The Fed Pivot Coming in March or May?

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Alex Harring and Pia Singh of CNBC report the S&P 500 and Nasdaq fall Friday to snap six-day win streak, but both notch weekly gains:

The S&P 500 closed slightly lower Friday, but clinched weekly gains as the latest economic data added to a positive picture of the economy.

The broad market index inched down by 0.07% to 4,890.97. The Nasdaq Composite slipped 0.36% to 15,455.36, hurt by a post-earnings slide in Intel. The Dow Jones Industrial Average bucked the trend by adding 60.30 points, or 0.16%, to 38,109.43, an all-time closing high. All three major averages are now up more than 100% from their pandemic lows.

Despite Friday’s mixed session, the major averages recorded a winning week. The S&P 500 advanced around 1.1%, while the technology-heavy Nasdaq Composite climbed about 0.9%. The blue-chip Dow gained approximately 0.7%.

Friday’s losses ended a six-day winning streak for the S&P 500 and Nasdaq. Through the end of Thursday’s session, the benchmark S&P 500 had closed at a record high for five straight trading days, the longest streak of its kind since November 2021.

Stocks got a boost this week from encouraging economic data.

December’s core personal consumption expenditures price index came in line with economists’ forecasts month over month, but was slightly lower than anticipated on an annualized basis, data released Friday shows. It’s a preferred gauge of inflation for the Federal Reserve, which sets monetary policy.

Friday’s PCE print came a day after gross domestic product data revealed higher-than-expected economic growth in the fourth quarter. That bolstered investors’ hopes that the economy has avoided a deep recession.

“All the economic data — both the GDP and PCE — was good this week,” said Rhys Williams, chief strategist at Spouting Rock Asset Management. “That was comforting to everybody. And I think it does show we’re still in this potential ‘Goldilocks’ landing, where the economy softens a bit but is still positive.”

But sell-offs among some well-known stocks on the back of earnings reports restricted gains this week.

Chipmaker Intel tumbled nearly 12% on Friday after offering a disappointing fiscal first-quarter outlook. KLA slid more than 6% in the session after the semiconductor company posted light guidance for its fiscal third quarter.

On the other hand, American Express rallied more than 7% after sharing a better-than-expected forecast for full-year earnings. That helped the 30-stock Dow mitigate losses from Intel’s drop.

Elsewhere, Tesla, a retail investor darling, registered its worst week since October, declining 13.6% in the period. Shares took a leg down after the electric vehicle maker posted disappointing earnings and warned of trouble in 2024.

Rita Nazareth of Bloomberg also reports that bond yields rise on bets Fed ‘not rushing’ to ease:

Wall Street grappling with mixed economic data sent Treasuries down, with traders betting the Federal Reserve will signal patience before it decides to cut interest rates this year.

Bond losses were led by shorter maturities as data showed personal spending topped estimates — even as the Fed’s preferred gauge of underlying inflation slowed to an almost three-year low. With policymakers telegraphing they want to see sustainable signs of cooling before lowering borrowing costs, the figures only reinforced bets that a March pivot is still very much elusive.

It’s not that investors have abandoned their bets on an interest-rate cut in the first quarter, but they continued to fully price in a Fed move in May. Of course, that’s all going to hinge upon the next several economic reports, with the impacts from the disruptions in shipping yet to be seen. As Jerome Powell and his colleagues gather next week, traders will be waiting to hear how all that plays out in the balance of risks.

“Expectations remain that the Fed will be discussing ‘when’ — not ‘if’ — to initiate its rate-cutting cycle,” said Quincy Krosby, chief global strategist at LPL Financial. “Unless next month’s collection of inflation-related data underscores decisively that the path toward 2% is squarely in sight, the Fed will most likely wait until May or June to begin easing rates.”

Two-year US yields topped 4.35%. The S&P 500 wavered, while notching a third straight weekly gain. The Nasdaq 100 underperformed as disappointing forecasts from Intel Corp. and KLA Corp. weighed on chipmakers. Oil hit a two-month high after a fuel tanker operated on behalf of trading giant Trafigura Group. was struck by a missile as it transited the Red Sea, underscoring the geopolitical risks to crude supplies.

It’s too soon for US policymakers to call victory as the economy moves from an inflation sweet spot into a more challenging environment ahead, according to Mohamed El-Erian.

The performance of the world’s largest economy in the third and fourth quarters was “remarkable,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television Friday. But “the big risk for the administration is that the economy slows this year because some of the drivers of last year’s growth are no longer there. And, secondly, inflation stops going down.”

“Economic data in the US continues to point to a benign backdrop for markets — with resilient growth, moderating inflation, and the prospect of rate cuts,” said Solita Marcelli at UBS Global Wealth Management. “We expect the Fed to feel comfortable cutting rates starting in May, though this will likely require further signs that the economy is cooling off between now and then.”

The Federal Open Market Committee is widely expected to hold interest rates steady for the fourth straight meeting when it gathers in Washington on Jan. 30 and 31. The real focus though will be on what lies ahead, at the March meeting and beyond.

To Carl Riccadonna at BNP Paribas, the Fed will likely lean against imminent cuts. While a March move can’t be ruled out if the data warrants, he says his base case is for 150 basis points of rate reductions this year — starting in May.

“A faint hawkish bias may remain in the statement, though we admit it will be a close call,” he noted. “If not, we expect the committee to introduce language signaling a patient approach before adjusting policy settings. Recent easing in financial conditions and signs of economic resilience afford the FOMC some time to judge whether inflation is durably converging to the 2% target.”

Indeed, Powell and his colleagues can arguably take their time to start easing policy because they wouldn’t be cutting rates to counteract an economic contraction — as has often occurred in the past. Instead, they would be calibrating policy to reflect a surprisingly steep drop in inflation from a multidecade high 1-1/2 years ago.

“A soft landing seems increasingly evident,” said David Russell at TradeStation. “The big question now is how quickly Jerome Powell will normalize policy when there’s no immediate need. The data matters less going forward and internal conversations at the Fed matter more.”

To Gus Faucher at PNC, the Fed does not need to have inflation at 2% year-over-year to cut rates, but will be cautious given the potential for the tight labor market and strong consumer growth to reignite inflationary pressures. The Fed has further work to do and should not be tempted to declare “mission accomplished,” said Jeffrey Roach at LPL Financial.

“With inflation largely in the bag, the question for the Fed shifts to how to keep it there, and in particular, how far to lower rates in 2024 to achieve a more neutral setting,” said Krishna Guha at Evercore ISI. “Growth remains for now strong, raising questions as to whether short-run neutral could be higher than most estimates suggest – that also favoring waiting a little longer and not rushing in March.”

Aside from the FOMC gathering next week, traders will be closely watching the latest labor-market figures. Economists surveyed by Bloomberg forecast US payrolls rose by about 180,000 in January following a December gain of 216,000.

And when the Treasury Department previews its note and bond auction sizes for the next three months on Jan. 31, some of the projected sizes are likely to be the biggest investors have ever seen. Bond yields have seen a steep drop since October in anticipation that the Fed — which raised interest rates 11 times during the past two years to arrest a surge in inflation — will begin lowering them this year.

Companies and governments have flooded international markets with $721 billion of new debt this month, a record-setting sum that’s found investors eager to take on credit risk while yield is still plentiful. Investors are insatiable in primary markets, loading up on debt with elevated yields before central bankers can pull rates lower.

Next week will also bring results from some of the megacaps that have powered the resurgence in US equities from the October 2022 bottom, including Apple Inc., Microsoft Corp. and Google’s parent Alphabet Inc.

Though the artificial-intelligence mania and growing economic optimism has helped lift stocks, the ongoing fourth-quarter earnings season is going to be a key factor in deciding where equities are headed this year. Especially since experts have been divided lately, with some seeing this torrid rally as a sign the market is overheating, while others are expecting more gains ahead.

“The impressive technical rally was reinforced this week with encouraging macro data,” said Mark Hackett at Nationwide. “The Goldilocks economic data (strong growth, easing inflation) lightened investor concerns heading into the FOMC meeting next week. While economic and market data is impressive, the mixed results from earnings season could act as a headwind, though we will know more after next week’s surge in announcements.”

Corporate Highlights:

  • JetBlue Airways Corp. warned that its planned $3.8 billion acquisition of Spirit Airlines Inc. may be terminated in the coming days, setting up a possible clash between the carriers over the ailing deal.

  • Airbus SE is seeking to persuade customers to return some aircraft delivery slots that it could then hand over to United Airlines Holdings Inc., going all out for the rare chance to snatch a marquee order away from embattled rival Boeing Co.

  • American Express Co. forecast earnings for 2024 that topped analysts’ estimates and said it would stick to its long-term profit and revenue goals.

  • Salesforce Inc. is cutting about 700 workers, adding to a brutal string of tech layoffs at the start of 2024.

  • Johnson Controls International Plc is exploring a sale of a portfolio of heating and ventilation assets that could be valued at as much as $5 billion, people with knowledge of the matter said.

  • Saudi Aramco, the world’s largest oil company, is continuing to send tanker loads of crude and fuels through the southern Red Sea, where Houthi militants have for months been menacing merchant ships in response to Israel’s war in Gaza.

  • Grifols SA sued Gotham City Research over a report alleging the company has overstated profit and misstated its accounting.

It was a somewhat busy and mixed week in terms of earnings. Netflix (NFLX) kicked things off with a positive earnings surprise and there were strong earnings from American Express (AXP) and IBM (IBM) but there were also weak earnings from 3M (MMM), Intel (INTC), Humana (HUM) and Tesla (TSLA).

Next week we will see earnings from Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN) and Apple (AAPL) and traders will keep an eye on how their stocks react post-earnings.

Looking at the Nasdaq below, it can go higher but it remains to be seen whether it can make a new all-time high:

Both Nvidia (NVDA) and AMD (AMD) did make fresh new all-time highs earlier this week but weakness from Intel weighed on chipmakers today.

Still, semis look great on the weekly chart:

Next week we get the January US payroll numbers on Friday and while they might surprise to the upside, tech layoffs are surging and the economy is definitely weakening:

Perhaps most surprising is that institutional investors are increasingly believing the Fed can engineer a soft landing:

I maintain that we are heading into the worst global recession since the 70s and my fear is that as layoffs mount, the American consumer isn't in good shape:

This won't end well but for now, investors are oblivious preferring to look at coincident economic indicators like GDP.

As far as megacap tech stocks, that party is coming to an end too:

It might not be right away, but it's coming so best to prepare for it now.

Alright, going to wrap it up there.

Below, Jeremy Siegel, Wharton School professor of finance, joins 'Closing Bell' to discuss markets, earnings, and what to expect for the week ahead.

Next, JoAnne Feeney, Advisors Capital Management partner and portfolio manager, joins 'Squawk Box' to discuss the latest market trends ahead of the opening bell on Friday.

Third, Dave Sekera, Morningstar chief U.S. market strategist, and Lindsey Piegza, Stifel chief economist, join 'Squawk Box' to discuss latest market trends, state of the economy, the Fed's rate path outlook, and more.

Fourth, Pimco Economist Tiffany Wilding says the PCE data gives the Federal Reserve cover if they want to cut rates in March but the optics of the CPI and strong demand probably will keep the Fed on hold a little bit longer.

Fifth, Dan Ives, managing director at Wedbush Securities, joins 'Closing Bell' to discuss Tesla and his outlook for the company.

Sixth, earlier this week Pimco co-founder Bill Gross discusses his views on equity and fixed income markets, Federal Reserve monetary policy and where he is finding investment opportunities with Romaine Bostick and Alix Steel on Bloomberg Television.

Seventh, DoubleLine Capital CEO Jeffrey Gundlach provides his 2024 market outlook and weighs in on the Fed's inflation fight on 'Making Money.'

Lastly, take the time to watch part 1 and 2 of the 2024 DoubleLine Round Table Prime featuring DoubleLine CEO Jeffrey Gundlach and moderator DoubleLine Deputy Chief Investment Officer Jeffrey Sherman with their guests James Bianco, President and Macro Strategist at Bianco Research; Danielle DiMartino Booth, CEO of Quill Intelligence; Charles Payne, author and Fox Business Anchor; and David Rosenberg, President of economic consulting firm Rosenberg Research & Associates. Round Table Prime was held Jan. 11, 2024 (part 1 is macro outlook and part 2 is market outlook).

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