Weekly | Inflationary Confidence
Your weekly summary with the most important news for your investments, in this edition:
Your weekly summary with the most important news for your investments, in this edition:
Factors affecting the stock market.
Developments in the U.S. stock market.
Relevant aspects to take into account.
Last week we outlined that the stock market had to navigate through three potential rocky shoals in order not to stall on its upward path. These included:
The Federal Reserve (FED) monetary policy decision and subsequent intervention by its chairman, Jerome Powell.
The quarterly results of the country's main technology companies.
The previous month's employment data in a context where the economy is showing a high degree of resilience to a macroeconomic slowdown despite the monetary policy rate at 5.5%.
In this context:
The FED changed its discourse at this meeting clarifying that it was very likely that the discussion from now on will no longer be focused on whether to keep raising the rate but when to reduce it by introducing the concept of "inflationary confidence" as we will analyze in more detail below.
The results of Amazon and Meta surprised considerably which allowed the market to find momentum to continue to rise.
The economy generated 353 thousand new jobs, double what was estimated, the unemployment rate remained structurally low at 3.7% for the third consecutive month but, and here is the small problem, wage inflation closed the month at 4.5% when the market estimated 4.1%.
It was in this environment that U.S. stock indexes continued to rise:
With the Dow accumulating a +2% rise so far in the year 2024.
The S&P 500 +4%.
The Nasdaq +4.1%, led mainly by the technology sector.
For now, stock market volatility, as measured by the VIX, has remained stable below 14 points since the beginning of the year. However, we must take into consideration the abrupt movement of the 10-year sovereign rate, which surely brings with it a content that we must monitor. This rate started the week at 4.15% and last Thursday, after the FED's announcements, it moved to 3.87% and started today, Monday, at 4.09%. This abrupt movement in the long Treasury bond rates, if it continues in this way in the coming days, is likely to eventually generate turmoil in the stock market. In between, the price of oil, as measured by WTI crude oil eased towards US$72 a barrel, despite the spread of the U.S. war role in the Middle East by expanding its attacks in Iraq and Syria last Friday.
Without giving much explanation on our part, I attach the announcement that Powell managed after the decision to keep the monetary policy rate intact:
"So what are we looking for in order to have greater confidence? Let me say that we are confident. We are looking for greater confidence that inflation is declining in a sustainable way to 2 percent. Implicitly, we do have confidence and it has been rising, but we want to get more confidence. What do we want to see? We want to see more positive data. It's not that we are looking for better data. We're looking for a continuation of the good data we've been seeing, and a good example is inflation."
He continued with the following comment:
"So, as you know, almost everyone on the committee believes it will be appropriate to cut rates, and partly for the reasons you mention. We feel that inflation is coming down. Growth has been strong. The labor market is strong. What we're trying to do is identify a point at which we really have confidence that inflation will fall back to 2 percent so that we can begin the process of reducing the restrictive level. So, in general, I think people believe, and as you know, the median participant wrote three rate cuts this year. But I think to get to that point where we feel comfortable starting the process, we need confirmation that inflation is, in fact, coming down sustainably to 2 percent."
Concluding his verbal remarks last night in a pre-recorded program for the "60 Minutes" television program he noted:
"There is no easy, simple or obvious path, we believe the economy is in a good place. We believe inflation is coming down. We just want to gain a little more confidence that it's coming down in a sustainable way, [and we still] have work to do on this."
However, the structural problem the FED has is that wage inflation is with too much downward drag from the robust labor market. Headline inflation will not move toward 2% on a sustainable basis if wage inflation does not fall below 4%, so the Fed's "confidence" will come on that front.
In the corporate world, the share price of Meta (owner of Facebook, Instagram and WhatsApp) returned +20% on the week not only because sales showed a revival but also because the company introduced dividends and announced a US$50 billion share buyback program. Reiterating the stance that excess liquidity by these companies has value. Amazon rallied +7.5% on the week after it argued that its cloud services are showing a solid rebound. Meanwhile Apple and Microsoft generated higher than expected earnings but their shares moved flat while Alphabet's (Google) share price gave up 7.5%, with everyone now awaiting Nvidia's results on February 21. This week it will be the turn of Caterpillar, Disney, Expedia, McDonald's, Snapchat and Spotify among many others, who will give us a glimpse of global demand.
Meanwhile, during the week there was the appearance of the main CEOs of social networks in front of Congress on the impact their companies have on youth. In it the majority owner and CEO of Meta, Mark Zuckerberg, managed a public apology to those parents whose children had committed suicide due to the social pressure of such platforms. This gave room for possible compensation to the families of these victims, making it the first formal mea culpa by the industry, reminding us of the tobacco and pharmaceutical companies, at the time.
In conclusion, even though the FED introduced the concept of "monetary confidence", we will have to monitor from now on the sharp movement of the FED's medium and long term sovereign rates, as an indicator of what could happen to the US stock market.
This Week
Monday (February 05)
Quarterly Reports
McDonald's Corporation
Caterpillar, Inc.
Vertex Pharmaceuticals Incorporated
Sumitomo Mitsui Financial Group Inc.
Estee Lauder Companies, Inc. (The)
Itaú Unibanco Banco Holding SA
Air Products and Chemicals, Inc.
Financial reports
Service Sector Purchasing Managers Index Report, S&P Global
S&P Global Composite Purchasing Managers' Index Report
Speech by Atlanta Fed President Raphael Bostic
Tuesday (February 6)
Quarterly Reports
Eli Lilly and Company
Toyota Motor Corp Ltd Ord
Chipotle Mexican Grill, Inc
Linde plc
Amgen Inc.
UBS AG
Economic reports
Red Book Annual Change Report
Speech by Fed President, Cleveland, Loretta Mester
Household Debt Report
Wednesday (February 07)
Quarterly Reports
Alibaba Group Holding Limited
Walt Disney Company (The)
CVS Health Corporation
PayPal Holdings, Inc.
Uber Technologies, Inc.
Economic Reports
Trade Balance Report
Imports Report
Export Report
Speech by Richmond Fed President Tom Barkin
Speech by Fed Governor Michelle Bowman
Thursday (February 8)
Quarterly Reports
S&P Global Inc.
Philip Morris International Inc.
ConocoPhillips
Unilever PLC
Astrazeneca PLC
Economic Reports
Initial Jobless Assistance Report
Wholesale Inventories Monthly Inventory Change Report
Friday (February 09)
Quarterly Reports
Pepsico, Inc.
Enbridge Inc.
Honda Motor Company, Ltd.
Fortis Inc.
Blue Owl Capital Inc.
Now you have more information about your investments. See you next week with more news.
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