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By: Jose Torres Interactive Brokers’ Senior Economist

While the start of February seemed to extend the positive sentiment that has been supported by a dovish tone from Federal Reserve (Fed) Chairman Jerome Powell, Thursday’s earnings results and Friday’s economic data suggest otherwise. Powell has warned that wage pressures are a significant inflation concern and data shows that wage pressures are still strong. Markets are getting hit with a traditional one-two, jab-cross punch combination as incoming data point to accelerating inflation and deteriorating earnings.

Markets are reacting strongly to the implication of a more hawkish Fed as corporate earnings weaken. The S&P 500 was down 1.3% in early trading but has recovered about half of that loss an hour and change into trading. Bond yields are propelling much higher, with the 2-year Treasury up a whopping 18 basis points (bps) and the 10-year up 13 bps on the back of expectations that the Fed may need to raise rates higher than anticipated and for a longer period of time than previously presumed. The dollar index is trading at 102.50, up 0.8% as it escapes strong support at 100. Crude oil is recovering some recent losses, up 1.8% to $77.25 per barrel.

Payroll job gains eclipsed expectations by a long shot, coming in at a whopping 517,000 jobs, much higher than the 260,000 from last month and the 185,000 expected. The unemployment rate fell to 3.4%, its lowest level since 1969, illustrating that the labor market is exceptionally tight. The scarcity of workers continues to generate an environment of elevated wage pressures, with wages up 0.3% month-over-month (m/m) or 3.6% on an annualized basis, which is inconsistent with the Fed’s 2% inflation target. To make matters worse in terms of heat, the ISM services index reported a 55.2% reading for January, shattering expectations of 50.4% and returning to growth after a mere one month in contraction with a 49.2% reading in December. 

On the earnings front, Apple, Amazon, and Alphabet yesterday provided mixed earnings and revenue results for the fourth quarter, but one common theme among the tech giants was growing concern about consumer weakness and challenging economic conditions. Apple’s fourth-quarter revenue declined 5% year-over-year (y/y), its first quarterly decline since 2019. Its profits fell even more, dropping 13% y/y. Its results were hurt by a strong U.S. dollar, production issues in China and a weakening economy. Apple Chief Financial Officer Luca Maestri said the company expects revenues in the current quarter will experience a similar decline, driven by weakening sales of its Mac, iPad, and iPhone products. On a bright note: it expects sales of its services, such as streaming music and Apple TV, to increase.

Unlike Apple, Amazon grew its fourth-quarter revenue, but at only 9%, an anemic rate for the company as inflation put a dampener on consumer spending. Amazon expects its first-quarter revenue to grow between 4% and 8% and the company is bracing for an economic slowdown. It recently announced that it is laying off 18,000 jobs, which followed other layoffs in November.

Alphabet also contributed to concerns about challenging business conditions when it reported flat revenue growth for the fourth quarter with advertisers curtailing spending. Alphabet’s Google division saw advertising revenues dropped 3.5% y/y. Like many other tech companies, Alphabet is cutting expenses, including reducing its real estate footprint and laying off 12,000 employees.

The disappointing reports come just after Meta announced better-than-expected fourth-quarter results that drove its stock price up 23% yesterday. Even though the company’s revenues declined and its profits tanked 55% in the fourth quarter, Meta’s results were better than expected by analysts.

Perhaps one encouraging factor that differentiates Meta from other big tech companies is the collective clout of scantily clad fitness gurus, cats appearing to fly across living rooms and home improvement experts demonstrating seemingly miraculous labor-saving tips can play in generating attention. Those types of entertainers and a wide variety of other attention grabbers on Meta’s Reels videos from Instagram generated twice the level of engagement in 2022 than in 2021. 

Perhaps one encouraging factor that differentiates Meta from other big tech companies is the collective clout of scantily clad fitness gurus, cats appearing to fly across living rooms and home improvement experts demonstrating seemingly miraculous labor-saving tips can play in generating attention. Those types of entertainers and a wide variety of other attention grabbers on Meta’s Reels videos from Instagram generated twice the level of engagement in 2022 than in 2021. Facebook is now working on monetizing the engagement.

On balance, Friday’s macroeconomic environment reflects sticky inflation concentrated in the service areas of the economy and contracting earnings as the consumer slows down. Friday’s reports are likely to keep the Fed on the market’s back via valuations, while the stresses of higher inflation and elevated interest rates continue to weigh on corporate earnings and revenues. Dovish Powell may have sowed the seeds for a February fiesta, but the latest reports may have established the foundation for a February flush. Happy Jobs Day!

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