After yesterday’s huge rally, data early today provided fresh positive confirmation that inflation is becoming less of a problem and focus is shifting to what kind of economy we’ll face in 2023. Right now, the market seems happy with how things are going, and hopes are rising that the Federal Reserve will ease off the gas pedal as we round this final turn.
Yesterday was all about waiting for Federal Reserve Chairman Jerome Powell’s speech. Today could be all about waiting for tomorrow’s Nonfarm Payrolls data, which we’ll see before the open Friday. Analysts anticipate November jobs growth of around 200,000, down from October’s 261,000 but still historically strong (see more below). Trading could be uneventful ahead of the data.
In general, the market would likely view a job number that exceeds expectations as more reason for the Fed to be hawkish, a likely negative for stocks. However, if numbers come in well below consensus on jobs growth, that could spur serious concerns about the economic trajectory.
The best-case scenario, if you’re a bull, is probably a small miss in headline jobs, accompanied by wage growth in line with consensus or slightly below.
Just In
In this big data rush before the open, perhaps tops on the list is October Personal Consumption Expenditures (PCE) prices, the Fed’s favored inflation index. Headline PCE inflation rose 0.3%, below the 0.4% Wall Street consensus and the same as in September. Core PCE rose just 0.2%, in line with consensus and down from September’s 0.5%. PCE numbers provided more confirmation that inflation appears to be moderating, and stock index futures jumped on news.
Continued jobless claims offered more evidence. Popping over 1.6 million for first time since early in the year, the report showed even more signs that the job market may also be moderating. Weekly claims of 225,000, however, were below the consensus for nearly 240,000.
In other news:
- Dollar General Corporation (NYSE:DG) shares got crushed ahead of the opening bell after reporting earnings per share (EPS) that came in below Wall Street’s expectations. However DG met consensus on revenues and reaffirmed fiscal 2023 guidance. However, in this time of low earnings expectations, companies that miss are getting punished.
- Things were brighter down the aisle at Kroger Company (NYSE:KR) this morning as it beat EPS forecasts and posted revenues in line with Wall Street’s thinking. KR also raised fiscal 2023 guidance and shares rose nearly 3% in premarket trading. This came after a strong grocery quarter for Walmart (NYSE:WMT) and may be another sign that Americans have prioritized grocery spending in inflationary times while pulling back on discretionary items.
- Before KR and DG this morning, a bunch of major companies reported last night after the close, and most of the tidings looked positive. That included earnings-per-share (EPS) beats from Costco (NASDAQ:COST), Salesforce (NYSE:CRM), and Synopsys (NASDAQ:SNPS), though CRM slightly disappointed by offering Q4 revenue guidance that was below Wall Street’s consensus view. CRM shares got slammed in overnight trading.
Continuing our look back at yesterday, Powell certainly had some encouraging words, including that the time to start moderating rate hikes might be as early as the next Federal Open Market Committee (FOMC) meeting December 13-14, and that the central bank doesn’t want to overtighten. Investors might also take note of what Powell said about the Fed’s options, such as raising rates more slowly or holding on “longer,” which would mean keeping rates at high levels over a more extended period.
The Fed has made the mistake before of lowering rates too soon during an inflationary period and most certainly wants to get things right this time. Whether the economy can make a soft landing where unemployment stays low even as inflation comes down is the question. The Fed is in position to do that, Powell said, but investors should note it’s a tricky business and historically, not every Fed Chairman sticks the landing. In fact, the economy may already be experiencing a “rolling” recession, as you’ll see below.
Data Dive
By now you’ve seen yesterday’s data, but just a quick go-over and some thoughts.
- November’s Chicago PMI report was a big disappointment, coming in at 37.2. The consensus headline estimate was 47.5, and October’s figure was 45.2. The November headline was the worst since the depths of the pandemic, and it could be a flashing light signaling a possible recession. One month, of course, isn’t a trend. But if December’s figure also comes in below 40, that would be a very bearish sign for the economy. The November ISM Manufacturing Index is due soon after the opening bell, and that data now becomes more important to see if it also reflects weakness. Consensus for ISM is 49.8%, Briefing.com said. That’s down from 50.2% in October. Anything below 50 indicates contraction.
- The Job Openings and Labor Turnover Survey, better known as the JOLTS survey, saw a slight dip to 10.3 million, down from 10.7 million previously. Remember, this report was often at around 7 million in pre-pandemic times, so it remains well above normal levels. With openings elevated, they’re a clear barrier to any ease in wage pressure. And wage pressure often means more inflation.
Fed Spin: If you’re Powell or another FOMC member, your head might’ve been spinning as all the data poured in yesterday morning. The trends were somewhat hard to glean.
For instance, what are investors (and the Fed) to make of Q3 Gross Domestic Product (GDP) climbing to 2.9% in the government’s second estimate (from 2.6% in its first reading), even as pending home sales slid 4.7% month over month in October? Or what about ADP jobs growth slowing to 127,000 in November from 239,000 in October even as JOLTS remained historically high above 10 million?
Reviewing the Market Minutes
When a market that’s been so soft for so long has a day like Wednesday, one question to ask is how broad was the rally? Meaning did stocks across various sectors do well, or did a few mega-caps have an outsized impact on index performance? Wednesday’s rally looked robust, embracing every sector.
Gains ranged from 0.6% for energy to 5% for info tech, and advancers led decliners by a 6-1 margin on the New York Stock Exchange (NYSE). Volume far eclipsed average daily levels, another typical sign of health in a rally. In all, November turned into a solid month highlighted by a 5% gain for the S&P 500.