The Week in Review 02/05/2024

"No pressure, no diamonds.” – Thomas Carlyle

Last week was another dynamic week as we digested earnings reports, most of which impressed. The S&P 500 and the Dow saw new highs, the Russell 2000 was the exception.

Small Caps were another story… the underperformance of the small cap index was related to weakness in regional bank stocks after New York Community Bank reported that its provision for credit losses in the fourth quarter totaled $552 million compared to a $62 million provision for the three months ended September 30, 2023.

The increase, it said, was primarily attributable to higher net charge-offs, as well as, to address weakness in the office sector, potential repricing risk in the multi-family portfolio, and an increase in classified assets.

The added thunder came in the company's declaration that it would be cutting its dividend by 70% to $0.05 per common share to build capital. This report reminded investors of the regional bank fallout from last year.

Meanwhile, mega cap stocks outperformed the broader market as a group following earnings results from some influential names.

Alphabet and Microsoft reported results on Tuesday. The former logged a 6.7% decline last week while the latter climbed 1.8%. Apple, Amazon.com, and Meta Platforms all reported earnings on Thursday. Apple declined 3.4% on the week, while Amazon.com jumped 8.0% and META gained 20.5%.

These names combined make up nearly a quarter of the S&P 500.

Dow component Boeing was another notable name that reported earnings last week, logged a 1.9% gain since last Friday. BA is still down nearly 20% this year, however, following the prior grounding of 737 Max 9 planes.

In addition to earnings from influential names, this week's price action was driven by a recalibration of rate cut expectations following more strong economic data and the FOMC decision on Wednesday. The committee voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%.

This move was expected, but the market was hoping for a more dovish shift in rhetoric around the Fed's rate cut path. Instead, the directive declared that "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."

Fed Chair Powell reiterated this view in his subsequent press conference. Mr. Powell spoke specifically about the possibility of a March rate cut, saying in part "I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March at as the time to do that (cut rates), but that is to be seen."

Just about everything sold off on Wednesday in response.

The FOMC decision was followed by a much stronger than expected January Employment Situation Report on Friday, which featured a big upside surprise in payroll growth that was accompanied by a larger than expected increase in average hourly earnings.

As a result, the fed funds futures market repriced the probability of a 25-basis points rate cut at the March FOMC meeting to 20.5% (from 38.0% on Thursday and 47.6% one week ago) while the probability of a 25-basis points rate cut at the May FOMC meeting has been reduced to 74% (from 93.8% Thursday), according to the CME FedWatch Tool.

The price action in the Treasury market was partially in response to the rate cut rethink, and with the Treasury Department's first quarter borrowing estimate. The Treasury Department plans to borrow $760 billion in Q1, which is $55 billion below the forecast from October due to higher net fiscal flows and a higher cash balance at the beginning of the quarter. Borrowing in Q2 is expected to reach $202 billion.

The 2-yr note yield declined two basis points to 4.38% and the 10-yr note yield fell 13 basis points to 4.03%.

January’s jobs report posted the largest monthly gain since January of 2023, reinforcing the labor market’s status as a bedrock of the economy.

The jobs market remains one of the economy’s main engines with the unemployment rate near a 50-year low. November and December’s reports were also revised up 9,000 and 117,000, respectively. Additionally, wage growth increased 0.6% for the month and 4.5% year-over-year, while the unemployment rate held steady at 3.7% for the third straight month.

Powell said that while inflation has come down in the past six months (with the core rate excluding energy and foods of the metric he most closely watches) to the Fed’s 2% target, he and the other members of its monetary policy committee want to see a little more confirmation of the trend.

Market Snapshot…

• Oil Prices – Oil prices dropped by nearly 2% on odds interest rate cuts would not occur. West Texas Intermediate crude futures (WTI) fell $1.54 or 2%, to close at $72.28 a barrel. Brent crude futures shed $1.37, or 1.07%, to close at $77.33 a barrel.
• Gold– Gold prices slipped following a strong jobs report. Spot Gold was down 0.8% to $2,038.59 per ounce while U.S. gold futures fell 0.7% to $2,0557.10. Silver closed out the week at $21.984.
• U.S. Dollar– The dollar index jumped to a seven-week high in a broad rally. The dollar index reached 104.4, the highest it’s been since Dec. 12. Euro/US$ exchange rate is 1.074.
• U.S. Treasury Rates– The yield on the 10-year Treasury note topped 4% after a strong jobs report, an increase of 16 basis points.
• Asian shares were mixed in overnight trading.
• European markets are trading higher.
• Domestic markets are trading in the red this morning.

This week will be relatively light on the economic front. We will receive ISM non-manufacturing data and hear from several more FOMC members throughout the week. As such, a lot of focus will go toward the broad indices.

The Nasdaq is looking to reach a new all-time high and the S&P 500 is close to surpassing 5,000 for the first time. Continued strong earnings reports could help push markets higher and continue this rally.

Have a great week!

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