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Thursday 1 August 2024

Morning Brief: The Fed looks to September cuts and Meta breaks the streak

Thursday, Aug 01

👋 Good morning! Tech roared back Wednesday, bringing the S&P 500 and Nasdaq up 1.6% and 2.6%, respectively. Crude also jumped sharply, rising 5%. Thursday's another big day as the market digests Meta's report and awaits two from Apple and Amazon.

What we're watching

⚖️ The Fed looks both ways before September: The Federal Reserve held rates steady at the conclusion of its meeting Wednesday but seemingly telegraphed a September rate cut, noting that the central bank is back to evaluating both sides of its dual mandate — inflation and employment. Still, the "we're watching the data" and "we have made no decisions" mantras that Chair Jay Powell has been repeating all year still made an appearance at the press conference. But with an "uncertain" economic outlook, as the Fed put it, Powell stressed that the central bank is in a strong position to move quickly and decisively when the data says it's time.

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📈 Meta breaks the streak: After disappointments from Tesla, Alphabet, and Microsoft, Meta's Q2 financial results beat expectations Wednesday afternoon, with the company noting it would invest heavily in infrastructure in 2025 — specifically citing AI in its statement. The stock jumped in after-hours trading, and the evolving narrative to watch will be whether investors continue to read this as a bullish sign from a company confident in its ability to monetize the investment. But AI revenue or not, the company's Family of Apps is certainly being monetized well.

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💰 Apple, Amazon take the stage: The next two tech titans to report results do so Thursday after the bell. For Apple, the focus is on China, specifically news about the iPhone 16 — set for release in September — and any details on its Apple Intelligence AI product. On the Amazon side, the diversified business touching retail, cloud (with AI!) services, and a growing advertising business should provide a lot to chew until the next and last of the Magnificent Seven, Nvidia, reports at the end of August.

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🐂 Nvidia gets a bullish call: Nvidia may not be reporting for a month, but the stock jumped 13% after Morgan Stanley issued a bullish call for the world's third-most-valuable company and chip colleague AMD issued strong guidance. The stock is still around 13% off its all-time high, but some momentum has returned to the AI trade after the recent painful rotation.

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📆 A full calendar Thursday: Besides Apple and Amazon, Thursday features quarterly reports from Block, Coinbase, ConocoPhilips, Crocs, DraftKings, Moderna, Wayfair, and more. On the economic side, investors will get manufacturing data as well as the final appetizers of labor market data before the July jobs report: the Challenger job cuts and initial jobless claims.

What we're reading

🌮 Taco Bell is bringing AI to hundreds of drive-throughs.

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⚡️ Police say Tesla was in FSD mode when it hit, killed motorcyclist.

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⚖️ Shareholders sue CrowdStrike over huge software outage.

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🍪 Arm revenue beats forecasts but shares drop.

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💻 Microsoft's and AMD's results perfectly illustrate the two sides of the AI trade.

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📉 The AI stock plunge is just warming up: Citi strategist.

The Fed inches closer to inevitable cuts

Today's Takeaway is by Hamza Shaban, Senior Reporter.

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The Fed is delivering on rate cut hopes.

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The initial reactions from analysts and investors following Wednesday's meeting, statement, and press conferences pointed to what amounted to near certainty of the Fed delivering a September rate cut.

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As Lazard's chief market strategist Ronald Temple wrote, "The FOMC has clearly telegraphed a September rate cut."

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Powell, for his part, said that a rate cut is very much on the table for September. But while a coming easing cycle might be inevitable, the timing of the first cut still remains at least a little uncertain, despite what the market might suggest.

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"Certainty is not a word we have in our business," Powell said during the press conference that wrapped the July meeting. "We get a lot of data between now and September. And it isn't going to be one data read or even two, its going to be the totality of the data," he said.

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Powell once again leaned on his data-driven refrain that nothing is set in stone because there's always more information to analyze.

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But again, ask pretty much anyone not named Jerome Powell and they'll tell you that July's Fed meeting was likely the last under the pandemic tightening regime.

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Investors might as well have been on the podium in Paris, belting the national anthem. The Nasdaq Composite's daily gains somersaulted up 3% following Powell's remarks (before eventually closing 2.6% up).

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"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," he said. And the Fed softened its policy statement to reflect newfound optimism. A clause from the Fed's statement that previously read "modest further progress" on tackling inflation turned into "some further progress" on Wednesday. Wall Street translated the dense Fedspeak into "U-S-A! U-S-A!"

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If officials continue to see encouraging signs of cooling inflation, reasonably strong growth, and a resilient labor market, Powell said, "I think a rate cut could be on the table in September."

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But he pumped the brakes to say that if price pressures remained stubborn, the Fed would consider a range of factors. "It's not going to be just any one thing."

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Market bets didn't bother to take the Fed's qualifying statements seriously. The CME FedWatch tool registered a 0% chance that rates remain the same in September.

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Even if Powell says he can't rely on the concept of certainty, everyone else is.

Let the easing begin.

Chart of the day

The pay gap between job stayers and job changers narrowed in July in the latest sign that the US labor market is cooling.

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New data from ADP released Wednesday showed that the median year-over-year pay increase for job switchers fell to 7.2% in July, down from the 7.7% increase seen in June. Meanwhile, pay for workers who stay in the same job rose 4.8%, its slowest rate of increase since July 2021.

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The gap between the two numbers is slimming, indicating the benefits workers saw from leaving their jobs during the post-lockdown hiring boom continue to erode.

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"The payoff from switching jobs has dropped tremendously," ADP chief economist Nela Richardson said on a call with reporters Wednesday morning.

While it may be a less attractive outcome for workers, Richardson added the easing in wage growth is a welcome sign for the Federal Reserve in its fight against inflation.

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"Wages and pay are the bridge from the labor market to the inflation data, and we are certain, after three years of looking at these numbers, that if inflation picks up — and no one thinks that's likely right now — it won't be because of labor," Richardson said. "We're seeing continued steady declines in wage growth that fits with the overall inflation picture also cooling, along with the labor market."

Morning Brief is written and edited by Ethan Wolff-Mann. For the web version, click here. Follow all the action throughout the day on Yahoo Finance and on the Yahoo Finance app.

Earnings and economic calendar

Thursday

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Economic data: Challenger jobs cuts, year-over-year, July, (+19.8% prior); Unit labor costs, second quarter (+4% prior); Nonfarm productivity, fourth quarter (+1.6% expected, +5.2% prior); Initial jobless claims, week ending July 27 (235,000 prior); S&P Global US manufacturing PMI, July final (49.5 prior); Construction spending, month-over-month, July (+0.2% expected, -0.1% prior); ISM manufacturing, July (49 expected, 48.5 prior); ISM prices paid, July (52.1 prior)

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Earnings: Apple (AAPL), Amazon (AMZN), Block (SQ), Booking Holdings (BKNG), Canada Goose (GOOS), Coinbase (COIN), ConocoPhillips (COP), Crocs (CROX), DraftKings (DKNG), Marathon Digital Holdings (MARA), Mobileye (MBLY), Moderna (MRNA), Roku (ROKU) SiriusXM (SIRI), Wayfair (W)

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Friday

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Economic calendar: Nonfarm payrolls, July (+175,000 expected, +206,000 prior); Unemployment rate, January (4.1% expected, 4.1% previously); Average hourly earnings, month-over-month, July (+0.3% expected, +0.3% prior); Average hourly earnings, year-over-year, July (+3.7% expected, +3.9% prior); Average weekly hours worked, July (34.4 expected, 34.3 prior); Labor force participation rate, July (62.6% previously); Factory orders, June (+0.5% expected, -0.5% prior); Durable goods orders, June final (-6.6% prior)

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Earnings: Chevron (CVX), Exxon Mobil (XOM)

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770 Broadway, New York, NY 10003

Wednesday 31 July 2024

Morning Brief: Microsoft fails to wow as focus shifts to Fed

Wednesday, Jul 31

👋 Good morning! The Nasdaq had another rough day, falling 1.3% as the S&P 500 receded 0.5%. Meanwhile, the Russell 2000 continued the counterpoint we've been seeing, ticking up 0.4%.

What we're watching

📆 Fed speaks: The Federal Reserve's July policy meeting will conclude Wednesday afternoon, with the central bank announcing its interest rate decision at 2 p.m. ET and a press conference with Fed Chair Jay Powell following at 2:30 p.m. ET. While no interest rate cuts are expected, the market still widely believes the table will be set for the September meeting. All that's left to find out is how much Powell telegraphs this move later today.

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🤖 Microsoft disappoints: Microsoft's quarterly results Tuesday came in above estimates, but disappointing revenue in its cloud computing segments sent the stock lower in after-hours trading. A specific miss in "intelligent" cloud revenue didn't do anything to tamper the AI anxiety that's hit markets recently as investors consider whether Big Tech gains spiked too much too soon — this made three disappointments in a row after Alphabet and Tesla.

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🍪 Chips are still hot: The hyperscalers may be (slightly) disappointing so far this earnings season, but AMD's quarterly results, released late Tuesday, showed chip demand is still strong as it not only beat on profit and revenue but issued stronger guidance for Q3. Intel will be the next of the big chipmakers to report on Thursday, with Nvidia coming in a month or so.

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📉 Job openings dip: June's job openings showed a mild decline from May, another sign of a cooling — but, economists say, healthy — labor market. Deeper points in the JOLTS data also showed hiring and quitting decreasing, indicating a shared sentiment on both the employer and employee fronts on which way the economic wind is blowing.

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🥽 Meta steps up to the plate: Facebook and Instagram's parent company, Meta, will report its quarterly results Wednesday after the bell, providing the next chapter in the AI monetization story after Microsoft's update. Investors will be on the lookout for how the firm's major AI spending might get offset by AI revenue, as well as a check on its ad business. Besides the "Magnificent" headliner earnings calendar, Wednesday features plenty of action, with Arm, Boeing, Carvana, Kraft Heinz, and Qualcomm of particular interest.

What we're reading

☕️ Starbucks reports another quarter of declining sales as it pushes popping pearls and value plays.

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💸 The US national debt just surpassed another milestone.

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🏊‍♀️ Olympic ad spending at record levels as streaming boom helps fuel demand.

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🏡 Home prices hit record in May but decelerated from previous month.

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🧴 P&G CEO on earnings, more cautious consumers, and Trump tax cuts.

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🔎 Google's antitrust defense could benefit from the threat of SearchGPT.

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💉 Wall Street is still jittery on GLP-1s.

Small caps have nearly caught up to the S&P 500

Today's Takeaway is by Jared Blikre, Markets Reporter.

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Tech stocks led the S&P 500 lower Tuesday as the Nasdaq 100 closed at the lowest level since early June.

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It was the fourth day the tech-heavy index lost 1.5% or more in the month of July, especially notable as there had not been any losses of that magnitude in the two prior months.

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Ahead of June's Consumer Price Index reading on July 11, the Nasdaq 100 had been up 23% year to date. But after the CPI registered its first monthly drop in inflation since 2020, investors kicked off a stomach-churning rotation from large stocks into small.

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Since then, the Nasdaq has surrendered half those gains, sending many investors into relative shock upon learning that the laggard Russell 2000 index has nearly caught up to the volatile index known as home to the largest tech players.

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"[I] didn't have [the] Russell 2000 catching the Nasdaq 100 year-to-date on my bingo card to start this month. Getting close," wrote Jay Woods, chief global strategist at Freedom Capital Markets and former NYSE floor governor.

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In the month of June alone, the Nasdaq outperformed the Russell 2000 by over 7 percentage points. Then, in July, the relationship violently inverted such that the Russell outperformed the Nasdaq by nearly 14 percentage points. It's the biggest month-to-month flip in leadership that we have data for, going back to 1988.

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The narrative in the press followed the rotation as grave concerns over market concentration in the Magnificent Seven gave way to a small-cap miracle rally.

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To be clear, sector rotation is a healthy feature of bull markets. When a leading group of stocks takes a back seat, other pockets of the market should take their place such that — at the index level — volatility is subdued. Extremes on either side average out.

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But, given the speed and strength of the recent move, Wall Street is now assessing the damage to institutional portfolios.

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According to Morgan Stanley's derivatives team, "volatility of the last two weeks started out being very rotational."

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However, as the move gained steam, institutions began reining in leverage (borrowed money) and reducing directional bets on stocks. "What began as a de-grossing event has quickly turned more towards a shift in directional exposure to equities," the team continued.

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All of this, and there's still a Fed meeting later today and a Meta quarterly report to close July. Buckle up.

Chart of the day

Job openings decreased slightly in June, per data from the Bureau of Labor Statistics.

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But beyond a rather benign headline reading, economists were focused on signs of a cooling labor market found elsewhere in the report.

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The quits rate, a sign of confidence among workers, sat at 2.1% for the second straight month. In June, there were 3.28 million quits, down from 3.4 million in May and the lowest number of quits in a month since November 2020.

After the release of Tuesday's data, former US Secretary of Labor Seth Harris told Yahoo Finance the recent decline in quits indicates that workers are "feeling a little bit less secure that if they leave their jobs, they'll be able to find another job."

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This is one of the early signs of "turbulence" in the labor market data, per Harris, and one of the reasons he believes the Federal Reserve should be cutting interest rates when it announces its next policy decision on Wednesday.

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A cut isn't expected, but what Fed Chair Jerome Powell potentially says about quits or other data showing softness in the labor market will be a key takeaway from Wednesday's press conference.

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— Josh Schafer, Markets Reporter