Good morning contrarians!
Stock futures are lower a day after posting losses. Stocks reversed course yesterday after Fed chair Jerome Powell said the central bank was likely to raise interest rates by 0.5% at its meeting next month. Tech once again saw the worst of it, with the Nasdaq selling off 2% whilst the other U.S. indexes were down a little less.
State of Play
Today as of 0630, major U.S. indexes are pointing to a drop of about 0.4% at the open. Among individual stocks, Gap (GPS) is down 14% after announcing that the CEO of its Old Navy division is leaving.
Bonds are selling off again, with the yield on the 2-year up 8 basis points to 2.77% whilst the 10-year yield is up 2 bps to 2.94%. That’s right at a multi-year high for the 2-year as the yield curve moves back towards inverting.
Commodities are selling off for the most part. WTI crude is down 2% to trade around $102/barrel. Palladium and copper are down 2% and 1%, respectively. Gold and silver are dropping, with the latter down 2%. Cryptos are selling off with bitcoin down 4% to $40,400.
Earnings
American Express (AXP), Kimberly Clark (KMB), Schlumberger (SLB), and Verizon (VZ) all report before the open at 0930.
Economic Data Releases
Markit produces its Purchasing Manager Indexes for March at 0945. There are three of these that economists survey: Manufacturing PMI (consensus 58.2/previous 58.8), Services PMI (58/58), and Composite PMI (57/57.7).
These have all been ascendant the last couple of months. Anything above 50 signals expansion whilst anything below 50 signals recession. The last reading in recessionary territory for the composite PMI was July 2020.
The Bottom Line
Earnings have been solid and there really isn’t anything in the economic data to signal an impending recession. Stocks are selling off because of expectations the Fed will hike interest rates more than the 0.25% increment that had been anticipated.
It’s been a full generation since the Fed last raised interest rates by this much: May 2000, to be precise. That turned out to be the final nail in the dot-com coffin. It followed a year of pretty aggressive interest rate hikes by the Greenspan Fed, which eventually triggered a recession.
Today’s tech stocks are vastly different from their dot-com forebears, few of which even had any revenues. But the price action has been the same — actually worse for this generation’s tech darlings, which are already off 50% or more from the highs. Markets are forward-looking mechanisms. Tech has been telling us for some time that the best is over in this economic expansion. Are they right? Maybe the more relevant question is why crypto hasn’t sold off more along with tech? Could that be the next shoe to drop?
Earnings, PMIs: Daily Contrarian, April 22