The Week Behind

The early-year rally continued as all the majors closed last week in the green. The U.S. Dollar and treasury yields continued to behave near cycle lows as the case for 25 bps grew stronger behind Core PCE Inflation printing its third consecutive monthly decline. The NASDAQ outperformed, adding 4.32%. The S&P 500 again found itself in the middle of the pack, gaining 2.47%. The DOW underperformed but managed to trade up 1.81%. 

Highlights

• Fed Whisperer, Nick Timiraos, reported the Fed is leaning toward 25 bps at February’s FOMC Meeting and may begin discussion concerning when to pause rate hikes.
• 3M (MMM) became the first notable company outside Silicon Valley to announce layoffs, representing the first sign Fed tightening may begin to spillover into other industries.
• PCE printed in-line with consensus, marking a third consecutive decrease in the Fed’s preferred inflation gauge.  

Given how loaded this week is, instead of doing two small stories and “The Week Ahead” segment, we will cover the three stories that will dominate the coming week: the FOMC Meeting, Mega-Cap Earnings, and January Payrolls. This will keep the brief concise, organized, and digestible. Expect two supplemental releases to come this week.

The Week Ahead

February FOMC Meeting

Economic data has made a good case for 25 bps via benign CPI, PPI, and PCE. The most recent payrolls report showed slowing wage inflation. If we get 25 bps and rhetoric hinting at a pause, this rally can continue. However, no one is expecting or appears to be positioned for 50. A 50 bps hike would shock the market into a sell-off. 

My take is that the Fed will hike 25 bps but without the dovish rhetoric. Fed jawboning has been relatively effective. No reason to deviate from a policy that appears to be working. Furthermore, while eco-data is beginning to roll over, earnings have either been better-than-feared or just plain good. Good news on earnings provides additional runway for Fed hawkishness. For a Fed erring on the side of doing too much as opposed to too little, I would be surprised if they let that runway go to waste.     

The FOMC decision is made at 2PM, Wednesday. The press conference follows 30 minutes later.

Mega-Cap Earnings

The remaining mega-caps report this week. Meta (META) reports Wednesday on the heels of the FOMC decision. Alphabet (GOOG), Amazon (AMZN), and Apple (AAPL) all report after trade on Thursday. Broadly speaking, I do not expect any big surprises. However, given the interconnected nature of their businesses and proximity to the FOMC meeting, accurately interpreting the market’s response to their reports will be difficult. Furthermore, the VIX closed last week at a multi-month low of 18.5, which suggests this is the calmest market in months. We may be overdue for a volatility spike.

As for META, investor focus will be on spending discipline surrounding the metaverse and monetization of Instagram Reels. As a digital advertiser of similar scale, their report may be indicative of Alphabet’s earnings (GOOG). 

GOOG will likely provide an update on their AI project, LaMBA, to combat the narrative surrounding Chat GPT as a potential competitor to their internet search business.

AMZN will update us on the consumer. I suspect margins and growth at AWS will be the focus. No one is convinced AMZN’s layoffs will not be enough to protect margins. Furthermore, given MSFT’s Azure, there is justifiable doubt that AWS’ growth will be enough to mitigate margin concerns. 

AAPL will provide hints on China. AAPL has been increasingly reliant on China for growth, and it is no secret China has been bad. That being said, expectations for the quarter are low. Consequently, it will be on 2023 guidance to reassure investors.

January Payrolls

To end the week, ahead of the open on Friday, January Payrolls hits the wire. As a reminder, this is a “bad news is bullish” report. There are three numbers to watch for: job creation (headline), unemployment rate, and wage growth. 

Consensus for headline job creation is 185k, but analysts have yet to figure this one out. While the number tends to come in above expectations, the market tends to be constructive as long as it comes in lower on a monthly basis. Last month, the number was 223k, making it the number to watch.

Unemployment is projected at 3.6% versus the prior month’s 3.5%. Higher unemployment implies less pressure on services inflation, which means the Fed can do less. Unemployment at or above 3.6% would be bullish. 

Perhaps most important, wage growth. Last month, wage growth decreased from 6.17% to 5.28%. It was the only aspect of last month’s report that bulls could hang their hats on, but it was enough to spark a bullish response. A decrease in wage growth would be a major victory for the Fed. Wages are at the core of services inflation. Victory over wage inflation means victory over all inflation. I doubt the Fed will declare victory based on a good number from this report, but it would be a step in the right direction. Sub-5.28% wage growth would be big for bulls.