Daily Markets: When Will the Fed Start Cutting Rates?

Today’s Big Picture

Asia-Pacific equity markets finished the day decidedly lower in reaction to lowered rate cut expectations with relative strength coming from Australia’s ASX All Ordinaries and Japan’s Nikkei which declined “only” 0.32% and 0.40%, respectively. Otherwise, it was a tough day for trading for the region as Taiwan’s TAIEX dropped 1.07%, China’s Shanghai Composite declined 2.09%, India’s SENSEX tumbled 2.23%, and South Korea’s KOSPI skidded 2.47%. Hong Kong’s Hang Seng closed 3.71% lower in a broad decline that saw all 82 constituents end the day lower, led by Health Services names.

European markets are down across the board in midday trading. U.S. equity futures are well in the red, pointing to a down market open later this morning, as the market recalibrates rate cut expectations.

Before the market opens, the December Retail Sales report will be published at 8:30 AM ET and it will reveal the degree to which consumers opened their wallets for the holiday shopping season. The consensus forecast is retail sales ex-autos rose 0.2% MoM, the same as in November. Given the pull forward in holiday shopping due to events like Amazon’s Prime Deal Days in October, the trailing three-month data contained in today’s Retail Sales report will provide much more insight. That trailing three-month data also sets the bar for companies as they report their December quarter results.

At 9 AM ET, Michael Barr, the Fed’s Vice Chair for Supervision, and Fed Governor Michelle Bowman will be making the rounds, and they are likely to reiterate a slower path to Fed rate cuts. Speaking yesterday, Federal Reserve Governor Christopher Waller said the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained. That fueled an upward move in Treasury yields while the dollar jumped to a one-month high as investors curbed expectations of an interest rate cut by the Federal Reserve in March.

As tensions in the Red Sea and the risk of Israel's war in Gaza spreading in the Middle East escalate, the U.S. is expected to designate the Yemeni Houthi militant group as a foreign terrorist organization. This is likely to turn up the flames of geopolitical tensions, adding to current market anxiety.

Data Download

International Economy

China’s economy grew by a seasonally adjusted 1.0% in 4Q 2023, matching market expectations but moderating from an upwardly revised 1.5% increase in 3Q. On a YoY basis, the Chinese economy expanded 5.2% in 4Q 2023, faster than 4.9% growth in 3Q but less than market forecasts of 5.3%. The country’s 2024 GDP growth target will be announced at an annual parliamentary meeting in early March. China's retail sales increased by 7.4% year-on-year in December 2023, missing market consensus of 8.0% and slowing from a 10.1% jump in November. For 2023, the country’s retail sales rose 7.2% compared to 2022. China's industrial capacity utilization rate increased to 75.9% in 4Q 2023, the highest since 4Q 2021. According to the National Bureau of Statistics, the nation's total population fell by over 2M in 2023 to 1.41B, marking the second straight year of contraction.

The inflation rate in the Euro Area was confirmed at 2.9% in December, up from an over two-year low of 2.4% seen in November. The core inflation rate in the Euro Area, excluding volatile food and energy prices, cooled to 3.4% in December, the lowest since March 2022. European Central Bank President Christine Lagarde shared the bank could cut interest rates in the summer, not as soon as March or April, as expected by the market. Following Lagarde’s comments, the market expectations lopped off one rate cut this year to five quarter-point cuts.

Domestic Economy

In addition to the December Retail Sales report, today brings the December reports for Industrial Production & Capacity Utilization, Import/Export Prices, and November Business Inventories. Today also brings the next reading for the weekly MBA Mortgage Applications and the January Housing Market index from the National Association of Homebuilders. We close out today’s economic data with the latest iteration of the Fed’s Beige Book at 2 PM ET.

Markets

Bank earnings, ongoing geopolitical tensions, and Fed comments regarding their aggressiveness, or lack of it, in the timing of the start of rate cuts, weighed on equities yesterday. Technology (0.25%) was the only sector to post gains, spurred ahead by Advanced Micro Devices (AMD), Nvidia (NVDA), and Microsoft (MSFT), which combined to contribute close to 190% of the sector’s returns. Laggards included Utilities (-1.09%), Materials (-1.15%), and Energy which fell 2.38%. Broad indexes were all lower as the Nasdaq Composite declined 0.19%, the S&P 500 fell 0.37%. the Dow dropped 0.62% and the Russell 2000 closed 1.21% lower.

In individual names, shares of Spirit Airlines (SAVE) plunged 47.09%, lower than levels seen in the depths of the pandemic selloff and in fact, setting an all-time low. This move was in response to a federal judge blocking the sale of the airline to Jet Blue (BLU) on grounds that the acquisition would be anti-competitive. Here’s how the major market indicators stack up year-to-date:

• Dow Jones Industrial Average: -0.87%
• S&P 500: -0.08%
• Nasdaq Composite: -0.45%
• Russell 2000: -4.92%
• Bitcoin (BTC-USD): 2.79%
• Ether (ETH-USD): 12.75%

Stocks to Watch

Charles Schwab (SCHW), Citizens Financial Group (CFG), Prologis (PLD), and US Bancorp (USB) are expected to release quarterly earnings before equities begin trading later this morning. Pre-market breadth is lighter today as 267 names in the S&P 500 have traded hands so far this morning with 31 gainers and 236 decliners. Enphase Energy (ENPH) continues to be volatile, getting bid down this morning along with Moderna (MNRA) and Generac Holdings (GNRC) while Kenvue (KVUE), the former consumer healthcare division of Johnson & Johnson (JNJ) is seeing a strong bid ahead of the open.

Boeing (BA) shares were under even more pressure yesterday as the Federal Aviation Administration is presently investigating an accident between two Boeing planes that were taxiing at Chicago's O'Hare International Airport. A collision took place between the wingtips of a Delta Airlines (DAL) plane and an All Nippon Airways (ALNPY) plane.

Interactive Broker (IBKR) reported a $0.01 per share bottom line miss for its December quarter. Revenue for the period rose 16.7% to $1.14 billion, matching the consensus forecast.

Plexus Corp. (PLXS) announced it will not meet its fiscal 1Q revenue guidance of $0.99-$1.03 billion and GAP EPS of $1.15-$1.33. The company now expects revenue for the quarter to be in the range of $980-$985 million with EPS of $1.02-$1.06.

Calavo Growers (CVGW) filed for an extension to submit its 2023 10-K with the SEC and issued downside guidance for its October 2023 quarter of $972 million vs. the $1.0 billion consensus. The company also shared it is exploring a sale of its Fresh Cut Business to F&S Fresh Foods.

Big Five Sports (BGFV) reports December quarter revenue of $196.3 million, missing the $209.23 million consensus. Same-store sales for the quarter fell 17.7% YoY and management guided December quarter EPS to $(0.40)-$(0.38) vs. the ($0.28) consensus.

Google (GOOGL) is expected to announce layoffs in its advertising sales division as part of efforts to automate more processes. Last week, the company announced it would lay off hundreds of staff in its voice assistant, hardware, and engineering teams.

GoPro (GPRO) announced an agreement to acquire Forcite Helmet Systems, a pioneer in embedding technology into helmets.

BP (BP) agreed to acquire GETEC ENERGIE GmbH, a leading independent supplier of energy to commercial and industrial customers in Germany.

IPOs

Readers who want to dig deeper into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

Alcoa (AA), Discover Financial Services (DFS), Kinder Morgan (KMI), Synovus (SNV), and Wintrust Financial (WTFC) are expected to report quarterly results after equities stop trading today. Those looking for more on upcoming quarterly earnings reports should head on over to Nasdaq’s Earnings Calendar.

On the Horizon

Thursday, January 18

• Japan: Machinery Orders – November
• China: Foreign Direct Investment – December
• US: Weekly Initial & Continuing Jobless Claims
• US: Housing Starts & Building Permits – December
• US: Weekly EIA Natural Gas Inventories
• US: Weekly EIA Crude Oil Inventories

Friday, January 19

• Japan: Inflation Rate – December
• US: Existing Home Sales – December
• US: The University of Michigan Consumer Sentiment Index (Preliminary) – January

Thought for the Day

“We suffer more in imagination than in reality.” - Seneca

Disclosures

• AMD (AMD), Nvidia (NVDA) are constituents of the Tematica BITA Digital Infrastructure & Connectivity Index
• Microsoft (MSF) is a constituent of the Tematica Research Thematic Dividend All-Stars Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks Economy Earnings Central Banks