Markets Turn Bearish On Positive Job Report (Wall Street Cheat Sheet)

The record job data and a slew of dismal profits from Wall Street’s heavyweights caused US equities to end lower on Friday.

There are many things happening such as bad earnings and layoffs, but I think the investors were hoping for a Fed pivot and the record unemployment number will keep the Fed increasing rates.

As mentioned in the past, this is an example of good news being bad. The markets have become dependent on “low cost capital”. Specifically, the tech sector has enjoyed “free money” for years.

The bottom line is that the Fed wants inflation below 5%(which it 5.46% according to Truflation) and higher unemployment above 5% before they stop increasing rates.

Let’s dig into last week more.

Economic News – Good News is Bad News

Economically speaking, the unemployment rate fell below expectations, coming in at 3.4% rather than the 3.6% that was widely anticipated. This is the lowest unemployment rate since 1969, despite the headwind of a vigorous round of rate hikes.

Non-Farm Payrolls, meanwhile, reported a much higher increase in employment in the United States (517K new jobs) than had been predicted (187,000). This was the largest increase since July 2022. As a whole, the employment figures show that the labor market is remarkably robust, even as the Federal Reserve has been historically hawkish.

No surprises were found in the rate-hike projections included in the announcements of this week’s monetary policy decisions from the Federal Reserve, the European Central Bank, and the Bank of England. In contrast, there were a few unexpected developments at the subsequent sessions.

in particular on the side of the Federal Reserve in the United States. Many investors were concerned that Federal Reserve Chair Jerome Powell would criticize their rosy outlook. There was no such occurrence.

The head of the central bank failed miserably in his attempts to urge prudence because he seemed befuddled. His stance lent credence to the bulls’ preferred scenario, which is that interest rates are at their peak and the economy would continue to grow until the Fed decides to start cutting them again.

The sole “dark spot” on the otherwise sunny image is Friday’s explosive US employment numbers for January, which have stoked concerns of a return to Fed firmness. As a result, we’ve begun to go in a complete circle.

Earning Fall Short

Apple reported its largest revenue drop since 2016 due to supply chain concerns that hurt iPhone sales.

Meanwhile, falling ad revenue and higher operational expenses drove Alphabet, Google’s parent company, to fail both its top and bottom line goals. Despite ending 2022 with its worst annual growth since going public, Amazon announced better-than-expected revenue.

These most recent financial results have been less than encouraging for Big Tech as a whole, calling into doubt the companies’ respective future viability. I don’t expect a “Fed Pivot” soon, but when it does tech will likely rocket up again.

Buybacks are Back

To begin, buybacks have been reinstated, and expect to see HUGE movements when stocks do them. In January, American companies announced a record-breaking amount of buybacks.

Sales are up $31 billion from the same time last year, bringing the total to $132 billion. The volume of buyback orders processed by Morgan Stanley’s execution desk increased by 5% week over week.

CALENDAR & EVENTS

  • Wednesday February 8: EIA Petroleum Status Report
  • Thursday February 9: Initial Jobless Claims
  • Fed Talk
  • Debt Ceiling Fight

Next week, investors will be treated to a slew of fresh corporate results along with a few other noteworthy engagements. Beginning with Jerome Powell’s upcoming address on Tuesday. Can we expect the Fed chairman to try to hone his Wednesday speech? What exactly happened is a mystery. On Thursday, the European Union (EU) will issue updated economic estimates. The preliminary consumer confidence index from the University of Michigan will bring attention back to the United States on Friday. To gauge the severity of the economic slowdown, this indicator is crucial.

After the January jobs report crushed expectations, reinforcing the view that the Federal Reserve will proceed with planned rate hikes, investors will return next week with a fresh wildcard in the mix. Federal Reserve Chairman Jerome Powell will be speaking at the Economic Club of Washington, D.C., on February 7. The employment report will likely keep him on script. In the coming week, there will be fewer earnings reports overall, but some important ones to keep an eye on.

BONDS

Investors saw the Federal Reserve’s announcement of a 25 basis point raise last Wednesday as a dovish signal, causing the yield on US 10-year bonds to fall. The mood, however, was altered by the employment news. In most regards, it surpassed projections and just offset the decline seen a few days previously.

Ultimately, the 10-year rate fluctuated between a tight range of 3.35% and 3.56%. A break above this level would signal a more substantial comeback to 3.90/95%, which would have a negative effect on equity markets. The German 10-year yield is similarly fluctuating erratically between 2.32% and 1.97%, with no discernible short-term trend apparent.

COMMODITIES

OIL & ENERGY

Risky assets are celebrating, though not all of them due to oil’s continued decline this week for the second week in a row. OPEC’s directives to its members, which still encourage prudence and lower output owing to persisting uncertainty regarding global demand for crude, have taken a backseat to the huge increase in weekly stockpiles in the United States, obviously weighing on oil prices.

The European Union will begin banning Russian refined products like diesel this coming weekend, which is also noteworthy. Prices for both Brent in the North Sea and WTI in the United States are falling, currently sitting at $82.50 and $76 a barrel, respectively. The Rotterdam TTF for natural gas in Europe has stayed steady at about 58 EUR/MWh despite the ongoing price pressure.

PRECIOUS METALS & GOLD

The London Metal Exchange, the price of a ton of copper has been relatively constant this week at around $9,100. Investors are still worried about supply problems, especially in Peru where demonstrations have caused disruptions in the market. Even if the price of an ounce of gold reached a high of $1956 earlier this week, it is expected to close the week down by roughly 1%.

The World Gold Council said that in 2022, demand for gold was at an all-time high, mostly due to the interest shown in the ancient artifact by central banks. More than 1,100 tons of gold have been amassed by central banks, which is more than twice as much as in 2021.

CRYPTOCURRENCY

After having its best January since 2013, Bitcoin is holding steady this week at roughly $23,000. The result is consistent with a renewed interest in high-risk investments at the outset of 2023. The conditions are ideal for the cryptocurrency market to continue its ascent if the macroeconomic climate continues to improve and U.S. monetary policy softens in the coming months. However, at this time there is insufficient data to make any firm conclusions.

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