Fed backtracks, but does it matter?

This week was the first meeting of the year for the Federal Reserve to decide on the level of interest rates. As expected, the Fed left rates unchanged; however, during the press conference, Chairman Powell seemed to have taken a cut in March off the table. The market began the year ascribing a high probability of a cut in March, however going into yesterday’s meeting it had come down closer to a coin flip. After the meeting, the odds came down below 40%. Stocks reacted negatively, with the S&P 500 selling off 1.6% for the day, the worst day for the index since September of last year. Notably, long-end (10yr+) bond yields were little changed pre and post-announcement. The following day the S&P 500 retraced most of its losses.

• We have made the argument that the Fed may be less relevant today than the US Treasury
• Our point is the market is more concerned about long-end bond yields getting out of control given the US fiscal situation
• Less talked about, earlier in the week, the US treasury released its Quarterly Refunding Announcement
• Notably, their estimate for Q2 borrowing was lower than expected, which the market liked
• The yield on the 10-yr came down from ~4.1% to ~3.86% following this announcement
• As a reminder, we are currently running a fiscal deficit of ~7%, the largest peacetime deficit in history; this is stimulative to the economy

Jobs number blows away expectations

Today the the BLS announced that the economy added 353,000 jobs in January, blowing away expectations of 185,000. The unemployment rate ticked down to 3.7%, and wages rose 4.5% year over year and 0.6% month over month. Both wage growth numbers were higher than expected. Additionally, the December jobs number was revised higher by 126,000. The gains were broad-based in the private sector across professional and business services, healthcare, retail, and manufacturing.

• There is continued divergence in economic data with manufacturing data remaining very weak, but jobs data continues to be very strong
• Wage growth is something we have highlighted to be mindful of given its potential to keep a floor under inflation
• Unlike the Fed announcement, the jobs news caused the long-end of the yield curve to rise dramatically, with the 10-yr rising to 4.03, slightly lower than it was before the treasury QRA
• The probability of a March rate cut went down again to just 20%
• Given the strength in the job market it's hard to see an imminent recession

Earnings season shows trends

So far this earnings season, only 68% of companies are beating estimates by an average of 6%. Low expectations helped interest rate-sensitive sectors such as financials, real estate, and energy deliver the highest beat rate. A few themes have emerged this earnings cycle. A new tech capex cycle driven by AI. Early-cycle semiconductor companies such as Taiwan Semiconductor, ASML, and Super Microchip all had strong growth and significantly higher guidance. ASML said their orders more than tripled. Big-cap tech confirmed with strong growth and margin expansion from Meta and Amazon. Another theme is healthcare spending is recovering from the COVID hangover. We saw high medical loss ratios at insurers, while hospitals and medical device companies delivered strong results and guidance. For banks, commercial real estate will remain a problem. We started to see significant markdowns from banks, including NY Community Bank.

• Earnings this season have been mixed thus far
• Winners and losers are emerging and driving stock prices
• For instance, in large-cap tech, Meta, Amazon, and Microsoft showed leading positions in AI, while Tesla, Apple, and Google showed some challenges
• Elsewhere, we are starting to see bifurcation in healthcare sectors, driven by a recovery in spending
• Banks also showed dispersion along the lines of CRE exposure
• All this argues for more of a stock-picking environment

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