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By: Jose Torres Interactive Brokers’ Senior Economist

Markets are soaring today in reaction to Federal Reserve Chairman Jerome Powell explaining yesterday that the central bank is making progress in battling inflation, despite his remarks of ongoing rate increases being appropriate and history cautioning against prematurely declaring victory on inflation. Yesterday’s encouraging earnings call from META is also supporting optimism that earnings releases later today from Alphabet, Amazon.com AMZN, and Apple AAPL will be stronger than anticipated.

The S&P 500 is up roughly 9% since the start of 2023, an impressive run as the bulls orchestrate a dribble in, pass outside, three pointer offense. The bears, meanwhile, have sat back into a zone defense after their full court press proved defective so far despite economic data pointing to recession, lackluster earnings, pricey valuations, stretched technicals and a Fed that’s continuing to hike.

The S&P 500 is adding to yesterday’s gains prior to this afternoon’s monumental earnings releases from Big Tech, with the benchmark up 1.3%. Bonds are also continuing their rally, down roughly 2-4 basis points across the curve while the dollar is catching a bid near its $100 support level; it’s up 0.5%. Crude oil is down 0.1%. The S&P 500 is up roughly 9% since the start of 2023, an impressive run as the bulls orchestrate a dribble in, pass outside, three pointer offense. The bears, meanwhile, have sat back into a zone defense after their full court press proved defective so far despite economic data pointing to a recession, lackluster earnings, pricey valuations, stretched technicals and a Fed that’s continuing to hike.

Powell relieved investors’ fears that stubborn services inflation and wage pressures would cause the Fed to become more hawkish when he casually began to answer questions during the press conference Q&A. The market was selling off when the press release was released at 2:00 pm and also during Powell’s scripted remarks at 2:30 pm. Powell then went off script during the Q&A, offering the market a sweet tone, as he countlessly patted himself on the back for initiating the beginning of the disinflationary process. Perhaps more significant, he didn’t make much of the recent easing of financial conditions, causing my jaw to drop and the market to aggressively reverse from losses to gains during yesterday’s off script Q&A. He also implied that the Fed’s outlook for rate hikes hasn’t changed since the central banks’ December meeting. At that time, the Summary of Economic Projection (SEP) anticipated a terminal rate of 5.13%. Yesterday’s 25 basis point increase has brought the current target rate to 4.5% to 4.75%.

On one hand, investor optimism may have been supported by his comments that the Fed has made progress with inflation, especially with goods prices, while other investors’ may believe that the Fed will turn more dovish in coming months than currently expected. 

Investors are also reacting favorably to Meta results. During a broadly disappointing quarter for tech companies and social media platforms, Meta yesterday said its fourth-quarter revenue declined 4% year-over-year (y/y), totaling $32.17 billion, which exceeded the Refinitiv consensus estimate of $31.53 billion. It was the third consecutive quarter of year-over-year revenue declines for the company. While many companies expect to see revenues decline during the current quarter, Meta guided to revenues ranging between $26 billion and $28.5 billion. If it hits the higher end of that range, it would end the company’s recent trend of quarterly y/y declines. Honeywell, meanwhile, has joined the many companies that anticipate weakening revenues in 2023. It expects sales to grow between 2% and 5% compared to the 6% growth rate in 2022. The logistics industry is also feeling the punch of a weakening economy. Since this past June, Federal Express has announced laying off 12,000 employees due to slowing shipping volumes.

Despite a long list of large-scale layoffs and aggressive Fed tightening, the labor market continues to sizzle. Initial jobless claims last week fell to a seasonally adjusted 183,000, a decline of 3,000 from the prior week and the lowest level since last April. A low labor participation rate is contributing to the labor crunch as some employers “onshore” or “near shore” production due to supply chain issues. Additionally, various types of skilled workers are hard to find as illustrated by General Electric. It’s laying off 2,000 employees from its onshore wind energy business but its need for machinists and welders is strong enough that Chief Executive Larry Culp recently mentioned the issue in the company’s earnings call. 

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