TMT Market Report #66
GDP blows away expectations as the US economy is solid heading into the first Fed meeting of the year. What to expect? When will rate cuts start? Let's discuss.
This past week we saw a continued surge higher to start the week as the QQQ Trust was up over 2% at the peak during Wednesday’s afternoon trading session. Then by Friday Intel reported earnings and gave a dismal forecast that cast a shadow over the Technology sector to end the week. Now, over Thursday and Friday, we saw a considerable amount of selling, but if you’re a bull, you’re still enjoying drinks poolside as the bears look on in frustration. As over the past week, the SPY was up by 1.03% with the QQQ Trust coming in with over half the haul at 0.62%.
Now, let’s discuss the key economic news from the past week. The economy once again grew faster than expected, registering an annualized growth rate of 3.1% for the year. As GDP this past week came in better than expectations at 3.3% for Q4. Meanwhile the rate of inflation has continued to fall, with the key measure of inflation, the personal consumption expenditures (PCE), increasing by just 0.2% in December, marking the lowest point in over two years. This positive economic data has led to record highs yet again last week in US stock markets, but it also presents a challenge for the Federal Reserve in deciding whether to maintain the current interest rates or adjust them in response to the lower inflation figures. This week we should get some clarity on the path of rates moving into the Summer. Mind you, we will probably be beholden to the data in the end, as things could change economically on a dime. As of now though, I have little reason to believe the US Economy will slow down materially from here. To be honest, some data is pointing to a reacceleration. So we have to continue to stay open-minded and let the realities’ economy play out as they will.
Here are the other economic data highlights from the past week:
Initial Jobless Claims 214K Vs 200K Est.; 189K Prior
Continuing Jobless Claims 1.833M Vs 1.828M Expected, 1.806M Expected
Goods Trade Balance (Dec) (88.46B) vs (88.70B) Est.
Retail Inventories Ex Auto (Dec) +0.6%, Prior -0.9%
Durables Excluding Defense (MoM) For December 0.5% Vs 6.9% Prior
GDP (QoQ)(Q4) 3.3% Vs 2.0% Est. 4.9% Prior
New Home Sales (Dec) 664K Vs 645K Est.; 615K Prior
Natural Gas Storage -326B Vs -322B Est.; -154B Prior
Core PCE Price Index (YoY) (Dec) +2.9% vs +3% Est.
Core PCE Price Index (MoM) For Dec. 0.2% Vs 0.2% Est.; 0.1% Prior
Personal Spending (MoM) For Dec. 0.7% Vs 0.4% Expected, 0.2% Prior
PCE Price index (YoY) (Dec) +2.6% vs +2.6% Est.
Building Permits 1.493M Vs 1.495M Expected, 1.467M Prior
Crude Oil Inventories A Draw Of 9.233M Vs A Draw Of 2.150M Est.; Draw Of 2.492M Prior
S&P Global Services PMI (Jan) 52.9 Vs 51.0 Est.; 51.4 Prior
S&P Global US Manufacturing PMI (Jan) 50.3 Vs 47.9 Est.; 47.9 Prior
S&P Global Composite PMI (Jan) 52.3 Vs 50.9 Prior
Richmond Manufacturing Index (Jan) -15 Vs -7 Est.; -11 Prior
US Leading Index (MoM) For December -0.1% Vs -0.3% Est.; -0.5% Prior
Turning to bonds, we saw muted moves across the complex as the selloff we saw last week, higher yields stuck, as the 10-year pictured below settled up just over a basis point. Now the short end of the curve didn’t hold up as well, with the 2-year falling off by about 5 basis points to finish at 4.357% on the week. Odds now for the Fed Fund future March meeting are sitting at 52.3% chance of a hold with 46.2% going on a 25-basis point cut.
For the upcoming week, the Fed will keep rates steady, which is all but certain. However, the color provided in the press conference from this meeting should be enough to give the bond market a better understanding for the March meeting odds. Now just a thought, but in the past Jerome Powell has been more Dovish than the committee has been, as just last meeting we have some Fed Governor’s push back on the market’s reaction to his press conference. With the unprecedented easing of financial conditions over the last few months, we should see a Fed that feels ok with talking firm about when they expect rate cuts. They shouldn’t feel the need to cut rates in March when it’s all said and done. A more likely start would be the May/June timeframe, as though I don’t agree with this current stance. The Fed wants to cut rates and if they can, they will.
- Earnings -
This is the most important week of earnings for the season. This week’s calendar is jam-packed from start to finish, with Monday and Friday being the two outlier days for earnings. We still get Sofi, Cliffs, Nucor, F5, Supermicro, while Friday we see Exxon, Chevon, AbbVie, AON, CBOE and Grainger among others. Now reports I’m laser focused on this week are AMD, Microsoft, and Google, which are on Tuesday evening. Also Thursday evening we see a similar hat-trick of technology power players with earnings from Meta, Amazon, and Apple. Outside these I’m also interested in GM, UPS, Boeing, Mastercard, Hess, and Qualcomm. A lot of the future direction in the equity space could hinge on what color we get from many of these companies I highlighted above.
- Equity Market +
The S&P 500 over the past week continued to forge higher by the tune of 1.06% closing at another record this past week. We have a nice channel developing in the short-term and looking at the 10-Minute chart below you can see the areas I’m focusing on in the week ahead. If we breakdown through $4865 or so we should see considerable selling if bears can keep the index under that level. A pullback to $4800 would be a likely landing spot on a breakdown, with the moves lately it would likely be welcome by many market participants.
Looking now at a 10-minute chart of the QQQ Trust over the past week, we can see the move lower mid-week after setting record highs on Wednesday. I have a similar view on the trading levels as I do with the S&P 500 above. I will be closely following how the market trades at the pivots shown in the chart below. This could be a critical week for direction moving forward so all hands-on deck. With how many stocks are reporting that are major players in the index I expect a move to over $430 or under $421 in the week ahead. Which one? I have better odds that we actually get a pullback but just barely, it’s a coin flip. Over the past week, there was a 0.62% move higher in the QQQ Trust.
The Russell 2000 last week was the best relative performer with a 1.84% move higher. We saw a monster surge on Monday to start the week hitting our pivot and the bulls held those gains, though it was a chop fest for most of the week. The index closed just at the lower end of our pivot area and with the amount of economic news and data right in front of us this I expect a move away from this pivot area in the week ahead. A breakout over $200 would be a bullish sign while a move back into the previous pivot ranges a negative. The latter would likely set up of a test of the 50-day SMA at $190.10.
- Commodity Update +
Copper finished the week at $3.85 breaking back above the 50-day and 200-day moving averages. During the week, the base metal was higher by 1.73%
Gold over the past week had a muted trade very similar to the Dollar and bonds. The metals trading activity over the past week resulted in a -0.59% decrease, with the week's lowest point occurring on Thursday at just above $2000.
Silver over the past week was up by 0.71%
The US Dollar on the week held around the moving averages after breaking above them in the last week. This week coming up will probably make or break the current move higher since the start of the year. As if the bond market prices out rate cuts to May this should boost the Dollar all things equal. Over the past week, the Dollar Index moved higher by just 0.16% finishing at $103.23.
WTI crude this past week rallied into the close finishing over the 200-day SMA for the first time in a few months. During the week, the commodity saw monster gains of 6.50%. Looking at the move, we could be on our way to the $80 a barrel area in the weeks ahead as the bottom, in our pivot area looks to have held. I’m a believer in a bottom being made here, as many readers know. If we skirt a recession and the economy holds up better than expected, I feel oil will only move higher. That being said, a Russian oil tanker being attacked in the Red Sea sparked the move higher on Friday and with the oil market not really reacting to the Red Sea conflict. This could be an important tipping point as many market participants looked past the Red Sea conflict because the oil going through the Red Sea is Russian, that changed last Friday.
- Notable on the week -
Over the last five trading days, the sector leaders were:
XLE Energy was up by 5.09%
XLC Communication Services was up by 3.81% (Making a 3-week haul of 7.65%)
XLF Financial was up 1.90% and 2.78% over two weeks.
Laggards over the past week were:
XLY Consumer Discretionary was lower by -1.84%
XLRE Real Estate was lower by -0.54%
XLV Healthcare finished lower by just -0.14%
This week we saw a reversal with the XLE as energy was a major player with the price of oil moving considerably higher. XLF continued the run higher, as the brief setback around earnings out of many banks was short-lived. Technology last week was in the middle of the pack and wasn’t a strong relative performer. With the slate of earnings this week heavily focused on tech, it's going to be a wild week from start to finish, and I expect significant volatility. Granted, technology has been strong over the last few weeks, but so has the XLC now making it in the top 3 for three weeks running. This week we will get earnings from Meta and Google both 1 and 2 in the XLC. Now highlighted in this week’s chart is the XLI, the Industrials. After bouncing off support a few weeks back, we are back up to the December highs. This will be an important dynamic to watch if the index can continue to move higher in the next few weeks or not.
- The Micro Minute -
This week I wanted to try something different than just highlighting 4 charts. I feel a better use of this section would be to highlight one or two stock that I find compelling and or worth mentioning and dive deeper.
UPS - Has been triangulating in the lead up to this week’s earnings report on Tuesday morning. The overhead resistance could be an area of support if the earnings come out better than the market expectations. That being said, a breakout over the 200-day SMA could bring the index to $170, another key area of resistance. A breakdown out of the ascending triangle should bring the stock down to the $150 level post earnings. When stocks range is shrinking into a big event, often you get an outsized move in one direction afterwards.
Discovering United Parcel Service: A Closer Look
As the world's largest parcel delivery company, UPS manages a massive fleet of more than 500 planes and 100,000 vehicles, along with many hundreds of sorting facilities, to deliver an average of about 25 million packages per day to residences and businesses across the globe. UPS' domestic U.S. package operations generate around 64% of total revenue while international package makes up 20%. Air and ocean freight forwarding, truckload brokerage, and contract logistics make up the remainder.
Key Indicators: United Parcel Service's Financial Health
Market Capitalization Analysis: Above industry benchmarks, the company's market capitalization emphasizes a noteworthy size, indicative of a strong market presence.
Decline in Revenue: Over the 3 months period, United Parcel Service faced challenges, resulting in a decline of approximately -12.83% in revenue growth as of 30 September, 2023. This signifies a reduction in the company's top-line earnings. As compared to its peers, the revenue growth lags behind its industry peers. The company achieved a growth rate lower than the average among peers in Industrials sector.
Net Margin: United Parcel Service's net margin is impressive, surpassing industry averages. With a net margin of 5.35%, the company demonstrates strong profitability and effective cost management.
Return on Equity (ROE): The company's ROE is a standout performer, exceeding industry averages. With an impressive ROE of 5.75%, the company showcases effective utilization of equity capital.
Return on Assets (ROA): United Parcel Service's ROA stands out, surpassing industry averages. With an impressive ROA of 1.6%, the company demonstrates effective utilization of assets and strong financial performance.
Debt Management: With a below-average debt-to-equity ratio of 1.33, United Parcel Service adopts a prudent financial strategy, indicating a balanced approach to debt management.
- Major Economic and FED speaker highlights for the week ahead -
Monday, January 29th
9 am Dallas Fed Mfg Business Index (Dec)- Consensus ?? Prior 1.50%
9 am Dallas Fed PCE(Dec) -
11:30 am 3/6 Month Bill Auction - Prior 5.225/5.020%
Tuesday, January 30th
8 am IMF Meetings
9 am House Price Index (MoM)(Nov) - Consensus 0.2% Prior 0.3%
9 am S&P/CS HPI Composite - 20 n.s.a.(YoY)(Nov)- Consensus 5.8% Prior 4.9%
10 am CB Consumer Confidence (Jan) - Consensus 113.9 Prior 110.7
10 am JOLTs Job Opening(Dec) - Consensus 8.73M Prior 8.790M
10:30 am Dallas Fed Services Revenue(Jan) - Consensus ?? Prior 4.3
4:30 pm API Weekly Crude Oil Stock - Consensus ?? Prior -6.674M
Wednesday, January 31st
8:15 am ADP Nonfarm Employment(Jan) - Consensus 143K Prior 164K
8:30 am Employment Cost Index(QoQ)(Q4) - Consensus 1.0% Prior 1.1%
9:45 am Chicago PMI(Aug) - Consensus 47.0 Prior 46.9
10:30 am Crude Oil Inventories - Consensus ?? Prior -9.233M
2 pm FOMC Statement
2:30 pm FOMC Press Conference
Thursday, February 1st
5 am OPEC Meeting
8:30 am Continuing Jobless Claims - Consensus ?? Prior 1833K
8:30 am Initial Jobless Claims - Consensus 211k Prior 214k
8:30 am Nonfarm Productivity (QoQ)(Q4) - Consensus 1.9% Prior 5.2%
9:45 am Manufactuing PMI (Jan) - Consensus 50.3 Prior 50.3
10 am ISM Manufactuing Employment (Jan) - Consensus ?? Prior 48.1
10 am ISM Manufactuing PMI (Jan) - Consensus 47.4 Prior 47.4
10 am ISM Manufactuing Prices (Jan) - Consensus 45.6 Prior 45.2
10:30 am Natural Gas Storage - Consensus
11:30 am 4-week/8-week Bill Auction
4:30 pm Fed’s Balance Sheet- Prior 7.677B
Friday, February 2nd
8:30 am Average Hourly Earnings (MoM)(Jan) -Consensus 4.1% Prior 4.1%
8:30 am Average Hourly Earnings (YoY)(Jan) - Consensus 0.3% Prior 0.4%
8:30 am Nonfarm Payrolls (Jan) - Consensus 177K Prior 216K
8:30 am Participation Rate - Consensus ?? Prior 62.5%
8:30 am Private Nonfarm Payrolls (Jan) - Consensus 143K Prior 164K
8:30 am Unemployment Rate (Jan) - Consensus 3.7% Prior 3.7%
10 am Construction Spending (MoM)(Dec) - Consensus ?? Prior
10 am Michigan 1-Year Inflation Expectations - Consensus 2.9% Prior 2.9%
10 am Michigan 1-Year Inflation Sentiment (Jan) -Consensus 78.8 Prior 69.7
1 pm US Baker Hughes Rig Count
4:30 pm CFTC Various Speculative Net Positions
- Conclusion -
So, over the past week we saw a continued move higher but finished the week on a soggy note, with a negative finish on equities. That being said, the data continued to come in strong, but bonds and the odds for rate cuts remained pretty flat over the week, all things considered.
Moving forward to this week, I believe we will get a considerable move away from the ranges over the last week as the data comes hard, Fed motives will become clearer, and the epic earnings calendar will provide increasing volatility. I believe this is the week we will see the March rate cut get priced out considerably as the data will probably remain on the fiery side and the Fed will make their intentions clearer. That being said, I have often guessed the motives of the Fed wrong, as they like to supply the market bulls with as much ammo as they can give out. This week I feel faced with the continued strength in the data and economy, they will probably try to push the rate cuts out to the May timeframe. While I believe they want to keep the market expectations roughly in line. This I believe gives the Fed more optionality and time to figure out their next move.
Looking at the economic calendar, we have so many data points to go on. It’s hard to focus on anyone in particular outside the Nonfarm on Friday. I have a hard time believing we won’t see another employment number around 200k. Also, the average hourly earnings number is a major focus of the market as this has been hotter than the Fed would like ideally. Outside that, the ADP employment, Jolts number and Initial claims will give another read on the labor market prior to Friday. Then the PMIs on Thursday could also catch the market off guard with manufacturing strength coming in higher than what’s expected. Just my thoughts.
Well, that’s it. Let’s have a great week and remember to take a deep breath. Take care and be good.
Eric