- 0:01
SPEAKER_00: No Rush, my weekly market review, February 4th, 2024.
- 0:07
SPEAKER_00: It was a very busy week with some huge earnings reports painting a somewhat mixed but on balance positive picture.
- 0:14
SPEAKER_00: A Fed interest rate meeting that pushed back hard against Wall Street interest rate cut expectations, a sudden resurrection of regional bank concerns, and an astonishing jobs report that indicated that the economy is on fire right now.
- 0:31
SPEAKER_00: All this kept traders on their toes, but the final outcome was yet another positive week for US stocks, which ended Friday back at more new all-time highs.
- 0:43
SPEAKER_00: Coming off a weekend of increased Middle East tension and the apparent final confirmation of the demise of China's largest real estate firm, the Evergrande Group,
- 0:53
SPEAKER_00: Markets were quite subdued for most of Monday before a late flurry of optimism about falling Treasury yields and the Federal Reserve's upcoming interest rate call pushed stocks higher and right back into all-time record-closing high territory once again.
- 1:10
SPEAKER_00: Monday's late-day gains were broadly maintained on Tuesday,
- 1:14
SPEAKER_00: But things were generally very quiet and barely changed ahead of some mega tech earnings after the closing bell and the Fed interest rate setting meeting the following day.
- 1:25
SPEAKER_00: When they were released, the big fourth quarter 2023 earnings reports were kind of so-so.
- 1:32
SPEAKER_00: Microsoft posted its strongest revenue growth since 2022 with the help of AI products, but its cloud performance disappointed.
- 1:40
SPEAKER_00: Alphabet Google beat estimates for sales and profits, but its ad revenue came in shy of forecasts.
- 1:47
SPEAKER_00: The knee-jerk reaction to these earnings on Wednesday was a sharp sell-off in tech and tech-adjacent stocks, and this accelerated when the Fed statement was released.
- 1:58
SPEAKER_00: after interest rates were predictably left unchanged that included the killer line that Fed officials do not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%.
- 2:18
SPEAKER_00: A definition of what greater confidence meant was notably lacking, but the message was clear.
- 2:24
SPEAKER_00: Yes, there will likely be interest rate cuts at some point in 2024, but there's definitely no rush.
- 2:33
SPEAKER_00: Fed Chairman Jerome Powell very much stuck to this script in his press conference, calling an interest rate cut at the Fed's next meeting in March not the most likely case.
- 2:44
SPEAKER_00: You could almost hear the stock market groaning in disappointment, as stocks continued to cascade lower all afternoon, with the tech-heavy Nasdaq having its worst day in over a year.
- 2:57
SPEAKER_00: Thursday was a day of digestion, as Wall Street re-litigated the previous day's Fed decision and Powell's words, eventually deciding that things weren't so bad after all.
- 3:08
SPEAKER_00: It was also a massive day for earnings, and we got another mixed bag.
- 3:13
SPEAKER_00: Apple shares fell after a deepening slump in China overshadowed sales from elsewhere, beating estimates.
- 3:19
SPEAKER_00: But Amazon reported very strong sales, and MetaFacebook shares jumped in extended trading after its sales forecast beat estimates.
- 3:29
SPEAKER_00: The firm will also pay its first-ever dividend in March.
- 3:34
SPEAKER_00: Stocks rebounded from Wednesday's dismal showing, and all the indexes jumped more than 1% on the day.
- 3:42
SPEAKER_00: Everything seemed to change on Friday morning, when pre-market we got a stunning blowout jobs report.
- 3:50
SPEAKER_00: Payrolls increased by 353,000 in January.
- 3:55
SPEAKER_00: That's double what had been expected.
- 3:58
SPEAKER_00: While the unemployment rate remained unchanged at 3.7%, wage growth exploded higher as well to 4.5% year-on-year, up from 4.1% in December.
- 4:11
SPEAKER_00: Numbers for prior payroll reports were even revised higher, suggesting that this is something more than just a one-off blip.
- 4:19
SPEAKER_00: This kind of data is an interest rate cut killer, as it points to the fact that a victory lap over the final conquest of inflation may possibly be premature.
- 4:31
SPEAKER_00: Going into the jobs report, the market-derived probability of lower interest rates by the end of the March Fed meeting was 42%, and by the May meeting was 94%.
- 4:43
SPEAKER_00: Within minutes of the report coming out, these probabilities had plunged to 16% and 68% respectively, before recovering slightly later.
- 4:54
SPEAKER_00: And the number of expected quarter-point rate cuts for 2024 fell from 6 to 5.
- 5:02
SPEAKER_00: Stocks which have been poised to roar higher when the market opened on the back of those solid earnings reports the previous evening from MetaFacebook and Amazon wobbled at first in the face of the jobs data, and for a while it felt like a bad-tempered stock market was going to knock prices down as a result of the sense that the imminent and frequent rate cuts to which it feels so entitled were slipping away from its grasp.
- 5:28
SPEAKER_00: However, disappointment about a diminishing imminent rate cut likelihood was ultimately overwhelmed by a sense of bullishness about the ripping economy and what it could mean for corporate earnings.
- 5:42
SPEAKER_00: Stocks took another leg higher, led by tech and communications services sectors, and MetaFacebook in particular, which soared 20%.
- 5:52
SPEAKER_00: and even deeper into all-time record high territory by Friday's close.
- 5:58
SPEAKER_00: It's just plain hard to be a seller of stocks at the moment in an economy that is experiencing massive expansion, collapsing inflation, vibrant labor markets, a consumer that seems incapable of not spending shitloads of money, mostly solid and sometimes spectacular earnings reports from the biggest companies, and a very healthy technical setup.
- 6:23
SPEAKER_00: March and possibly even May interest rates cuts may now be off the table after that staggering jobs report.
- 6:30
SPEAKER_00: But there is a developing sense that exactly when the interest rate cuts begin is becoming less important than the total extent of the cuts by the end of the year, both in terms of how many cuts there'll be and how much lower interest rates will be on New Year's Eve than they are now.
- 6:48
SPEAKER_00: I'm monitoring all these numbers for you in the FedWatch interest rate tool in my newsletter.
- 6:54
SPEAKER_00: And even after the shocks of last week, we are still looking at a market expectation of a total of five interest rate cuts in 2024.
- 7:05
SPEAKER_00: If we see nothing in May's meeting, that would mean a quarter point cut at each and every one of the remaining Fed meetings for the rest of the year.
- 7:15
SPEAKER_00: It sounds like a tall order, but consider this.
- 7:19
SPEAKER_00: When you look at the inflation rate using more recent data with a 6-month look-back than annualised, rather than the more traditional straight 1-year look-back, the Fed's measure of annual inflation is now down to 1.9%, already below its target of 2%.
- 7:40
SPEAKER_00: That says to me that the Fed could already be in a position to cut interest rates and just needs to be sure that the recent inflation data is not some kind of short-term head fake that could suddenly reverse.
- 7:55
SPEAKER_00: The startling jobs report demonstrated the wisdom of the Fed's slow and cautious approach, which gives policymakers flexibility.
- 8:04
SPEAKER_00: But ultimately, the cuts will come.