Stocks took a breather today with the S&P, Dow, and Nasdaq Composite all retreating from their recent highs following an impressive start to November. This morning’s pause comes as investors await key developments, including Nvidia’s earnings report and the release of the Federal Reserve’s minutes.
In mid-morning trading, the S&P dipped by around 0.4%. This decline follows its recent close at the highest level since August. The Dow and the tech-heavy Nasdaq Composite also experienced downturns, dropping approximately 0.3% and 0.9%, respectively.
The retail sector faced headwinds, with shares of companies like Lowe’s, Best Buy, American Eagle Outfitters, and Kohl’s declining. This slump reflects a pullback in consumer spending, which has clouded forecasts and impacted sales figures for many retailers, continuing the trend set by Gap, Walmart, and Target earnings.
Investors are now turning their attention to leading chipmaker (and “AI stock”) Nvidia. The company’s stock reached a record close on Monday, and there’s significant anticipation surrounding its quarterly report. Nvidia has become synonymous with the AI narrative of 2023, especially after its last earnings report catalyzed a broader market rally.
In the realm of AI, the ongoing saga at OpenAI remains a focal point. Microsoft’s CEO recently hinted at the possibility of Sam Altman rejoining the ChatGPT maker, a move that has kept the tech community abuzz. Microsoft’s shares remained steady in early trading today, following a surge to a record high on Monday. This surge was driven by the company’s recruitment of the abruptly ousted OpenAI CEO, a move seen as bolstering Microsoft’s AI ambitions. The tech giant could further benefit if it manages to attract talent from a potential exodus of OpenAI employees.
But the big news of the day will be the upcoming Fed meeting minutes release, due out at 2 pm EST. These minutes are expected to lean towards a more hawkish stance than current market expectations. However, it’s important to note that these minutes might not fully reflect the latest economic developments, including the softer October nonfarm payrolls and Consumer Price Index (CPI) data, along with other lower inflation metrics.
Additionally, some recent survey releases, like the ISMs, have shown downward surprises. This has led traders to scale back their expectations for further rate hikes and increase their bets on potential rate cuts in 2024 – with nearly 100 basis points of easing priced in by the end of next year and a 25% implied probability of a cut as early as the March FOMC meeting.
Fed Chair Jerome Powell, in his remarks about a week after the FOMC meeting, maintained a hawkish tone. He acknowledged some progress on inflation but emphasized that there’s still a “long way to go.” Powell reiterated the uncertainty regarding whether the Fed has reached a sufficiently restrictive policy stance.
He added that the FOMC would not hesitate to tighten policy further if necessary, emphasizing that the Fed will continue to move cautiously and make decisions on a meeting-by-meeting basis. These sentiments have been largely echoed by his colleagues and are likely to be reflected in the minutes. However, it’s clear that market participants are currently more influenced by the dovish data trends rather than the hawkish official commentary.
At its November policy meeting, the FOMC kept rates steady at 5.25-5.50%, aligning with expectations and market pricing. The central bank’s statement saw only minor adjustments. It continued to suggest that “additional policy firming may be appropriate” and slightly upgraded its description of economic growth, noting that activity had been expanding at a “strong” pace in Q3, compared to the “solid” pace mentioned in September.
The FOMC also acknowledged a moderation in job gains since earlier in the year, a shift from the previous language of “slowed in recent months,” but continued to highlight the strength of job growth and the low unemployment rate. Notably, the statement included a new line addressing the rise in Treasury yields ahead of the meeting, suggesting that tighter financial and credit conditions could negatively impact economic activity, hiring, and inflation.
In his press conference, Chair Powell echoed his recent views, underscoring the Fed’s commitment to maintaining a restrictive monetary policy. He noted that the full effects of this policy were yet to be fully realized. Powell described the economy as strong, with robust growth and labor demand, but stressed that inflation remains high. He also noted some signs of easing in wage growth due to tight labor markets.
During the Q&A session, Powell conveyed uncertainty about future policy and financial conditions, hinting at the possibility of further interest rate hikes. He suggested that the Fed is nearing the end of the current rate-hike cycle and is evaluating its approach. Powell confirmed that rate cuts are not currently under consideration, with the focus being on the duration of maintaining a restrictive policy stance.
And so, because the market expects slightly hawkish minutes, there’s a possibility of an intraday rally on minutes that look more dovish (or less hawkish) than anticipated. Yes, stocks have already screamed higher.
But what are another 20 or 30 S&P points to take us to 4550? For this rally, a gain of that magnitude would be “small potatoes” considering that the index topped-out above that level yesterday.
That being said, 4550 also seems as good a place as any to start a broader market retracement prior to another dizzying rip, which may even take us to new highs before the new year.
