By: Jose Torres Interactive Brokers’ Senior Economist

This year’s ferocious rally faces a crucial test this afternoon when Federal Reserve (Fed) Chairman Jerome Powell emerges at the podium. Since the previous Fed meeting in December, we’ve seen mixed messages from inflation, the Fed’s great foe. Labor markets remain strong, overall inflation is heating up despite what the headlines say, while financial conditions continue easing, providing Powell with cover to be unquestionably hawkish. What makes Fed meetings exciting, however, is that there’s always some kind of surprise; are we going to get dovish “neutral” Powell like in July or a hawkish Jackson Hole Powell like last August. Will he stay on script or go off script? Time will tell.

On the inflationary front, goods have experienced sharp disinflation, while commodities and services prices, however, have accelerated. Together they make up a greater share of the economy than goods, suggesting the market is too optimistic about inflation as investors disagree with the Fed’s interest rate path. Adding fuel to the fire, the labor market remains hot, fundamentally supporting services price inflation. The market believes in a year-end 2023 rate of roughly 4.5%, while Powell and the Fed are anticipating 5.13%. How firm will Powell be when asked about cutting rates later this year?

Look for Powell to talk the talk and walk the walk as the labor market fails to soften notably even as the Fed pursues significant monetary policy restraint. 

Speaking of a blazing hot labor market and consistent with accelerating inflation, this morning’s job openings data was a scorcher, with December job openings rising significantly to 11 million, obliterating expectations of a drop to 10.3 million from 10.4 million. ADP employment was much more muted, with January job gains of 106,000, worse than the 178,000 expected and the 253,000 from December. Look for Powell to talk the talk and walk the walk as the labor market fails to soften notably even as the Fed pursues significant monetary policy restraint.

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ISM manufacturing data released today came in at 47.4, weaker than the forecast for 48. While new orders and prices paid remained deep in contraction territory, employment remained in expansionary terrain against the backdrop of persistent labor shortages and weak labor force participation. ADP’s jobs report also points to the manufacturing sector continuing to add jobs, despite being in contraction territory while goods prices continue falling due to depressed demand. Construction spending this morning also reflected more weakness in the ailing real estate sector, contracting 0.4%, much worse than expectations for an unchanged reading and from November’s 0.5% gain.

The morning kicked off with investors assessing a handful of quarterly earnings reports that included pessimistic forecasts for business and consumer spending. After growing its sales 44% in 2022, AMD reported yesterday that it expects its current quarter sales to decline 10%, a result of pc providers having high inventory levels and declining consumer demand. Its 2022 sales increase was driven not by pc sales, which declined considerably, but by technology for large data centers. AMD joins a handful of other tech firms such as Microsoft that have forecasted weakening demand for 2023. Social media platform company Snap also has a negative outlook. Its fourth quarter revenue of $1.30 billion fell a whisker short of analysts’ expectations of $1.31 billion, making it the third consecutive quarter of missed estimates. Snap didn’t provide guidance, but its internal investor newsletter says the company is modeling a 2% to 10% decline in revenues this year as advertisers reign in spending. This afternoon and tomorrow’s earnings from Big Tech giants, Apple, Amazon, Alphabet and Meta will also provide major insights on the health of the technology sector.

Weakness in consumer and business spending isn’t limited to high tech. UPS yesterday reported fourth quarter revenue of $27.03 billion, a 2.7% year-over-year decline and substantially below the Refinitiv consensus estimate of $28.09. UPS is anticipating “a bumpy 2023” with revenues ranging from $97 billion to $99.4, a decline from 2022 revenues of $100.3 billion and below the consensus estimate of $99.98 billion. Despite uninspiring earnings results and weak guidance, markets are muted this morning as they wait for Chair Powell to address market participants around the globe. The S&P 500 and the dollar are down .2%, Treasuries are roughly unchanged across the board and crude oil is down 0.6%.

With Powell set to take the mound at 2:00 pm, bears hope Chair Powell is currently throwing heat from the bullpen, warming his arm for the big showing. Bulls, on the other hand, hope that he’s casually enjoying delicious sunflower seeds from the dugout. Will today’s press conference lead to a February fiesta or a February flush? Get your popcorn ready. Happy Fed Day!

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