Home builders are soaring and Snap is under pressure

Wednesday’s optimism slept in yesterday’s session and stocks sank as traders eyed hot inflation numbers. Markets are at odds with the Fed’s narrative, having already factored in the rate hike cycle and even, perhaps, weaker economic growth as a consequence.

We’ve only just begun.  Yesterday afternoon, I sat with a group of my colleagues, and we all stared at the multitude of screens that line my office. We took turns trying to explain what was happening with the markets as they ticked lower and lower into the close. The first potential culprit was bond yields. Tech and growth stocks were taking it on the chin, which has recently been caused by longer maturity yield jumps. But wait… 10-year yields were trading lower late in the session, having started the day around 1.74%, they were down to 1.70% by 3:00, just as the tech/growth-heavy Nasdaq was also tumbling.  The next culprit was the economic releases from the morning. The Bureau of Labor Statistics released its Producer Price Index, which is a leading indicator for last Wednesday’s more closely watched CPI release. The PPI tracks costs incurred by producers…you know the people who influence consumer prices the most…also the ones who have been raising prices due to supply shortages, labor cost increases, and “you know… the supply chain.” “That must be it,” we all thought. But… no. PPI showed a +0.2% gain, lower than expected. Further, the monthly growth number was significantly lower than the revised +1.0% from November. This means that the inflation faced by producers is possibly trending downward, which could mean that the Fed would not have to be so aggressive in their hiking campaign. That thesis should be supportive to growth stocks.  Could it have been the year over year number that spooked investors? That number showed that producer prices jumped by +9.7% from December 2020 through last month. On the one hand, the spike is the largest annual change in… the history of the metric. On the other hand, inflation had not yet started ticking up in earnest in 2020, so just by basic arithmetic alone, if prices stay constant over the next few months, we will witness the annual number quickly retreat. The print was also lower than expected. So, what gives? While these facts don’t exonerate the PPI, they certainly lessen the economic number’s possible culpability. I looked through all my favorite sources for some sort of commentary and came up with very little. The next closest explanation is that 10-year Treasury yields, which were lower, typically bounced higher after a drop of yesterday’s magnitude, so equity traders might have been anticipating that spike by selling growth stocks. That sounds a little too weak to me, wouldn’t you agree? Checking the numbers this morning, I note that 10-year note yields have indeed jumped by + 4 basis points over night while Nasdaq futures are… mostly unchanged. So much for that theory. One thing I can tell you is that all these numbers on my screen at this early hour are likely to continue gyrating and changing through the open a few hours from now. In fact, they are likely to continue to behave like this until we get more clarity from the Fed. The markets have factored in hikes starting in March and they have even digested the potential for a balance sheet runoff… for the most part. Some days traders believe that the Fed will not act so aggressively, and markets tick up while on other days traders focus on the Fed’s optionality which, in this case, means that they may even hike more than 3 times to tackle inflation. On those days markets give up the prior day’s gains. Later this month the Fed will hold an FOMC meeting, and we will perhaps, get some more data points. Earnings season officially starts today and soon earnings releases will overtake Fed speculation as the top story… but don’t kid yourself, those suspects mentioned above will continue to ply the shadows of the market and will surely resurface in the days and months ahead.

MOVERS ‘N SHAKERS

Snap Inc (SNAP) shares fell by -10.18% yesterday after Cowen downgraded the stock from OUTPERFORM to MARKET PERFORM, the equivalent of a HOLD recommendation. The firm also lowered its target from $75 to $45. The stock is down by -21.72% in the past year. Potential average analyst target upside: +83.2%.

KB Home (KBH) rose by +16.52% yesterday after it announced earnings the prior day that beat estimates by +8.1%. The company also provided strong forward guidance. In the past month, 76% of analysts have changed their price targets, 9 up, 1 down, and 3 unchanged. Dividend yield: 1.22%.  Potential average analyst target upside: +21.5%.

JPMorgan Chase & Co (JPM) shares are down by -3.25% in the pre-market after it announced earnings this morning. While JPM beat estimates on EPS and Revenue, the company slightly missed analyst targets in revenue from Equity and FICC trading. FICC stands for Fixed Income Clearing Corporation, so FICC Trading is a Wall Street term to refer to fixed income Treasury trading. Dividend yield: 2.26%. Potential average analyst target upside: +6.6%.

Wells Fargo & Co (WFC) is trading higher by +2.70% in the pre-market after it beat on both EPS and Revenues by +35.01% and +10.26%, respectively. In its announcement the bank stated that loans are on the rise and that businesses are borrowing again. Dividend yield: 1.43%. Potential average analyst target upside: +3.0%.

YESTERDAY’S MARKETS

Stocks traded lower yesterday in a broad risk-off move which was led by growth shares. The fear of the inflation fighting Fed and higher rates could simply not be ignored. The S&P500 fell by -1.42%, the Dow Jones Industrial Average slipped by -0.49%, the Nasdaq Composite Index was trounced by -2.51%, the Russell 2000 was lower by -0.76%, and the S&P500 ESG Index fell by -1.53%. Bonds were up and 10-year Treasury yields fell by -4 basis points to 1.70%. Cryptos fell by -2.90% and Bitcoin traded lower by -2.20%.

NXT UP

  • Retail Sales (Dec) may have pulled back by -0.1% after gaining by +0.3% in November.
  • University of Michigan Sentiment (Jan) is expected to have decreased slightly to 70.0 from 70.6.
  • Next week is a shortened trading week with markets closed for Martin Luther King Jr. Day on Monday. Throughout the remainder of the week, we will get lots of earnings announcements along with housing numbers, some regional Fed reports, and the Leading Economic Index.  Please check in on Tuesday for calendars and details.

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