending capacity.

·    The Treasury Budget for January showed a deficit of $38.8 bln versus a surplus of $118.7 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the January deficit cannot be compared to the deficit of $85.0 bln for December.

Only one of the 11 S&P 500 sectors logged a gain this week -- energy (+5.0%) -- while the communication services sector (-6.6%) registered the largest decline by a wide margin.

The 2-yr Treasury note yield rose 22 basis points this week to 4.51% and the 10-yr note yield rose 21 basis points to 3.74%.

Those moves in the Treasury market reflected some budding angst that last Friday's January employment report will give the Fed more room to raise rates and to keep rates higher for longer. This sentiment was also evident in the fed funds futures market, which is now pricing in a 78.0% probability of a third, 25-basis point rate increase at the May FOMC meeting, according to the CME FedWatch Tool, versus only a 30% probability last Thursday (i.e., the day before the employment report).

·    Nasdaq Composite: -2.4% for the week / +12.0% YTD

·    Russell 2000: -3.4% for the week / +9.0% YTD

·    S&P Midcap 400: -2.5% for the week / +8.6% YTD

·    S&P 500: -1.1% for the week / +6.5% YTD

·    Dow Jones Industrial Average: -0.2% for the week / +2.2% YTD

Market Recap - Market holds up on busy week of earnings and economic data

The Week Got Started On A Softer Note As Investors Took Some Money Off The Table Following A Strong Showing This Month. Entering Monday, The Nasdaq And S&P 500 Were Up 11.0% And 6.0%, Respectively, In January.

The early weakness was precipitated by an article in The Wall Street Journal by Nick Timiraos indicating that Fed officials were concerned that inflation could reaccelerate due to tight labor markets. Mr. Timiraos added in a Monday article that the Fed's interest rate strategy could depend on how much members believe the economy will slow.

There was also an element of trepidation behind Monday's weak showing ahead of several market-moving data releases, including the Q4 Employment Cost Index, the January ISM releases, and the January Employment Situation Report. In addition, market participants were cognizant that more than 100 S&P 500 companies would be reporting earnings this week, headlined by Meta Platforms, Apple, Alphabet, and Amazon.com.

Sentiment started to shift on Tuesday as investors looked intent on closing out a strong month on an upbeat note. Participants were also driven by a sense that the Fed may be compelled to pause its rate hikes in the near future following a pleasing Q4 Employment Cost Index and some weaker-than-expected January Chicago PMI and Consumer Confidence data.

The latter point was corroborated in a Wall Street Journal article by Nick Timiraos that suggested the Employment Cost Index report could increase the possibility of Fed officials agreeing to pause the rate hikes sooner rather than later. 

A strong rebound effort took root on Wednesday. This followed the FOMC's unanimous decision to raise the target range for the fed funds rate by 25 basis points to 4.50-4.75%, as expected, and Fed Chair Powell's press conference, where did not go out of his way to rein in the market's rebound enthusiasm. 

Mr. Powell acknowledged that the "Full effects of rapid tightening so far have yet to be felt and we have more work to do." He indicated that core services inflation is still running too high, which creates a basis for ongoing rate hikes. Overall, though, Mr. Powell was generally encouraging about the emerging signs of disinflation.

Importantly for market participants, he did not condemn loosening financial conditions and maintained that he thinks there is a path to getting inflation back down to 2.0% without a really significant economic decline or significant increase in unemployment.

A huge earnings-driven gain in Meta Platforms fueled a continuation of the rally effort at the start of Thursday's session. Meta's pleasing results on the heels of Fed Chair Powell's press conference, where he took a less aggressive tone, fueled a sense that earnings growth and monetary policy may be better than feared this year.

Positive reactions to some data releases Thursday morning also helped along the upside bias. A pleasing Q4 Productivity report, which featured a moderation in unit labor costs, left the market feeling good about inflation trends. Separately, weekly initial jobless claims hit their lowest level (183,000) since April 2022, but that did not deter the rally effort, as it was construed as another good portent for a possible soft landing.

The rally did hit an air pocket, though, when the S&P 500 failed to clear the 4,200 level. The pullback was likely driven by a feeling that the market had gotten overbought/overextended and was due for some consolidation. The downturn did not last long, however, and the main indices were able to climb back towards session highs ahead of Thursday's closing bell.

To be fair, a sizable loss in Merck following its quarterly results kept the price-weighted Dow Jones Industrial Average in negative territory for most of Thursday's session.  

The final session of the week turned out to be a losing session with disappointing earnings and/or guidance from Alphabet, Amazon.com, Starbucks, and Ford dictating the action along with a surprisingly strong gain in January nonfarm payrolls (+517,000) and a stronger than expected January ISM Services PMI (55.2%) that marked a return to growth mode.

The strong data created some doubts as to whether the Fed will pause its rate hikes soon and cut rates at all before the end of the year. 

Treasuries sold off sharply in response to the data releases. The 2-yr note yield rose 21 basis points to 4.29% and the 10-yr note yield rose 14 basis points to 3.53%. The U.S. Dollar Index rose 1.2% to 102.96. Separately, the fed funds futures market is now accounting for the prospect of a third 25 basis point rate hike in May. According to the CME FedWatch Tool, the probability of a rate hike in May, in addition to the one that is fully priced in for March, increased to 61.8% from 30.0% yesterday.

Many stocks pulled back on profit-taking efforts following the earnings and economic news. Apple, however, which also came up shy of earnings estimates for the December quarter, was not among them. Granted Apple declined 2.0% off the open but quickly rebounded and finished the day up 2.4% as investors seemingly believed its shortcomings would be short lived.

Only three S&P 500 sectors registered losses this week -- energy (-5.9%), health care (-0.1%), and utilities (-1.5%) -- while the communication services (+5.3%), information technology (+3.8%), and consumer discretionary (+2.3%) sectors logged the biggest gains. 

·    Nasdaq Composite: +3.3% for the week / +14.7% YTD

·    Russell 2000: +3.9% for the week / +12.7% YTD

·    S&P Midcap 400: +3.4% for the week / +11.4% YTD

·    S&P 500: +1.6% for the week / +7.7% YTD

·    Dow Jones Industrial Average: -0.2% for the week / +2.4% YTD

Market Recap - January rally still riding high as earnings season rolls on

Things got started on an upbeat note on Monday after a Wall Street Journal article over the weekend by Nick Timiraos highlighted the possibility of the Fed pausing its rate hikes this spring, along with a recent survey of businesses by the NABE that conveyed a lower possibility (56% vs nearly two-thirds before) of the U.S. being in a recession or entering one.

The market hit some turbulence on Tuesday with a lot of aberrant stock prices for a number of NYSE-listed stocks. The aberrations led almost instantly to volatility halts with market participants/observers wondering what was happening. The official explanation turned out to be an "exchange-related issue." That issue, fortunately, got resolved quickly and stocks soon returned to trading in a normal manner.

The NYSE declared a number of trades as erroneous from Tuesday morning and some trades were busted that traded outside of trading bands.

Market participants were also digesting some disappointing earnings/guidance from the likes of 3M, Verizon, Union Pacific, and General Electric, along with the news that the U.S. filed an antitrust lawsuit against Google over alleged dominance in digital advertising.

Defense-related companies Lockheed Martin and Raytheon Technologies reported pleasing quarterly results, which helped offset some weakness.

There was also an element of geopolitical angst in play midweek after Germany and the U.S. reached an agreement to supply tanks to Ukraine for its fight against Russia.

Price action on Wednesday was integral to keeping the rally effort alive this week. Valuation concerns following Microsoft's disappointing fiscal Q3 outlook and expected growth deceleration for its Azure business fueled a broad retreat to kick off the session.

Investors also had a negative reaction initially to results and/or guidance from the likes of Dow component Boeing, Texas Instruments, Kimberly-Clark, and Norfolk Southern while Capital One went against the grain after its earnings report. 

Sentiment started to shift, however, when buyers showed up fairly quickly after the S&P 500 slipped below its 200-day moving average. Most stocks either narrowed their losses or completely recovered and closed the session with a gain.

Following Wednesday's strong reversal, Tesla reported strong quarterly results and outlook, which drove a continued rebound in the mega cap space, and Chevron announced a massive $75 billion stock repurchase program announcement.

There was also a slate of pleasing data releases Thursday morning that helped support a positive bias. Namely, the Advance Q4 GDP Report, weekly initial jobless claims, and December durable goods orders all came in better than expected.

The upside moves accelerated in the afternoon trade likely driven by some short-covering activity and a fear of missing out on further gains.

The rally effort continued on Friday despite Intel reporting ugly results and guidance, KLA Corp. issuing below-consensus guidance, Chevron missing on earnings estimates, and Hasbro issuing a Q4 profit warning.

Market participants received some relatively pleasing inflation data in the December Personal Income and Spending Report.

Briefly, the PCE Price Index was up 0.1% month-over-month (Briefing.com consensus 0.0%) while the core-PCE Price Index, which excludes food and energy, was up 0.3%, as expected. That left the year-over-year changes at 5.0% and 4.4%, respectively, versus 5.5% and 4.7% in November.

There was a sharp pullback ahead of Friday's close, however. Market participants most likely wanted to take some money off the table following a big run and ahead of a big week of market moving catalyst next week that will include, among other things, the FOMC decision, earnings reports from Alphabet, Meta Platforms, Apple, and Amazon.com, followed by the January Employment Report.

Only two S&P 500 sectors registered losses this week -- utilities (-0.5%) and health care (-0.9%) -- while the consumer discretionary (+6.4%), information technology (+4.1%), and communication services (+3.3%) sectors led the outperformers. 

The 2-yr Treasury note yield rose one basis point this week to 4.21% and the 10-yr note yield rose four basis points this week to 3.52%.

·    Nasdaq Composite: +4.3% for the week / +11.0% YTD

·    Russell 2000: +2.4% for the week / +8.5% YTD

·    S&P Midcap 400: +2.4% for the week / +7.8% YTD

·    S&P 500: +2.5% for the week / +6.0% YTD

·    Dow Jones Industrial Average: +1.8% for the week / +2.5% YTD

Market Recap - 2023 rally hits an air pocket

In addition, growth and rate hike concerns, which had been put on the backburner to start the year, seemed to be back in play. 

The market initially reacted positively on Wednesday to the welcome slowdown in inflation reflected in the December Producer Price Index (PPI) (actual -0.5%; Briefing.com consensus -0.1%). Any optimism that may have come from the pleasing PPI report quickly dissipated, though, as investors digested the weak retail sales and manufacturing data from December.

Briefly, retail sales fell 1.1% month-over-month in December (Briefing.com consensus -0.8%) after falling a revised 1.0% in November (from -0.6%) and industrial production decreased 0.7% month-over-month in December (Briefing.com consensus -0.1%) after decreasing a revised 0.6% in November (from -0.2%).

The main indices sold off on Wednesday due to the understanding that the Fed is likely to remain on its rate hike path in spite of a weakening economic backdrop, increasing the risk for a policy mistake to trigger a deeper setback. Selling efforts had the S&P 500 take out support at its 200-day moving average.

Market participants also received official commentary on the economy when the FOMC released its latest Beige Book at 14:00 ET Wednesday. On balance, contacts generally expected little growth in the months ahead.

St. Louis Fed President Bullard (non-FOMC voter) added fueled the market's concerns saying that he would prefer that the Fed stay on a more aggressive path, according to CNBC, but added that the prospects for a soft landing have improved.

Thursday's trade looked a lot like Wednesday's trade with investors reacting to more data and commentary pointing towards weakening growth and the possibility of the Fed making a policy mistake.

Building permits decreased for the third consecutive month in December (actual 1.330 mln; Briefing.com consensus 1.370 mln). That report, however, contained one positive element, as single-family starts grew 11.3% month-over-month.

Weekly initial claims were released at the same time, which decreased to their lowest level since late September (actual 190,000; Briefing.com consensus 212,000), implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.

JPMorgan Chase CEO Jamie Dimon said in a CNBC interview Thursday morning “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.

As earnings season progresses, the main sticking point for stock market participants is the potential that weaker growth will translate to further cuts to earnings estimates.

Dow component Goldman Sachs sold off sharply on Tuesday after reporting below-consensus earnings and revenue, along with increased provisions for credit losses.

So far, however, quarterly results have generally received positive reactions from investors. In contrast to Goldman Sachs, Morgan Stanley received a favorable reaction despite a Q4 earnings miss.

Another notable name that reported earnings was Netflix, which surged 8.5% on Friday and led to renewed interest in the tech space. This helped drive the sentiment shift that fueled a strong rally effort on Friday.

The rebound effort to close out the week had the Nasdaq Composite recoup all of its losses while the S&P 500 and Dow Jones Industrial Average put a nice dent in their weekly losses. The S&P 500 was able to climb back above its 200-day moving average by Friday's close.

Only three S&P 500 sectors were able to log a gain this week -- communication services (+3.0%), energy (+0.7%), and information technology (+0.7%) -- while the industrials (-3.4%), utilities (-2.9%), and consumer staples (-2.9%) sectors suffered the steepest losses.

The 2-yr Treasury note yield fell two basis points this week to 4.20% and the 10-yr note yield fell three basis points to 3.48%. The U.S. Dollar Index fell 0.2% to 101.99.

WTI crude oil futures rose 2.3% to $81.69/bbl and natural gas futures fell 5.3% to $3.03/mmbtu.

Separately, Treasury Secretary Yellen notified Congress via a letter that the debt ceiling has been reached, prompting the Treasury Department to begin employing extraordinary measures.

·    Nasdaq Composite: +0.6% for the week / +6.4% YTD

·    Russell 2000: -1.0% for the week / +6.0% YTD

·    S&P Midcap 400: -0.9% for the week / +5.3% YTD

·    S&P 500: -0.7% for the week / +3.5% YTD

·    Dow Jones Industrial Average: -2.7% for the week / +0.7% YTD

Market Recap - Off to a strong start in 2023

Market participants settled into a wait-and-see style trade in the first half of the week in front of Fed Chair Powell's speech on Tuesday, the December Consumer Price Index (CPI) on Thursday, and bank earnings reports on Friday that marked the official start to the Q4 earnings reporting season.

Fed Chair Powell gave a speech titled "Central Bank Independence" Tuesday morning. Investors may have felt emboldened because Mr. Powell did not purposely kill the market's rebound activity in his speech. He did, however, acknowledge that, "...restoring price stability when inflation is high can require measures that are not popular in the short term as we raise rates to slow the economy."

The latter point notwithstanding, the S&P 500 was able to close above technical resistance at its 50-day moving average. 

By Thursday's open, market participants were digesting the much-anticipated December CPI report. It was in-line with the market's hopeful expectations that it would show continued disinflation in total CPI (from 7.1% year/year to 6.5%) and core CPI (from 6.0% year/year to 5.7%).

Those were pleasing headline numbers, but it is worth noting that services inflation, which the Fed watches closely, did not improve and rose to 7.5% year/year from 7.2% in November.

That understanding did not seem to hold back the stock or bond market. The price action in those markets on Thursday generally supported the view that the Fed will pause its rate hikes sooner rather than later. In fact, the fed funds futures market now prices in a 67.0% probability of the target range for the fed funds rate peaking at 4.75-5.00% in May versus 55.2% a week ago, according to the CME FedWatch Tool.

The positive price action in the stock market was particularly notable considering the big move leading up to the CPI report. The S&P 500 was up 3.7% for the year entering Thursday and up 4.4% from its low of 3,802 on January 5.

When Friday's trade began, though, market participants decided to take some profits following the big run. Ahead of the open, Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup reported mixed quarterly results relative to expectations that featured increased provisions for credit losses. Those stocks languished out of the gate, as did the broader market, but true to form so far in 2023, buyers returned and bought the weakness. Before long the bank stocks were back in positive territory and so was the broader market.

The S&P 500 moved above its 200-day moving average (3,981) on the rebound trade and closed the week a whisker shy of 4,000. 

Only two of the S&P 500 sectors closed with a loss this week -- health care (-0.2%) and consumer staples (-1.5%) -- while the heavily weighted consumer discretionary (+5.8%) and information technology (+4.6%) sectors logged the biggest gains. 

The 2-yr Treasury note yield fell five basis points to 4.22% and the 10-yr note yield fell six basis points to 3.51%. The U.S. Dollar Index fell 1.6% this week to 102.18. 

WTI crude oil futures made strides to the upside this week rising 8.5% to $80.06/bbl. Natural gas futures fell 4.8% to $3.23/mmbtu. 

·    Russell 2000: +5.3% for the week / +7.1% YTD

·    S&P Midcap 400: +3.7% for the week / +6.2% YTD

·    Nasdaq Composite: +4.8% for the week / +5.9% YTD

·    S&P 500: +2.7% for the week / +4.2% YTD

·    Dow Jones Industrial Average: +2.0% for the week / +3.5% YTD

Market Recap - Friday’s rally leaves market higher for the week

With Wednesday's higher finish, the market logged a net gain over the Santa Claus rally period (the last five trading sessions of the year and the first two trading sessions of the new year), which, historically has been regarded as a positive sign for the start of the new year. 

The major indices experienced some choppy action this week, though, driven by expectations surrounding the Fed's rate hike path. Those expectations were influenced by notable economic releases this week. 

A stronger-than-expected ADP Employment Change Report for December and initial jobless claims for the week ending December 31, which hit their lowest level since September, indicated that the labor market remains tight. Simultaneously, a sharp narrowing in the November trade deficit that was led by declines in both exports and imports reflected weakening global demand.

Investors are aware that the Fed considers a weakening of the labor market to be an integral step in bringing down inflation, so strong labor data left market participants fearful about the Fed continuing to raise rates and not entertaining a pivot to a rate cut cycle anytime soon. 

Minneapolis Fed President Kashkari (a 2023 FOMC voter) said that he sees the Fed pausing its rate hikes at 5.40% before cautioning that rates could be taken potentially much higher from wherever the Fed pauses if there is slow progress in lowering inflation after the Fed pauses.

The FOMC Minutes from the December 13-14 meeting, which were released on Wednesday following Mr. Kashkari's remarks, indicated "No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023."

Kansas City Fed President George (not an FOMC voter), meanwhile, told CNBC in an interview on Thursday that she sees the fed funds rate reaching 5.0% and staying there "well into 2024." The same day, St. Louis Fed President Bullard (not an FOMC voter) said, "While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer." 

The market languished on Thursday following the ADP and initial claims numbers, leaving participants fearful about the December Employment Situation Report being stronger than expected. 

It turned out that the employment report was not as strong as feared, but it also was not weak. Nonetheless, the market took a liking to the understanding that average hourly earnings growth moderated to 4.6% year-over-year in December versus a downwardly revised 4.8% in November.

That report was subsequently followed by the December ISM Non-Manufacturing Index, which fell into contraction territory (i.e. a sub-50 reading) for the first time since May 2020. The downturn reflected a clear slowdown in economic activity that is a byproduct of rising interest rates and weakening demand.

The takeaway for the Treasury and stock markets in the wake of this softer data was that the Fed won't be able to take the target range for the fed funds rate much higher before it decides to hit the pause button. Accordingly, both markets enjoyed substantive rallies to finish the week.

The 2-yr note yield fell 15 basis points for the week to 4.27% and the 10-yr note yield fell 32 basis points for the week to 3.56%.

The bulk of the weekly gains came in Friday's rally. Nine of the 11 S&P 500 sectors closed with a gain led by communication services (+3.7%), materials (+3.5%), and financials (+3.3%). Meanwhile, the energy sector closed flat and health care fell 0.2%.

The mega cap stock had a roller-coaster week fueled by notable news catalysts. Tesla disappointed with Q4 deliveries and reportedly cut prices again in China for its Model Y and Model 3 vehicles. Apple reportedly told suppliers to build fewer components for several devices in Q1 due to weakening demand. Amazon.com announced plans to cut ~18,000 positions.

Another story stock of note was Dow component Salesforce, which announced it will be pursuing a restructuring effort that will include the elimination of roughly 10% of its staff and select real estate exits and office space reductions.

·    S&P Midcap 400: +2.4% for the week / +2.4% YTD

·    Russell 2000: +1.8% for the week / +1.8% YTD

·    S&P 500: +1.5% for the week / +1.5% YTD

·    Dow Jones Industrial Average: +1.5% for the week / +1.5% YTD

·    Nasdaq Composite: +1.0% for the week / +1.0% YTD