Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover:
Market Recap - Choppy market
Macro - The PMI numbers and what they mean
Earnings Season begins!
Premium Article - The FOMC Minutes
The Week Ahead - Economic & Earnings Calendar
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Let’s dive in ⬇️
Market Recap - 03 Jan - 06 Jan, 2023
The year began with choppy price action in the major indices before closing out on a high note on Friday with a +2% change across the board. The price action during the week was driven by different sets of economic data including the FOMC meeting minutes that were released on Wednesday. Most days we saw major price action at the open and then again towards the close. It’s been a difficult market to trade.
Friday’s rally was set off by the release of unemployment numbers at 8:30pm ET which showed a deceleration in wage growth. The rally got a renewed sense of enthusiasm once the Services PMI was released. The number came in below 50 showing a contraction. But, the SPX hit the 50-day moving average and closed slightly below it, while the Dow hit crossed the 50-day moving average and closed slightly above. Most indicators are still in decision territory, probably until CPI numbers.
The new narrative seems to be that anything that drives wage growth lower will mean that the Fed’s been effective in their policy and will probably slow their hikes. I don’t necessarily agree with this view, at least not to the extent that the market does.
I don’t think it’s time to celebrate just yet. The unemployment rate actually ticked down and the labor participation has not improved as much. This means that there is still an imbalance in supply and demand, and the labor market still remains tight. This could very well be enough to keep the Fed on course for tightening until 5%-5.25% and holding the rate there. I believe we need to see a more meaningful change in the labor numbers for this to change.
We get CPI numbers next week and the beginning of earnings season so we will know better then.
Macro of the Week - ISM PMIs and what they mean
We received ISM PMI numbers this week. But, it would seem that the ISM Services PMI numbers gave the market a second boost after the release of unemployment numbers in the morning.
What were the numbers?
Manufacturing PMI came in at 48.40 vs. 49 in the previous month and Services PMI came in at 49.6 vs. 56.5 in the previous month. This marks the first time since the Covid crash that the Service PMI crossed below 50.
What do the ISM Numbers mean?
The numbers that came in were below expected and below last months numbers and in fact signifies and important turning point. Numbers below 50 tend to indicate that the activity cycle or the economy is in contraction mode. The ISM surveys show us what supply managers are dealing with and provide interesting insight into various economic variables.
Earnings - pre-season earnings
We had few earnings come out the past week. None of them were Q4 earnings and most of them belonged to the consumer staples category, which are currently outperforming. Walgreens reported good numbers but the stock price tanked nevertheless because they warned on guidance.
The Q4 earnings season actually begins this upcoming week with Friday being a heavy day with 6 major banks reporting including JP Morgan. This season will close out 2022 and will tell us where we stand in terms of the next few quarters and as I have been warning, we’re looking at an earnings recession. The EPS estimates show a negative growth of -2.8% according to FactSet.
The Week Ahead
Earnings Season kicks off in full flow on Friday Jan 13, with a whole host of banks reporting + Delta + United Health
Economic Calendar - There’s no rest even if it’s the first week of the year
Tuesday - Jan 10 at 9am ET Chair Jerome H. Powell - discussion on
Central Bank Independence At the Sveriges Riksbank International Symposium
Thursday - Jan 12 at 8:30am ET CPI and Infltion data
Closing Thoughts - Hello 2023
We have earnings season staring next week and the projection is bleak. The Banks will certainly give us a preview into the state of the economy but, one interesting earnings I would look out for is KB Homes on Wednesday. That’s one of the bigger homebuilders and the state of their order book (which has been declining) should give us some important insights into the housing industry.
Right now, we’re looking at situation where an earnings recession will likely give way to an economic recession, if not a severe slowdown. We saw that in the PMI numbers this week.
A contraction in the services number was seen as a sign of relief probably because the market thinks that with a recession coming on the Fed will have to cool off on tightening and that will cause stocks to rally. As long as inflation remains higher than the Fed expects, I doubt a slowdown in the economy will cause the Fed to reverse course.
Here’s wishing you safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers
"The Q4 earnings season actually begins this upcoming week with Friday being a heavy day with 6 major banks reporting including JP Morgan"
I'm interested to see if rates have been accretive yet. (I'm guessing we see bank earnings have improved).