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Fading Rate Cut Optimism May Lead To Pullback On Wall Street
US Market
The major U.S. index futures are currently pointing to a modestly lower open on Monday, with stocks likely to give back ground following the rally seen to close out the previous week.
Traders may look to cash in on the rally seen over the two previous sessions amid fading optimism about the likelihood the Federal Reserve will cut interest rates in March.
Fed Chair Jerome Powell reiterated the central bank is unlikely to cut interest rates next month during an interview with “60 Minutes” on Sunday.
Powell suggested the strength of the U.S. economy even amidst elevated rates will allow the Fed to proceed carefully.
“With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully,” Powell said.
“We want to see more evidence that inflation is moving sustainably down to 2 percent,” He added. “Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
Following last week’s Fed meeting and Powell’s subsequent comments, the chances of a March rate cut have fallen to just 15.5 percent, according to CME Group’s FedWatch Tool
Stocks moved sharply higher over the course of the trading day on Friday, extending the recovery rally seen during trading Thursday’s session. The major averages more than offset the steep drop seen on Wednesday, with the Dow and the S&P 500 reaching new record closing highs.
The major averages pulled back off their best levels going into the close but remained in positive territory. The Nasdaq surged 267.31 points or 1.7 percent to 15,628.95, the S&P 500 jumped 52.42 points or 1.1 percent to 4,958.61 and the S&P 500 climbed 134.58 points or 0.4 percent to 38,654.42.
For the week, the Nasdaq shot up by 1.1 percent, while the Dow and the S&P 500 both jumped by 1.4 percent.
The extended rally on Wall Street came amid a positive reaction to earnings news from Facebook parent Meta Platforms (META) and online retail giant Amazon (AMZN).
Shares of Meta are soared by 20.3 percent after the company reported better than expected fourth quarter results, announced its first-ever quarterly dividend and authorized a $50 billion share buyback.
Amazon also spiked by 7.9 percent after reporting fourth quarter results that exceeded analyst estimates on both the top and bottom lines.
Traders were also reacting to a closely watched report from the Labor Department showing much stronger than expected job growth in the month of January.
The Labor Department said non-farm payroll employment spiked by 353,000 jobs in January compared to economist estimates for an increase of about 180,000 jobs.
The report also showed significantly stronger than previously reported job growth in December, with employment surging by 333,000 jobs during the month compared to the jump of 216,000 jobs that had been reported.
The Labor Department also said the unemployment rate in January came in unchanged from the previous month at 3.7 percent. Economists had expected the unemployment rate to inch up to 3.8 percent.
While the data further reduces the chances of an interest cut in March, Larry Tentarelli, Chief Technical Strategist, Blue Chip Daily Trend Report, said he views a strong jobs market as a “net positive for both the economy and the stock market.”
Retail stocks saw substantial strength on the day, with the strong jobs data generating optimism about the outlook for consumer spending.
Reflecting the strength in the retail sector, the Dow Jones U.S. Retail Index surged by 3.1 percent to its best closing level in two years.
Considerable strength was also visible among brokerage stocks, as reflected by the 1.9 percent gain posted by the NYSE Arca Broker/Dealer Index.
Software, semiconductor and airline stocks have also showed strong moves to the upside over the course of the session.
On the other hand, gold stocks pulled back sharply after rallying on Thursday, resulting in a 3.4 percent nosedive by the NYSE Arca Gold Bugs Index. The sell-off by gold stocks came amid a notable decrease by the price of the precious metal.
Oil service stocks also came under pressure amid a steep drop by the price of crude oil, moving significantly lower along with interest rate-sensitive commercial real estate, utilities and telecom stocks.
U.S. Economic Reports
The Institute for Supply Management is scheduled to release its report on service sector activity in the month of January at 10 am ET.
The ISM’s services PMI is expected to rise to 52.0 in January from 50.6 in December, with a reading above 50 indicating growth in the sector.
At 2 pm ET, Atlanta Federal Reserve President Raphael Bostic is due to give welcome remarks before a virtual “Uneven Outcomes in the Labor Market” conference.
Stocks in Focus
Shares of Estee Lauder (EL) are moving sharply higher in pre-market trading after the cosmetics company reported fiscal second quarter results that exceeded analyst estimates on both the top and bottom lines.
Contract drug manufacturer Catalent (CTLT) also seeing substantial pre-market strength after the company agreed to be acquired by Novo Holdings for $63.50 per share in cash.
Meanwhile, shares of Air Products and Chemicals (APD) are likely to come under pressure after the industrial gas supplier reported disappointing fiscal first quarter.
Europe
European stocks are subdued on Monday as hopes of early U.S. rate cuts faded and the Eurozone’s services PMI came in at 48.4 in January, down slightly from December’s 48.8.
ONS figures suggested that Britain’s unemployment rate was much lower than initial estimates at the end of last year.
Meanwhile, the Eurozone Sentix Investor Confidence Index improved further from -15.8 in January to -12.9 in February.
While the U.K.’s FTSE 100 Index is up by 0.4 percent, the German DAX Index is just below the unchanged line and the French CAC 40 Index is down by 0.1 percent.
UniCredit has surged after the Italian banking group announced plans to boost shareholder returns and upgraded its 2024 profit outlook.
Porvair, a British filtration and environmental technology company has also moved higher after reporting improved FY23 earnings and lifting dividend.
CMC Markets has also soared after an announcement that the online trading platform is cutting 200 jobs to save on costs.
On the other hand, Vodafone has moved to the downside despite the telecommunications company surpassing sales expectations in the third fiscal quarter.
Lloyds Bank and Santander have also fallen after the Financial Times reported that Iran evaded sanctions and was able to covertly move money around the world using accounts at two of the U.K.’s biggest banks.
Societe Generale has edged down slightly. The French lender announced that the implementation of organizational changes would result in approximately 900 job cuts at its head office without forced departures.
Supermarket group Casino is also moving lower, giving up early gains after confirming that it has received expressions of interest for its hypermarket and supermarket stores.
Delivery Hero shares have also slumped despite the German online service provider for food delivering on its full-year targets.
Asia
Asian stocks ended broadly lower on Monday as robust U.S. jobs data coupled with relatively hawkish comments from Federal Reserve Chair Jerome Powell in an interview broadcast Sunday night led investors to scale back bets on interest rate cuts this year.
The dollar and bond yields rose, weighing on investors’ risk appetite. Gold was under selling pressure for a second straight session, while oil prices climbed amid indications that the United States plans further military action in the Middle East.
Chinese markets led losses, with the benchmark Shanghai Composite Index ending 1.0 percent lower at 2,702.18 after a volatile session as a cut to the reserve ratio requirements for banks came into effect and a private survey showed activity in the Chinese services sector fell slightly at the start of 2024.
With many big shareholders of big companies facing margin calls, China’s securities regulator said earlier today that it would closely monitor and take forceful measures to prevent risks from pledged shares.
Hong Kong’s Hang Seng Index finished down 0.2 percent at 15,510.01, recouping some initial losses as former U.S. President Donald Trump said he would impose tariffs on China again if elected to power in the scheduled November presidential polls.
Japanese markets advanced after data showed December service activity expanded at a faster pace than the previous month. The Nikkei 225 Index rose 0.5 percent to 36,354.16, while the broader Topix Index settled 0.7 percent higher at 2,556.71.
Automakers and other export-related stocks topped the gainers list, tracking a weaker yen. Department store operator Isetan Mitsukoshi Holdings surged 6.6 percent and electronics firm Panasonic Holdings jumped 4.6 percent after reporting better-than-expected earnings.
South Korea’s Kospi dropped 0.9 percent to 2,591.31 in cautious trade as the Lunar New Year approaches. Samsung Electronics fell 1.2 percent as its Chairman Lee Jae-yong was acquitted by a court of financial crimes linked to a controversial 2015 merger.
Australian markets fell sharply ahead of an interest rate decision from the Reserve Bank of Australia, due Tuesday.
The benchmark S&P ASX 200 Index slumped 1.0 percent to 7,625.90, dragged down by resources stocks. The broader All Ordinaries Index closed 1.0 percent lower at 7,855.40.
Silver Lake Resources plummeted 11.5 percent, while Red 5 added 3 percent after the gold miners agreed to merge via a scheme of arrangement. Evolution Mining and Northern Star lost 4.6 percent and 3.8 percent, respectively.
Commodities
Crude oil futures are slipping $0.24 to $72.04 a barrel after tumbling $1.54 to 472.28 a barrel last Friday. Meanwhile, after slumping $17.40 to $2,053.70 an ounce in the previous session, gold futures are falling $17.50 to $2,036.20 an ounce.
On the currency front, the U.S. dollar is trading at 148.54 yen versus the 148.38 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is trading at $1.0745 compared to last Friday’s $1.0788.
