Good morning contrarians!
Stock futures are dropping a day after a big rally on Wall Street. The Fed hiked interest rates by 50 basis points as expected but effectively said that a 75bps rate hike was off the table. A major relief rally ensued. The Nasdaq was the major winner, gaining more than 3% on the day, with S&P 500 and Dow Industrials close behind.
State of Play
As of 0540 this morning, stock futures are retreating again, with the Nasdaq off 0.9%. S&P 500 futures are down 0.7% and Dow Industrials down a little less. Among individual stocks, Booking (BKNG) is a major winner, up 10% in the pre-market. Etsy (ETSY) and eBay (EBAY) are among the losers, down 11% and 7%, respectively.
Industrial commodities are flat, with crude oil changing hands around $108/barrel but precious metals are rising: gold up 1.4% and silver almost 3%.
Bonds are dropping again after seeing their own relief rally yesterday. The two-year yield is up 6bps to 2.68% with the 10-year up 4bps to 2.95%. Cryptos aren’t doing much with bitcoin up 1.5% to trade around $39,500.
Economic Data Releases
The Bank of England (which despite its name also governs currencies in Scotland, Wales, and Northern Ireland) is scheduled for its interest rate decision at 0700. The consensus estimate is for the BoE to raise its benchmark rate to 1% from 0.75%.
Seeing how it’s Thursday, we also get initial jobless claims today. From all indications the labor market in the U.S. is extremely healthy and economists expect 182,000 new claims, roughly in line with last week’s 180,000. Initial jobless claims have been in this neighborhood for weeks. As recently as a year ago they were more than twice that.
Earnings
Several of these on tap today. Dickinson (BDX), ConocoPhillips (COP), Kellogg (K), Papa John’s (PZZA), Penn National Gaming (PENN), Wayfair (W), are all due before the market open at 0930. Later we’ll hear from Monster Beverage (MNST), World Wrestling Entertainment (WWE), and Zillow (Z).
The Bottom Line©
The Fed saying they will not tighten by more than 50bps removes one major albatross from investors’ necks. The velocity of yesterday’s relief rally does appear to indicate that the worst of bear market fears are over — at least for now.
Of course, understood in this calculation is faith that the Fed can engineer a ‘soft landing’ and thread the needle between inflation and a slowdown in the economy. Jay Powell’s comments yesterday did allow for some room for more aggressive rate hikes should inflation accelerate. For now the market doesn’t appear to be giving this much credence.
A slowing economy appears to be even less of a concern now. Indeed employment is very healthy and other macro indicators are holding steady. That situation can reverse very quickly of course as most of these data are trailing indicators. But you know what they say: Don’t fight the tape. And no matter what you do: Don’t fight the Fed.
Fed Relief Rally: Daily Contrarian, May 5