Daily Markets: Markets React to Powell's Well-Telegraphed Message

Today’s Big Picture

Asian markets closed up across the board today as Japan’s Nikkei 225 advanced 2.13%, Korea’s KOSPI Composite rose 0.57% and Hong Kong’s Hang Seng was higher by 0.23%, while Taiwan’s TAIEX and China’s Shanghai Composite gained 0.71% and 0.75%, respectively. European markets are up in midday trading while U.S. futures are pointing to a healthy open.

Once again, Fed Chair Powell and the Fed delivered as expected yesterday, exiting the latest monetary policy by announcing it would accelerate the pace of its bond tapering program and increased the likelihood of three interest rate hikes in 2022. Some are quick to point out how the stock market likes certainty, and we have to hand it to Team Powell for smartly telegraphing what it plans to do, so that economists, investors, and the stock market are prepared for what's coming down the line. This morning, the Bank of England also announced it is hiking its key policy rate and later this morning the European Central Bank is expected to announce its latest policy moves as well.

As we wait for that policy update, flash PMI data received so far this morning points to the global economy continuing to expand in December albeit at a slower pace than November. That data set for the U.S. will be released soon after those equity markets begin trading today, and investors will no doubt be looking at any and all inflation comments contained in that report so as to gauge how input costs will plague companies when they report their December quarter results in the coming months.

Data Download

Coronavirus

Japan officially approved Moderna (MRNA) COVID-19 vaccine for its booster program, while Novavax (NVAX) filed for its first approval of its shot in the country.

Denmark expects the omicron Covid-19 variant to overtake delta within a week as the number of cases of the new strain doubles every two days, according to the Statens Serum Institut in Copenhagen.

France announced that because of surging COVID-19 cases in Britain only designated categories of people would be allowed to travel between the two countries, and anyone arriving from Britain would have to self-isolate. Hoping not to exacerbate supply chain issues, truck drivers will be exempt from the new rules.

White House chief medical advisor Dr. Anthony Fauci said currently available booster shots work against the omicron variant of Covid-19 and do not need to be adjusted to fight the new, highly contagious strain of the virus at this time.

Apple (AAPL) is postponing its back to office push to a “date to be determined” given the resurgence of Covid-19 in the form of the Omicron variant. The company stated that while mandatory return to the office was being postponed that offices remain open and that employees are welcome to work where they see fit. The company also announced a $1,000 “work from home” bonus intended to help fund employees’ workspaces at home. CEO Tim Cook also encouraged employees to get vaccinated.

International Economy

Japan’s Exports rose by 20.5% YoY following the 9.4% increase in October and compared to expectations for an acceleration to 21.2%. Imports rose even more, up 43.8% YoY in November from October 26.7% increase and beating expectations for an increase to 40.0%.

Today brought a number of flash PMIs, both Manufacturing, and Services, from around the world for December which were generally lower than the latest announcements

• Per Japan’s Jibun Bank, Manufacturing PMI 54.2 lower slightly from the previous month’s 54.50 reading. Services came in lower at 51.10 compared to last month’s reading of 53.0
• France’s Markit PMI for Manufacturing came in 0.55 lower than expected at 54.9 and a full point lower than last month's reading of 55.9. Services surprised to the upside by 0.85 points to 57.1
• Germany’s IHS Markit PMI for Manufacturing surprised a full point reading 57.9 as compared to last month’s 57.4 level. Services came in lower than expectations by 2.6 points to 48.4 as compared to last month’s 52.7 figure
• The Eurozone IHS Markit Manufacturing surprised slightly to a 58.0 reading while Services came in 0.90 lower than expectations at 53.3
• The UK’s IHS Markit/CIPS Manufacturing also surprised slightly by 0.05 at 57.6, 0.60 down from the previous reading while Services dropped 4.30 points to 53.2.

The Bank of England decided this morning to raise its key lending rate to 0.25% from 0.10% where it had been since March of 2020. It also announced inflation observed at 5.1%, well above its 2% target.

Domestic Economy

Yesterday the Federal Reserve did exactly what it had telegraphed it would do. The word “transitory” was dropped, as expected, and the taper of the Fed’s balance sheet is doubling to $30 billion per month, from $15 billion. The median of the “dot plots” is now at three hikes in 2022 versus one previously and the other three in 2023, opening the door for a hike as early as March of next year, although we suspect that’s highly unlikely. The Fed funds rate is now expected to reach 1.625% by the end of 2023, up from the prior estimate of 1.0%. For 2024 the estimate is all the way up to 2.125% versus the prior estimate for 1.75%.

Overall, a decidedly hawkish turn. The Fed’s economic outlook was little changed, but then again the Fed is more cheerleader than skeptic when it comes to the health of the economy. When Powell was asked about what he looks for to determine maximum employment, he referred to the unemployment rate, the labor force participation rate, job openings, wages, and flows in and out of the labor force. Helping soothe the market, Powell shared the Fed will tighten policy in a gradual, yet accommodative, way because of robust economic activity that is driving inflation higher.

After three consecutive months of better-than-expected retail sales, November’s report came in significantly weaker than expected. Expectations were for headline sales to grow 0.8% MoM, which would basically have just kept up with inflation. The actual number came in at just 0.3%. The strongest areas were Gas Stations, up 1.7% MoM and 52.4% YoY. Next up Sporting Goods, up 1.3% MoM and 20.0% YoY, followed by Food and Beverage Stores, up 1.3% MoM and 8.6% YoY. Online sales came in below the headline pace at 0.02% MoM and 12.1% YoY. The weakest category was Electronics & Appliances, down 4.6% MoM but up 16.8% YoY followed by General Merchandise, down 1.2% MoM but up 14.2% YoY. Of particular note is that Bars and Restaurants have now seen positive growth for nine consecutive months, up 1.0% in November, and are up 37.4% YoY, a good indication that Americans are getting out of the house.

NY Empire State Manufacturing Index came in much stronger than expected, rising to 31.9 from November’s 30.9 versus expectations for a decline to 25. While New Orders are not rising at the pace they enjoyed a few months ago, back then the index was well into the 90th percentiles of its historic range.

Import prices rose 11.7% YoY, accelerating from October’s 11.0% pace and Export Prices similarly accelerated to 18.2% YoY from October’s 18.0% pace.

Business Inventories grew more than expected in October, rising 1.2% MoM from September’s 0.8% pace, and above the expected 1.1% growth rate.

Housing continues to be exceedingly strong with the NAHB Housing Market Index for December rising to 84 from November’s 83, where it was expected to remain.

Later today we will get Housing Starts, Building Permits, Philly Fed Manufacturing, jobless claims, Industrial Production, and Markit Manufacturing PMI (Flash).

Markets

The markets dislike uncertainty like nature abhors a vacuum. Luckily, the days of the Greenspan briefcase indicator are long gone and Fed chairs since have perfected the art of communication, as witnessed by the market's reaction to Chairman Powell's announcement yesterday of not just an increase in the pace of the previously announced taper but also an indication of not just two but possibly three rate hikes in 2022.

In response we saw the S&P 500 rally 1.6%, while the Dow Jones Industrial Average climbed 1.1%, the Nasdaq Composite jumped 2.2% and the small-cap heavy Russell 2000 finished 1.7% higher on the day.

Stocks to Watch

Pre-market quarterly earnings reports will be had this morning from Accenture (ACN), Adobe (ADBE), and Jabil (JBL) among others.

Semiconductor company NXP Semiconductor (NXPI) announced a strategic partnership with Foxconn Industrial Internet Ltd., a subsidy company of Foxconn group, to transform the car into the ultimate edge device.

J.M. Smucker (SJM) entered into a definitive agreement to sell its natural and organic beverage and grains businesses to Nexus Capital Management LP in a cash transaction valued at approximately $110 million.

Edison Motors, a Korean electric car manufacturer, announced that the company signed an agreement with Plug Power (PLUG) to develop and bring to market a hydrogen fuel cell-powered electric city bus.

Homebuilder Lennar (LEN) reported October quarter results that missed top and bottom line expectations. Per the company, “gross margins were impacted by a spike in logistics costs and non-recurring cost increases associated with divisional alignment efforts around best growth opportunities. Pricing actions are being taken to mitigate these negative impacts on gross margin as we move into the first half of 2022."

Shares of SAB Biotherapeutics (SABS) are climbing in pre-market trading after showing data demonstrating that SAB-185, a therapeutic candidate for the treatment of COVID-19 infections, retains neutralization activity against the Omicron SARS-CoV-2 variant in an in vitro pseudovirus model.

Equinix (EQIX) announced a multi-year partnership with Nasdaq (NDAQ) to scale the Equinix NY11 data center in Carteret, New Jersey to support the build out of Nasdaq's cloud infrastructure.

Inter Parfums (IPAR) has entered into a 10-year exclusive global licensing agreement with Emanuel Ungaro for the creation, development, and distribution of fragrances and fragrance-related products under the Emanuel Ungaro brand.

UnitedHealth Group (UNH) has pushed back the deadline to complete its merger with Change Healthcare (CHNG) to April 5, 2022.

IPOs

While not on the calendar any time soon, social media site Reddit has announced they have filed for an IPO. The site may be best known to readers as the home of r/WallStreetBets, the forum at the center of the meme stock - Gamestop (GME), AMC Entertainment (AMC) - frenzy at the beginning of 2021.

After Today’s Market Close

FedEx (FDX), Rivian Automotive (RIVN), and Steelcase (SCS) are slated to report their quarterly results. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar.

On the Horizon

• December 22: GDP (Q3) final estimate, Chicago Fed National Activity Index, Existing Home Sales
• December 23: Durable Goods, Personal Income & Spending, PCE Price Index, weekly jobless claims, New Home Sales, Michigan Consumer Sentiment

Thought for the Day

“What is Christmas? It is tenderness for the past, courage for the present, hope for the future.” — Agnes M. Pahro

Disclosures

• Equinix (EQIX) is a constituent of the Tematica BITA Digital Infrastructure & Connectivity 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 Central Banks Economy