Weekly Market Update (February 05, 2023)
HIGHLIGHTS
Massive jump in hiring in the US job market. Nonfarm payroll reported 517k jobs in January, far from the consensus of 188k. Unemployment dropped to 3.4%, which is the lowest in more than 50 years. Average hourly earnings dropped slightly to 4.6% YoY. The job report echoes the comments from FOMC that the labor market remains tight despite the slowdown in growth. Fed hiked another 25bps this week, which is the smallest increment since the beginning of the tightening cycle last year. Market is pricing another 35bps in the coming months.
- FOMC: Fed announced a rate hike downshifted to 25bps as expected. Powell did not confirm the hiking path will follow the Fed Dot Plot strictly. He emphasized that they need more economic indicators such as inflation data to decide the final terminal rates. The base case is a slight increase in inflation, which Fed is going to continue the rate hikes until May. If inflation keeps dropping with a weaker labor market and economic growth, Fed may pause the rate hike in March.
- Tech Earnings: Companies with big advertising exposure such as Google, Facebook and Snapchat are still suffering from the decline in advertisers' budgets. Google’s earning missed expectation, with a fall in advertising revenue. Despite the decline in advertising revenue, Meta (aka Facebook) managed to beat expectations with its cost cut and share buyback. Apple’s share price surged by 2.4% despite missing expectation. On the other hand, Amazon dropped 8% with its mixed earning result.
- Option Volume: On Thursday, the market recorded the largest options volume session in history. Market participants bet on the jump in volatility, focusing on the mega-cap tech companies. 68 million options contracts were traded in one single day.
- Credit Defaults: Last month, the defaults in the corporate credit market in the US surged to the highest since 2020. USD 5.8 billion of bonds and loans are affected by five lapses and one distressed debt exchange.
MARKETS
| Nasdaq | 12,006.95 | +3.31% |
| S&P 500 | 4,136.48 | +1.62% |
| Dow | 33,926.01 | -0.15% |
| 10-Year | 3.53% | +1bps |
| Brent | 79.94 | -7.75% |
| DXY | 102.92 | +0.98% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Goldman Sachs: The FOMC announcement was interpreted as dovish, pushing the equities up, especially for growth equities. A basket of TMT (Technology, Media and Telecommunications) stocks was up about 6%.
Morgan Stanley: The recent market rally is driven by the easing financial conditions but not the change in the economy. Dropping energy prices, weaker USD, and lower treasury yield are pouring liquidity into the market. We suggest investors be cautious of chasing market rallies only base on financial liquidity. Risks are still out there with uncertainty around Fed, inflation and Treasury issuance.
Fixed Income
Morgan Stanley: We recommend municipals and investment grade credit over high yield credit. We believe the high inflation is masking risks. If the growth deceleration gradually leads us to a recession, the current valuations of high yield leave little protection to investors.
Bank of America: Economic data is indicating an imminent recession in the coming 12 months, while credit spreads do not. High yield is offering a 7.7% (14% annualized) excess return over treasury, which is against the backdrop of the weak economy. Under the situation of the economy diverging from markets, we suggest being more defensive, with a lower weighting on corporate and higher weighting on treasury. It could deliver reasonable returns regardless of which way the gap may converge.
Economy
Goldman Sachs: Both ECB and BoE raised interest rates by 50bps. Market is forecasting ECB will hike another 50bps in March and 25bps in May. In contrast, market is expecting BoE will be more dovish, with the expectation of a 50bps hike in March and a pause in May.
J.P. Morgan: Some states in the US will increase the minimum wage this year. This will bring contagious effects on workers who are earning above minimum wage as well. Wage growth is an important gauge of inflation, which could affect the Fed’s policy decision.