U.S. stocks oscillate after Fed minutes release, still green
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Real estate leads S&P 500 sector gainers
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Tech, healthcare, energy all just below flat
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Dollar down; gold, bitcoin up; crude falls ~5%
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U.S. 10-Year Treasury yield slides to ~3.70%
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U.S. STOCKS TAKE THE FED MINUTES ROLLER COASTER RIDE (1419 EST/1919 GMT)
Wall Street gyrated, then backed away from its gains before clawing them back in the wake of the release of the Fed's minutes from its most recent monetary policy meeting, which showed members agreeing to slow the pace of future interest rate hikes.
All three major U.S. stock indexes are last in positive territory, though well off session highs.
But the minutes, which covered the December meeting, at which Powell & Co hiked interest rates by 50 basis points, also revealed concerns about any "misperception" that the central bank was easing back on its hawkish battle to rein in inflation.
At the time, Fed Chair Jerome Powell jolted investors by warning that restrictive interest rates could reach higher and last longer than many might have hoped.
Financial markets have currently priced in a 69.2% likelihood of a 25 basis point hike to the Fed funds target rate at the conclusion of its February policy palaver, according to CME's FedWatch tool, unchanged from directly prior to the release.
The Labor Department's hotly anticipated December employment report is the next catalyst being eyed by market participants. Consensus sees the U.S. economy having added 200,000 jobs in the final month of 2022, with unemployment holding firm at 3.7% and annual wage growth cooling slightly, to an even 5%.
At 2:19PM ET, the Dow Jones Industrial Average rose 163.09 points, or 0.49%, to 33,299.46, the S&P 500 gained 35.24 points, or 0.92%, to 3,859.38 and the Nasdaq Composite added 91.79 points, or 0.88%, to 10,478.77.
STICK WITH QUALITY GOING INTO 2023, BUT BE READY TO POUNCE ON OPPORTUNITIES (1226 EST/1726 GMT)
In the event an expected 2023 recession arrives, corporate revenue is likely to decline. With this, operating margins are likely to dip as interest, labor and input costs remain elevated.
As Austin Pickle, investment strategy analyst at the Wells Fargo Investment Institute (WFII), sees it, earnings are likely to contact early in 2023 as a result of the projected economic slowdown before rebounding toward year end.
However, Pickle believes that investors will likely anticipate the recovery and send equities higher.
"Similar to prior equity cycles - for example, 2009 and 2020 - we believe equity prices in 2023 are likely to increase much more rapidly than earnings can recover, causing multiples to expand."
Entering 2023, WFII continues to favor higher-quality U.S. large- and mid- cap equities over small cap and international stocks. WFII is also "neutral to unfavorable" on the majority of cyclical sectors, which as they see it, is the favorable positioning early in the recession.
However, equity markets, which tend to be forward looking, will likely begin discounting a recovery well before the recession ends.
Pickle's bottom line is that investors "will find opportunities to increase equity exposure in 2023, likely leaning into more economically sensitive areas of the market."
AFTER THE FALL, STILL OVER-VALUED (1147 EST/1647 GMT)
Even though 2022 was miserable for equity longs, DataTrek co-founder Nicholas Colas says the S&P 500 is still over-valued by as much as 11%-25%.
"Stocks have further significant downside if markets lose hope in a shallow, easily reversible recession. We hate relying on 'Hope' and remain cautious," writes Colas.
January may catch a "mechanical tailwind," with tax loss selling ending, but still faces headwinds including Federal Reserve policy and uncertain corporate earnings, making Colas unconvinced that "so goes January, so goes the year" will work.
The strategist does deem the S&P's multiple of 16.5 times 2023 consensus estimates (for a 4.4% increase in earnings) modestly cheap vs the 17.1 10-year average. But he says, with rates higher, "stocks should carry a lower multiple."
And if earnings expectations are reset due to even a modest recession, the valuation would change, according to Colas.
If there's a recession and 2023 earnings decline by 10%, that points to $200 earnings per share (EPS). If a 16-17x multiple is fair, this would put the S&P at 3,200–3,400 or 11%-16% below Tuesday's close, he says.
But in full-blown recessions since 1990 S&P earnings have fallen by at least 20%, which puts 2023 earnings at $178. So a 16-17x multiple lands the S&P at 2,850–3,000, or 22%-25% below current levels, he writes.
The current premium depends on the idea that a recession and its impact on earnings is short-lived and quickly reversible according to Colas, who calls this a "lingering hope that the Fed and corporate American can both thread very fine needles this year."
He concedes that the optimistic outlook could happen but prefers to remain cautious.
FEDTIME STORIES: JOLTS, PMI, MORTGAGE DEMAND (1125 EST/1625 GMT)
Data released on Fed Minutes Day added fresh strokes to an economic portrait detailing ongoing tightness in the labor market, contracting factory activity in the wake of a goods/services demand shift, and a softening housing sector.
There were 10.458 million unfilled jobs in November, landing well north of the even 10 million consensus.
While the number does represent a modest 0.5% easing, the shallower-than-expected decline was more than offset by upwardly revised October data.
The Labor Department's job openings and labor turnover survey (JOLTS), which tracks labor market churn, also showed a slowdown in hiring and an uptick in the quit rate.
The quit rate is often associated with consumer expectations, as workers are less likely to voluntarily walk away from a gig in times of economic uncertainty.
But it also reflects a demand/supply imbalance in the labor market, as employers entice workers away from their current jobs by sweetening the deal, a state of affairs which is likely stoking the fire of wage inflation.
"Wage inflation" is a term likely to be given a shout-out in the minutes from the Fed's most recent monetary policy meeting, which have the potential to wreak havoc at 2pm EST.
It's also likely to be one of the stars of the employment report on Friday. Economists polled by Reuters expect the economy to have added 200,000 jobs last month, with annual wage growth cooling nominally to 5%.
"The latest JOLTS report indicates a robust and unusually tight labor market," says Julia Pollak, chief economist at ZipRecruiter. "Job openings exceed the number of unemployed job seekers by more than 4 million."
Here's a picture of JOLTS labor market churn (or lack thereof):
Factory activity in the U.S. contracted for the second consecutive month in December.
Institute for Supply Management's (ISM) purchasing managers' index (PMI) shed 0.6 points to land at 48.4, just a hair below analyst expectations.
A PMI number below 50 signifies monthly contraction, while a reading of 41 or lower is widely associated with recession in the sector.
Broken down by components, new order contraction accelerated, as did production and supplier deliveries. On the bright side, employment expanded and the prices paid element plunged to 39.4, which bodes well for input prices, and ultimately, inflation.
"Manufacturing contracted again in December after expanding for 29 straight months," writes Timothy Fiore, chair of ISM's manufacturing business survey committee, who also notes that the headline number hasn't been this low since May 2020, when the economy was beginning to claw its way back from the steepest and most abrupt downturn ever.
The sector "faces headwinds from slowing demand as well as unexpected supply shocks," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics, who nevertheless says "onshoring of supply networks" and infrastructure investments "could provide support to factory activity going forward."
Remarks from ISM's survey respondents are peppered throughout with worrisome phrases, such as "skilled labor shortages are huge," "customer demand continues to be depressed," and "continued uncertainty in the economy."
Here's a breakdown of some of the report's most closely watched components:
Finally, mortgage demand plunged 10.3% over the last two weeks - the data having skipped the week between Christmas and New Year's Day - as the cost of borrowing resumed its uphill climb, according to the Mortgage Bankers Association (MBA).
After following benchmark Treasury yields lower in recent weeks, the average 30-year fixed contract rate jumped 16 basis points to 6.58%.
As a result, applications for loans to purchase homes and refinance existing mortgages dropped by 12.0% and 4.4%, respectively.
Taken together, demand for home loans has hit its lowest level in more than a quarter century.
"With mortgage rates still well above 6 percent and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996," writes Joel Kan, deputy chief economist at MBA. “Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market."
Just over the last 12 months, overall mortgage demand has tumbled a whopping 67.8%, as handily illustrated below:
U.S. stocks are modestly green, but off pre-data highs.
All S&P 500 sectors are gaining. Real estate is leading the gainers, while energy is the laggard.
Investors were showing a clear bias for value over growth.
U.S. STOCKS HIGHER AHEAD OF DATA, FED MINUTES (0942 EST/1342 GMT)
Wall Street's main indexes are gaining in the early minutes of Wednesday's session on hopes of an economic recovery in China, while focus is also on minutes from the Federal Reserve's December policy meeting for clues on the outlook for interest rate hikes.
Minutes from the Fed's previous meeting, when it raised interest rates by half a percentage point and cautioned rates may need to remain higher for longer, are due to be released at 2 p.m. ET (1900 GMT).
According to the CME's FedWatch Tool, markets are suggesting a 70% chance of a 25 basis point rate hike at the January 31-February 1 FOMC meeting. There is a 30% chance of a 50 basis point increase.
Markets also await 1000 EST data in the form of U.S. December ISM manufacturing PMI, which is expected at 48.5. Prices paid is expected at 42.6. The Reuters poll on November JOLTS job openings calls for 10.0M.
Here is where market stood about 10 minutes into the trading day:
NASDAQ COMPOSITE: BABY STEPS OR SOMETHING MORE? (0855 EST/1355 GMT)
Last Wednesday, the Nasdaq Composite closed at 10,213.288, a fresh bear market low. That put the index down 36.4% from its November 2021 record close and only around 1% above its October 13 intraday trough, which was at 10,088.828.
The IXIC has since stumbled slightly higher, finishing Tuesday at 10,386.985.
Meanwhile, as January kicks off, one measure of internal strength, the Nasdaq New High/New Low (NH/NL) index, on a monthly basis, is seeing a constructive turn:
In October, this measure plunged to 14.5%, its weakest reading since 10.3% in March 2009. Since the October low, the measure has turned higher.
Over the past 20 years or so, this measure has tended to form V-bottoms around the time of some of the Nasdaq's major lows. For example, in March 2009, the Nasdaq ended a 56% collapse on a closing basis.
Even though the Composite is flirting with its bear-market lows, the measure has now risen to 21.2%, signifying that under the surface, there is building strength.
Although very early in the new month, the measure is ticking above its descending 10-month moving average (MMA), now at 20.8%. Traders will be focused on whether this positive development continues to hold. If the measure is in the early stages of a protracted trend above the moving average, it can suggest the potential for a multi-month IXIC consolidation, or in fact, a surprise advance.
The 14.5%-10.3% zone appears key on the downside. Breaking this area could see a fall closer to zero, amid a much deeper Nasdaq collapse.
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