February 8, 2023

Stocks Run-Up to Powell’s Speech: Markets Rape

(Bloomberg) — Stocks pared most of their losses as traders were reluctant to make big bets ahead of Jerome Powell’s speech on Wednesday.

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Gains in energy and financial firms led to a decline in big tech. Amazon.com Inc., which sells investment-grade debt, saw its shares slide. Trading volume was lower than last month’s average. A benchmark measuring the global yield curve has inverted for the first time in at least two decades — signaling a slowdown.

Powell is expected to confirm expectations that the Fed will hike next month while reminding Americans that its fight against inflation will continue into 2023. Some policymakers have insisted they will raise borrowing costs further this week. Rates are going slightly higher than he predicted a few months ago.

“The Fed has raised enough — quickly enough — to make a recession a fundamental scenario in our book,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “Volatility and risk premia may be elevated until the central bank fights inflation in a recession.”

Goodwin also noted that equity returns typically don’t begin to decline until a recession begins. That means the stock market’s fundamentals “could deteriorate further,” he added.

Goldman Sachs Group Inc. According to David Costin, corporate America’s bloated margins will begin to shrink in 2023. The firm’s strategists, along with those at other banks including Morgan Stanley, see a slowdown in earnings growth next year.

Alicia Levine at BNY Mellon Wealth Management says that even in a shallow recession, S&P 500 companies could still see a 20% decline in earnings.

“Ultimately there’s still risk here,” Levine told Bloomberg Television. “It’s a transition year. Next year, ‘OK, now your prices are higher, what does that mean for the real economy?’ I don’t think we’re really pricing it in.”

Read: Barclays delays call for US recession, Fed cuts amid strong data

Read: BofA Says US Yield Curve Will Return to Normal at Fed Pivot

The central bank’s actions, stubborn inflation, the war in Ukraine and the outlook for corporate earnings “make for a tough story for the stock market over the next 12 months,” said Kevin Phillips, partner at Bel Air Investment Advisors.

Last week, institutional clients and hedge funds poured money into stocks, while retail clients sold off for a fifth straight week — and the sell-off is expected to continue into next month, according to Bank of America Corp. strategists led by Jill Carey Hall.

The recent run-up coupled with the lack of “surrender-like exits” has investors believing that the market has already bottomed out. But BofA strategists say they see more downside risk ahead of the first half of 2023.

Many widely followed DeMark indicators attempt to anticipate changes in momentum and long-term trends, suggesting the Cboe Volatility Index may be poised for a reversal.

While the appearance of the “Countdown 13” pattern has led to reversals in the past, history has shown that clusters of such signals occur on more recent lows. The so-called fear gauge fell last week to its lowest level since August as the S&P 500 advanced.

Meanwhile, former greenback bulls, including JP Morgan Asset Management and Morgan Stanley, say the era of dollar strength is coming to an end as cooling prices ease markets’ challenges to further Fed tightening. This could spell buying opportunities for currencies from Europe, Japan and emerging markets.

Highlights of this week:

  • EIA crude oil inventories report, Wednesday

  • China PMI, Wednesday

  • Federal Reserve Chairman Jerome Powell’s speech, Wednesday

  • The Fed releases its Beige Book on Wednesday

  • US Gross Inventories, GDP, Wednesday

  • S&P Global PMIs, Thursday

  • US Construction Spending, Consumer Income, Initial Jobless Claims, ISM Manufacturing, Thursday

  • BOJ’s Haruhiko Kuroda speaks on Thursday

  • US unemployment, non-farm payrolls, Friday

  • ECB’s Christine Lagarde speaks on Friday

Some key movements in the markets:

Shares

  • The S&P 500 was down 0.2% as of 4 p.m. New York time

  • The Nasdaq 100 fell 0.7%

  • The Dow Jones Industrial Average was little changed

  • The MSCI World Index was unchanged

Coins

  • The Bloomberg Dollar Spot Index fell 0.1%

  • The euro fell 0.1% to $1.0326

  • The British pound fell 0.1% to $1.1947

  • The Japanese yen rose 0.1% to 138.79 per dollar

Cryptocurrencies

  • Bitcoin rose 1.8% to $16,492.11

  • Ether rose 4.3% to $1,222.22

Bonds

  • The yield on 10-year Treasuries rose seven basis points to 3.76%

  • Germany’s 10-year yield fell seven basis points to 1.92%

  • Britain’s 10-year yield fell three basis points to 3.10%.

materials

  • West Texas Intermediate crude was up 1.7% at $78.54 a barrel.

  • Gold futures rose 0.4% to $1,762.60 an ounce

This story was produced with the help of Bloomberg Automation.

–With assistance from Peyton Forte, Vildana Hajric and Garfield Reynolds.

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