Mid-day: Balancing hawkish Fed expectations with some earnings relief

The major indices are trading mixed, as investors balance hawkish Fed expectations following the January employment report with huge earnings relief in Amazon.com (AMZN 3143.00, +364.36, +13.2%) and Snap (SNAP 36.88, +12.39, +50.5%).

The S&P 500 (+0.3%) and Nasdaq Composite (+1.1%) trade higher, while the Dow Jones Industrial Average (-0.2%) and Russell 2000 (-0.4%) trade lower.

The broader market is looking more like the Dow and Russell 2000: seven of the 11 S&P 500 sectors are down with losses between 0.3% (health care) and 1.5% (materials), declining issues outnumber advancing issues by a 2:1 margin at the NYSE, and the Invesco S&P 500 Equal Weight ETF (RSP 155.28, -0.59) trades lower by 0.4%.

The negative undertone is being linked indirectly to the surprising employment report, which featured strong jobs growth and higher-than-expected wage gains.

Briefly, nonfarm and private sector payrolls both increased by more than 400,000 in January, blowing past expectations on top of huge upwards revisions for December. In addition, the labor force participation rate increased to 62.2% from 61.9% in December, and average hourly earnings rose 0.7% (Briefing.com consensus 0.5%).

Accordingly, Treasury yields are rising on expectations for the Fed to be more aggressive in tightening policy due to a perception that it’s behind the curve in fighting inflation. The 2-yr yield is up 11 basis points to 1.30%, and the 10-yr yield is up nine basis points to 1.92%. Crude futures are flirting with $93 per barrel ($92.72, +2.45, +2.7%).

A 25-basis-point hike in March is still the base case for the market, but the probability for a 50-bps hike has increased to 34.7% from 14.3% yesterday, according to the CME FedWatch Tool.

The financials sector (+1.3%) is keying off the higher rates while the energy sector (+1.9%) is keying off the high oil prices. The consumer discretionary sector (+3.3%), meanwhile, is the top-performer due to Amazon’s better-than-feared earnings report.

Pinterest (PINS 26.00, +1.49, +6.0%) also provided an earnings relief, but its reaction has been more subdued relative to Amazon’s 13% gain and Snap’s 50% gain. Ford Motor (F 17.84, -2.05, -10.3%), Clorox (CLX 141.11, -24.23, -14.6%), and Air Products (ADP 264.36, -16.58, -5.9%), on the other hand, are some of the earnings losers.

Reviewing the Employment Situation report in more depth:

  • January payrolls were not only strong, they were accompanied by large upward revisions to the payrolls data for December and November. The January employment report was also accompanied by a big pickup in the year-over-year change in average hourly earnings and a nice uptick in the labor force participation rate.
  • January nonfarm payrolls increased by 467,000 (Briefing.com consensus 180,000). December nonfarm payrolls revised to 510,000 from 199,000.
  • January private sector payrolls increased by 444,000 (Briefing.com consensus 160,000). December private sector payrolls revised to 503,000 from 211,000.
  • January unemployment rate was 4.0% (Briefing.com consensus 3.9%), versus 3.9% in December.
  • January average hourly earnings increased 0.7% (Briefing.com consensus 0.5%) versus a downwardly revised 0.5% increase (from 0.6%) in December.
  • The average workweek in January was 34.5 hours (Briefing.com consensus 34.7), versus 34.7 hours in December.
  • The labor force participation rate increased to 62.2% from 61.9% in December.
  • The employment-population ratio rose to 59.7% from 59.5% in December.
  • The key takeaway from the report is that it will inflame concerns about the Fed being behind the curve in fighting inflation.
1 Like