Stocks rebounded this morning as the market’s choppiness continued. The Dow, S&P, and Nasdaq Composite all gained on mixed economic data.
The November Job Openings and Labor Turnover report, more commonly referred to as the JOLTS report, revealed a slight “beat” while the ISM manufacturing index posted a contraction after 30 straight months of expansion for the sector.
But the big news of the morning was lower-than-expected Eurozone inflation, which sparked hopes of a dovish European Central Bank. France reported a cool CPI reading yesterday before Germany’s CPI release this morning also beat estimates.
If inflation cools as a result of significantly slowed growth, however, there could still be equity selling according to Swissquote Bank’s Ipek Ozkardeskaya.
“The risk-off investors will likely continue exiting stocks on a profit recession – and not on hawkish Fed expectations, and they could go back to bonds instead,” Ozkardeskaya said.
Next up for investors is the December Fed meeting minutes, due out at 2 pm EST this afternoon. Sentiment could flip on a dime if the minutes show anything that’s interpreted by the market as overly hawkish.
“This is very much wait-and-see mode,” said B. Riley Financial strategist Art Hogan.
“After wrapping up a year that was pretty terrible on all fronts, there’s always going to be trepidation by investors to put money to work and we’re seeing that in real-time at least in the first two trading days.”
Bulls are hoping that the Fed minutes will show a softer (aka, more dovish) side to the FOMC. But, with many corporations seemingly on the brink of an earnings collapse, the short-term focus is likely to shift to corporate revenues, not just rates.
“What we’ve picked up from our modeling is there’s a bit of a regime change taking place under the surface, and what we mean by that is 2022 was all about the Fed as they tightened financial conditions to fight inflation,” said Huw Roberts, head of analytics at Quant Insight.
“But what we’re picking up on now, is more sensitivity to the real economy – greater sensitivity to growth, to inflation expectations, to industrial metals, and to the credit cycle – and what that says to us is markets will be spending the early part of 2023 really getting nervous about a hard landing.”
We disagree with Roberts in that the Fed won’t matter as much this year. 2023 will still be controlled by Powell & Co., make no mistake about it.
That won’t stop equities from reacting strongly to this coming earnings season, though. Numerous companies slashed guidance for Q4 2022 and the year ahead.
If they can’t meet estimates even after deep EPS reductions, shareholders will react very poorly, especially with a Fed still hell-bent on raising rates – something we’ll learn more about very soon when the December minutes come out.
