The week just ended this past Friday, was quite simply, as they say... a wild one. Maybe one of the wildest that investors, traders, and economists have gone through in some time. It all began with JP Morgan (JPM) coming to the rescue and buying all of the good stuff left at First Republic Bank (FRC) as the latter became the fourth US bank to fail since March.
Would that do the trick? Would this action solve the issues that have plagued the regional banking business in this country? Or would this deal only pry open another can of worms as other banks whose stocks have tumbled due to mismanaged risk, or the deeply inverted yield curve seek aid. Maybe we'll just blame those creatures of the night often referred to by market participants as short sellers. In my opinion, a steepening of the yield curve solves a lot.
By midweek, the stocks of PacWest Bancorp (PACW) , Western Alliance (WAL) and First Horizon (FHN) all cratered. One bank would openly announce the search for strategic options, while one would deny doing any such thing. The other fell off of a cliff as a deal to merge with TD Bank (TD) fell apart.
However, as midweek rolled around, all eyes and ears had changed their focus, and turned their attention to the Federal Reserve Bank and the future trajectory for our national monetary policy. The FOMC agreed to increase the target range for the Fed Funds Rate by 25 basis points to a range spanning from 5% to 5.25%. The language within the official policy statement was softened. Not much, but just enough to allow for the committee some flexibility moving forward.
While this does set up the potential for a pause in the aggression that the FOMC has shown in increasing short-term interest rates over the past year and change, it does not actually signal a pivot policy toward a looser stance. Don't tell the marketplace. Markets seemed to react as if that's exactly what the Fed was trying to signal. Fed Chair Jerome Powell told us (yet again) at the press conference last Wednesday, not to expect rate cuts in 2023.
If that was not enough for one week, Friday just happened to be April "Jobs Day" and the numbers that hit the tape printed a bit hotter than expected. One might have expected traders to knock the market around as they have done in the past when positive looking data seemed to back a more hawkish policy narrative. This time, for a change, good news was good for equities, and not so good for Treasury securities. How refreshing. Equities had been under pressure all week, but rallied nicely - but on reduced volume - on Friday, as Treasuries had rallied all week only to selloff on Friday.
About Jobs
Non-Farm Payrolls for April surprised to the upside on Friday (though there were downside revisions made to prior months) just two days after the ADP Employment Report sent an equally strong message concerning job creation. Rarely do these two move together as they did last week. Friday's BLS survey results were strong across the board, as the unemployment rate unexpectedly dropped to 3.4% and the underemployment rate dropped to 6.6% amid participation that held firm at 62.6%.
Wage growth was strong as well, out-growing professional consensus view on both a month over month (0.5%) basis as well as that of a year over year (4.4%). Looking across racial demographics, each and every ethnic group covered within the report either held their own or saw their unemployment rate decrease, while every educational background grouping covered also saw their lot improve with the exception of those participating with less than a high school diploma.
This is a change from what we have seen earlier in the recovery to this point where job creation has been led by those less educated. The implication? Perhaps for April at least, the quality of those jobs created actually improved. About the only truly negative take-away from these labor surveys for April, in my opinion, was the average workweek, which held steady at 34.4 hours. That metric was 34.5 in February and 34.6 a year ago. Something to keep an eye on, as demand for labor could very well be volatile from here for a bit.
That said, and perhaps one reason why markets reacted to the jobs data differently than some might have expected, could be that increased job creation, increased quality in job creation and accelerating wage growth might all be inflationary, but also all fly in the face of the near imminent recession that many of us (including myself) in the economics profession have claimed to see coming. Perhaps we're wrong. I would be slow to say anything for certain, but that would be very nice.
Fed Funds Futures
The zero-dark hours seem to pass so easily on some nights/mornings, and yet so painfully on others. I dislike the transition of Sunday into Monday, I think more than all of the others, as this specific overnight just feels so "slow." As these zero-dark hours pass, I currently see Futures trading in Chicago that show a 93% likelihood of there being no rate change made to the target range for the Fed Funds Rate when the FOMC concludes its next policy meeting on June 14th. There is currently a 7% probability for another 25 basis point rate hike that day.
The Fed Funds Rate now stands at 5% to 5.25%. These markets are only pricing in a pause at this level that lasts until September 20th, when a first rate cut for the cycle is projected. If so, the whole Jackson Hole clambake out west should be a real doozy this year.
Futures are currently projecting that the September 20th rate cut would be the first of seven consecutive meetings where the FOMC eases policy in that way. A Fed Funds Rate of 4.25% to 4.5% is priced in at this point for year's end, and 2.75% to 3% for eighteen months from now.
Earnings
As far as this first quarter earnings season is concerned, last week was another massive five day set of released financial and operational performance results. While the week prior may have had more higher-profile tech names than any other week of the season, last week had Apple (AAPL) which accounts for 7% of S&P 500 performance all by itself and for that reason is the apex predator in terms of market impact. Apple surprised everyone with a solid report that showed growth in iPhone sales and in place of areas not quite growing outright, the firm grew its dividend and its share repurchase program.
According to FactSet, 85% of S&P 500 companies have now reported their first quarter results. That's up from 53% a week ago, just to give readers an idea of just how significantly large last week was. Of those companies, 79% have beaten expectations for earnings (flat with last week) and 75% (up from 74% a week ago) have beaten revenue projections.
For the quarter, the blended (results & projections) rate of earnings "growth" now stands at -2.2% (up huge from -3.7% last week and -6.2% the week prior to that) from the year ago comp. Revenue growth for the quarter now stands at 3.9% (up from 2.9% last week). For the full year (still reliant upon FactSet), consensus view is for earnings growth of 1.2% (up from 0.8% last week) on revenue growth of 2.4% (up from 2.2%).
Among sectors, the strongest earnings growth this season has easily been shown by Consumer Discretionaries (now +53.6%), with Industrials a very distant second place (+21.1%). Six of the 11 sectors are still showing year over year earnings contraction, with Materials (-25.6%), Utilities (-21.9%), Health Care (-16.4%), Communication Services (-11.1%), and Technology (-10.6%) all contracting by double digits in percentage terms.
Marketplace
As mentioned above, equity markets, for the most part last week, ripped off four "down" days only to rally quite aggressively on Friday. It may be worth noting that trading volume on Friday (the "up" day) was far lower than it had been on the preceding sessions, which had all ended with red candles. We have noticed that equities last week, the Nasdaq Composite in particular, have moved in the opposing direction from Treasury securities (or with yields).
Readers will see that bond traders brought the US Ten Year Note into week's end, when they sold that debt security, forcing its yield higher.
What last week did was take the spread between the yields of the US Ten Year Note and the US Three Month T-Bill to ever increasingly and quite excruciatingly more negative levels, which in turn ratcheted up the predictions for imminent recession. Look what happened on Friday, though, in response to the strong April jobs report.
That spread, though still obviously quite grotesque in appearance, did back away from the most negatively inverted levels we've seen in multiple decades. That leads us to equities. Readers will see that the Nasdaq Composite has now given up its 21 day EMA and then retaken that level in each of the past two weeks. This week, unlike last week, the Composite did not test its 50 day SMA. This, for now, keeps both the swing crowd and portfolio management crowd onside. This index has seen its advance halted at roughly the same place on the chart since late March. That's where it went out on Friday.
The S&P 500, just like the Nasdaq Composite, has also lost and then retaken its 21 day EMA in successive weeks. This index also found no need to retest its 50 day SMA (simple moving average) last week. This index has also been halted at roughly the same spot on the chart since mid-April. A lot of similarity in pattern formation between these two despite the known differences in sector composition and sector performance. Aren't algorithms grand?
For the week past, the S&P 500 gave up 0.8%, after rallying 1.85% on Friday. The S&P 500 closed last week up 7.73% year to date. The Nasdaq Composite just barely squeezed into the green for the week (+0.07%) after gaining a whopping 2.25% on Friday. This put this index up 16.9% for 2023. The Philadelphia Semiconductor Index had been the market beast this year, but not of late. The "SOX" finally got back into the win column last week, gaining 2.25% on Friday to close up 0.42% for the five day period. This index now stands up an impressive 18.78% for the year.
This leaves us with the Russell 2000. The small-cap index roared to a gain of 2.39% on Friday, but still closed out the week down 0.51%. The Russell is now down 0.08% for 2023. We have obviously had to have a very close eye on the KBW Bank Index for the past few months. The KBW rallied a semi-incredible 4.61% on Friday, still closing out the week an even more incredible 7.39% lower. The KBW is now off 25.36% this year. Eight of the 11 S&P sector-select SPDR ETFs shaded red for the week despite all 11 glowing a bright lit shade of green on Friday.
A "growthy'' type sector led the way for the week, with Technology (XLK) up just 0.27% with the semis outperforming software. Defensive sectors took the next three slots on the weekly performance tables with the Utilities (XLU) and Health Care (XLV) gaining just 0.07% and 0.04%, respectively. Energy (XLE) , took a severe beating for the week (-5.76%), despite leading all sector SPDRs (+2.71%) on Friday. Communication Services (XLC) and the Financials (XLF) also gave up multiple percentage points for the week.
According to FactSet, the S&P 500 now trades at 17.7 times forward looking earnings, down from 18.1 times from just one week ago. This ratio seems to be backing away from the S&P 500's five year average of 18.6 times (up from 18.5), while still standing above its ten year average of 17.3 times.
The Week Ahead
The week ahead will be interesting. Earnings season will not come to a complete stop, but will certainly slow down, with fewer names overall and fewer high-profile names reporting. The "season" seems to sort of pause after high-tech and ahead of the retailers. The Fed is now past last week's policy meeting, and last Friday's jobs report, so they as a group, will feel freer to speak publicly. I feel like most of our Fed heads unofficially extended the media blackout that ended with Powell's press conference last week into the weekend due to Friday's employment release.
This week, we expect to hear from Fed Gov. Lisa Cook, and New York Fed Pres. John Williams. Readers should also expect Fed Gov. Philip Jefferson to start increasing his overall public exposure. Jefferson, who has been quieter than most of his colleagues, is said to be under consideration for the Vice Chair position that was vacated when Lael Brainard left the Fed to join the Biden administration.
The macro this week will be focused upon the release of April data for consumer level inflation (CPI) on Wednesday and April data for producer level inflation (PPI) on Thursday. There is also a chance that such market impacting forces as quarterly earnings releases and inflation-focused macroeconomic data-points, will be overshadowed by the games that politicians play in DC this week.
Treasury Secretary Janet Yellen has warned that the United States will be unable to meet its financial obligations as soon as June 1st, without a legislative increase being made to the debt ceiling. Without getting political, House Republicans have passed legislation that accomplishes this but also would force the federal government to curb spending. To this point, that has been an unacceptable condition for the President or Senate Democrats to consider. We are where we are.
As far as earnings are concerned, there are some headline level (and less than headline level) releases on the way. Just to highlight a few companies that will be reporting this week, you'll hear from Tyson Foods (TSN) , International Flavors & Fragrances (IFF) , McKesson (MCK) , PayPal (PYPL) , Airbnb (ABNB) , The Walt Disney Company (DIS) , and Dillard's (DDS) .
Berkshire Hathaway Reports
Berkshire Hathaway ( (BRK-A) , (BRK-B) ) released the firm's first quarter operational results over the weekend. The firm also held their annual shareholder meeting that probably captured more investor attention than the firm's actual performance. On Saturday, Warren Buffett was joined by his Vice Chairs, long-time lieutenant Charlie Munger, as well as Greg Abel and Ajit Jain for hours of interaction with the firm's investors and fans. Abel is believed to be Buffett's eventual successor as chief executive.
For the quarter, operating earnings increased 12.6% from the year ago comparison to $8.065B, while the firm also drove investment gains of $27.439B versus an investment loss of $1.58B. As for earnings, EPS per average equivalent "A" share increased to $24,377 from $3,784, while EPS per average equivalent "B: share increased to $16.25 from $2.52.
Among Berkshire's headline level businesses, operating earnings were as follows: Insurance-Investment income increased 68.3% to $1.969B, BNSF (the railroad) decreased 9% to $1.247B, and Insurance-Underwriting increased 445% to $911M.
For the three month period ended March 31st, Berkshire spent $4.4B repurchasing class A and class B shares, and ended the quarter with a cash position including short-term securities of $130.6B.
Readers will see that BRK-B broke out of a basing period of consolidation that lasted from November into April. Since then, the firm has had to lean on former resistance as support and has passed both tests for now. If this line can hold as pivot and the shares remain above all three of their key moving averages... my target price will be $368, up from my former level of $361. I remain long these shares.
Economics (All Times Eastern)
10:00 - Wholesale Inventories (May-adv): Expecting 0.1% m/m, Last 0.1% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: TSN (.80)
After the Close: (DVN) (1.39), IFF (.89), MCK (7.13), PYPL (1.10), (SWKS) (2.03)
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A Wild Week, Job Creation, Fed Funds Rate, Earnings, Markets, Berkshire Reports - RealMoney
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