A rate cut in March is not the Fed’s base case. That was the view shared yesterday by Fed Chair Powell at his press conference to discuss the goings-on at the January FOMC meeting.
Stocks recoiled on that admission, sliding in a broad-based fashion that left the major indices at, or near, their lows for the session when the closing bell rang. Losses ranged from 0.8% (Dow Jones Industrial Average) to 2.5% (Russell 2000).
The equity futures market this morning, however, looks to have some rebound intentions on its mind.
Currently, the S&P 500 futures are up 20 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 101 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 12 points and are trading 0.2% above fair value.
This positive disposition is rooted in the rebound action seen in the mega-cap stocks, which paced yesterday’s declines along with the regional bank stocks, and small-cap issues. It is notable rebound action, primarily because Apple (AAPL), Amazon.com (AMZN), and Meta Platforms (META) are due to report their results after today’s close, yet there isn’t an inclination to sell these stocks like there was yesterday in the wake of the earnings reports — and before the FOMC decision — from Microsoft (MSFT) and Alphabet (GOOG).
Something these stocks, and other stocks, have going for them is the continued drop in market rates. The 2-yr note yield is down four basis points to 4.19% and the 10-yr note yield is down seven basis points to 3.90%.
Yields were already drifting lower in front of this morning’s economic data, but the data provided an added tailwind, particularly the Q4 productivity data.
Briefly, Q4 nonfarm business sector labor productivity increased 3.2% (Briefing.com consensus 2.1%) following a downwardly revised 4.9% (from 5.2%) in the third quarter. Unit labor costs rose just 0.5% (Briefing.com consensus 1.9%) following an upwardly revised 1.1% decline (from -1.2%) in the third quarter.
The key takeaway from the report is the tame increase in unit labor costs. That is being seen by the market as another inflation-friendly signal for the Fed to take into account as it considers when it might cut rates.
Just before the release of the productivity report, the fed funds futures market assigned a 35.5% probability to a 25-basis points rate cut at the March FOMC meeting. That has bumped up to 37.5% in the wake of the report, according to the CME FedWatch Tool. The May FOMC meeting, however, is the clear frontrunner in the market’s mind for the first rate cut. That probability stands at 93%.
The other economic news item of the morning is that initial jobless claims increased by 9,000 to 224,000 for the week ending January 27, pushing the four-week moving average up by 5,250 to 207,750. Continuing jobless claims for the week ending January 20 increased by 70,000 to 1.898 million.
The key takeaway from the report is that it shows some softening in labor market conditions that remain consistent with the soft landing outlook.
The December Construction Spending and January ISM Manufacturing Index report will be released at 10:00 a.m. ET. They will provide some more fodder for trading interest in the Treasury market that will have a carryover impact on trading interest in the stock market.
In the meantime, market participants are also digesting another batch of earnings results that have garnered some mixed responses.
Qualcomm (QCOM), Honeywell (HON), Cardinal Health (CAH), and Stanley Black & Decker (SWK), for instance, are trading down after their reports while Merck (MRK), Eaton (ETN), Shell (SHEL), and Royal Caribbean (RCL) are trading up after their reports.
Following on the heels of the Fed unanimous decision yesterday to leave the target range for the fed funds rate unchanged at 5.25-5.50%, the Bank of England voted 6-3 to leave its bank rate unchanged at 5.25%, saying policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term. Two voters were in favor of raising the bank rate by 25 basis points while one voter wanted to cut the bank rate by 25 basis points.
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February 1, 2024 – Equity futures show base case for early rebound action
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