Down at Noon on a Fed Day
The first Fed day of the year has arrived. While there’s widespread agreement that rates will be held steady today, according to the CME’s FedWatch tool, markets are pricing higher probabilities of cuts at other meetings this year. Looking six months out shows the market is giving a greater than 50% chance of rates being cut by at least a full percentage point from the current range of 5.25-5.50%. While time will tell what Powell and company decide, we would note that price action of the S&P 500 intraday on all Fed days since 1994 (when the FOMC first began announcing its decision on the same days as the meeting) when the FOMC holds rates steady has historically been less volatile, particularly post-decision, than when rates are cut or raised.
We would also note that the S&P 500 is currently trading lower by 0.86% as of this writing today in the wake of poorly received mega-cap earnings of Alphabet (GOOGL) and Microsoft (MSFT). While those drags on the market are independent of the Fed, that negative tone could lead to the first decline on a Fed day since the September meeting. As shown below, the meetings of the past couple of months have offered a positive change in tone after the S&P 500 largely fell on Fed days throughout late 2022 and 2023.
Not only have the past couple of meetings seen a more positive response from the S&P 500 but the moves have been particularly pronounced in afternoon trading. Below we show the intraday path of the S&P 500 on recent Fed days. The past two meetings (November and December) have resulted in gains of over 1% by the end of the day. However, in a stark difference to other recent meetings, the bulk of those gains have come from strong afternoon rallies in the wake of the decision. As shown by the red line below, the average if the prior ten meetings (those occurring from July 2022 through this past September) saw the S&P 500 trade higher throughout the session up until the final hour of trading when it gave up the ghost and closed at the lows of the day.
Looking back through all Fed days since 1994 when the FOMC began to announce its decisions on the same day of the meeting, there have been 14 times in which the S&P 500 was down by 0.5% or more by noon. Below we have constructed an intraday composite of those days. While the S&P has tended towards weakness throughout most of the session, it has experienced a rally, eating into those losses post-decision. That being said, the gains were not enough to erase all of the pre-announcement declines and the rally tended to be short-lived. Of those 14 days when the S&P 500 was down 0.5% or more by noon, it only closed higher on the day five times.
Fixed Income Weekly — 1/31/24
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Bespoke’s Morning Lineup – 1/31/24 – That Was Fast
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“The function of socialism is to raise suffering to a higher level.” – Norman Mailer
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
January often seems like the longest month of the year, but it’s hard to believe it’s already winding down. What’s been a strong month for equities so far looks to be going out on a sour note as earnings from mega-caps like Alphabet (GOOGL), Microsoft (MSFT), and Tesla (TSLA) haven’t impressed investors. Based on today’s pre-market levels, all three stocks have traded down in reaction to their earnings reports. That leaves Apple (AAPL), Amazon.com (AMZN), and Meta (META) on Thursday as the last chances to salvage something from the mega-cap space this earnings season (NVIDIA doesn’t report until late February).
On the economic calendar today, the ADP Employment report for January missed forecasts coming in at a level of 107K compared to forecasts for an increase of 150K. The Employment Cost Index was also just released and showed a smaller-than-expected increase of 0.9% compared to forecasts for growth of 1.0%. The only other report on the calendar for the day is the Chicago PMI at 9:45 which is expected to modestly increase from 46.9 to 48.0. But the most important event of the day is the FOMC’s rate decision at 2 PM, and given expectations for no change in rates, every word of Powell’s press conference thirty minutes later will be dissected down to each syllable.
As mentioned above, the first of the mega caps to report haven’t impressed investors so far this earnings season. Earnings reports are just one day in a quarter, though. While a positive stock price reaction to an earnings report can be nice, it’s only a small part of the picture.
Look at the chart of GOOGL below. With the stock trading down over 5% in the pre-market, it is now on pace to have its fifth negative earnings reaction day in the last six quarters. To put that in perspective, if you had purchased the stock at the close on the day of its earnings report and only held it through the close on its earnings reaction day, you’d be down just over 21% on these six trading days alone. Over the entire period and including these six days, though, GOOGL’s cumulative performance has been a gain of over 51%. Again, not only is a stock’s performance on its earnings reaction day a small part of a bigger picture, but it can also be wildly inaccurate.
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The Closer – Bond Binge, Cloud Juggernauts, Job Openings – 1/30/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look into the increase in layoff announcements and the increase in bond issuance (page 1). We then dive into the mega cap earnings of Alphabet (GOOGL) and Microsoft (MSFT) (page 2). Next, we update the latest Consumer Confidence and housing data (page 3) before reviewing the latest job openings data through the JOLTS report (page 4) and Indeed data (page 5 and 6).
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Daily Sector Snapshot — 1/30/24
Bespoke Stock Scores — 1/30/24
Chart of the Day – Confident Consumers
Powell: Only Game in Town?
The FOMC kicks off its first monetary policy meeting of the year this morning with a decision tomorrow, but with universal agreement that there will be no change in rates, what Chair Powell says in his 2:30 PM ET press conference will be the primary focus of investors around the world. Some would have you believe that the prospects for the market this year rest entirely on Powell’s words, so that if he’s dovish, there’s hope for the bulls, but if he comes out as hawkish, all hope will be lost.
A hawkish tone by the Fed Chair would likely be seen as a negative short-term development for the market, but at the same time, the relationship is not as binary as many seem to believe. The chart below compares the performance of the S&P 500 to the market pricing for the probability of a rate cut at the March meeting (based on Fed Fund Futures) since last October. While equities bottomed and started to rally in late October, it wasn’t until late November that the odds for a rate cut in March started to increase and move out of their range (red-shaded area). By that time the S&P 500 was nearly 10% above its low and 3.5% above the high end of its October range. From late November through late December, both the S&P 500 and the odds of a rate cut rose in unison with each other, but pricing for a March rate cut peaked on 12/22. On that day, the S&P 500 closed at 4,754.63, and since then, the odds of a March cut have been cut in half to 44.6%. Over that same period, the S&P 500 is up over 3.5%. If the Fed was driving the bus, how come the market hasn’t been going along for the ride lately?
Bespoke’s Morning Lineup – 1/30/24 – Weak Manufacturing
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“No man can tame a tiger into a kitten by stroking it.” – Dick Cheney, born 1/30/1941
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There’s been a weakening tone in the futures market all morning, but the pace of decline remains relatively small with the S&P 500 indicated to open down less than 0.25%. At the same time, the Nasdaq is down even less. The pace of earnings has picked up substantially, and we’re starting to see a lot of big winners and losers in pre-market trading. Tech-related stocks are reporting some strong numbers while results from more industrial-oriented firms have been weaker. There have been exceptions in each case, but that has been the overall trend. Will it continue through the close this evening when Microsoft (MSFT) and Alphabet (GOOGL) report after the bell? That’s the 5 trillion dollar question!
On the economic calendar, Case Shiller Home Price numbers will be released at 9 AM while Consumer Confidence and JOLTS will hit the wires at 10 AM.
Dallas Fed Manufacturing report. Huge miss.
KC Manufacturing. Miss
Richmond Fed Manufacturing. Miss
Philadelphia Fed Manufacturing. Miss
Empire Manufacturing. Huger than huge miss.
In case you hadn’t noticed, this month’s regional Fed manufacturing reports were a big disappointment not only on an absolute level but also relative to expectations. Not only were all five reports negative (indicating contraction) but they were also all weaker than expected. As we noted in a post yesterday, going back to 2011, the collective magnitude of the misses of the five reports was the third largest on record trailing only the months of December 2018 and March 2020.
Going back to 2012, when data and consensus expectations for all five regional Fed manufacturing indices are available, January was only the fourth time that all five reports were negative and weaker than expected. As indicated in the chart below, the other occurrences were in October 2012, September 2015, and February 2016. While these three months all occurred in the contact of a period of slack in the manufacturing sector, none of them were indicative of recessions, and forward returns for the S&P 500 were positive.
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The Closer – Borrowing Relief, Coal Collapse, 5 Fed Freefall – 1/29/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, after a rundown of tonight’s earning reports, we show the drop off in estimated borrowing by the US Treasury (page 1). We then show the collapse in coal production (page 2) before pivoting over to the collapse in our Five Fed Manufacturing Composite with the final addition of the Dallas Fed (page 3). We finish with a rundown of the latest positioning data (pages 4-7).
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