Daily Market Notes: 2-17-2023

Supposedly the “explanation” for the market’s worst showing in four weeks was the January P.P.I. report that showed wholesale inflation is staying stickier than expected.

But that does not tell what the real story for the late collapse was, as the Dow began in typical lower fashion with a 395 point decline by 10am which was then followed by the also typical comeback from those worst levels to be lower by “only” 94 points at 2:40pm. So instead of continuing to improve into the close as has been the recent pattern, things turned abruptly to the downside and basically collapsed which ended right on the lows with a 431 downside shellacking to 33,696. It was led in this negative endeavor by selling in AMGN, BA, UNH, DIS and MSFT which has gotten weak for the past two days after some strong head fakes to the upside.

The S&P followed the same pattern with an initial 51 point selloff which then recovered to “only” a 10 point decline at 2:40pm and once again it looked like another upside spurt into the close was going to follow – NOT. And then it also collapsed at that time and ended with a large 57 point downside shellacking to finish at 4090.

The Nasdaq did the same thing as well, with an initial start of negative 174 followed by a comeback to down 46 at 2:40pm to then turn tail to the downside like the others to finish at its lows as well, negative 214 to 11,855. It was hurt finally by selling in TSLA after it has become the upside darling of huge numbers of call buyers, who fled from their positions big-time. In addition, AAPL came down after it was initially higher and this was no surprise considering that it is under some sort of government investigation.

The Russell 2000 Index of small stocks lost 18 to 1942 while the VIX came back up from the level that has held on the downside for weeks now, namely in the 18’s and jumped to 20.17. And what else is new here in this pattern?

Th real straw that broke the camel’s back, so to speak, was a statement released at that 2:40pm time period in which Fed St. Louis Governor Bullard said that he can see the central bank raising the federal funds rate by 50 basis points at the next meeting at the end of March, instead of the almost universally expected consensus of 25 basis points for two more times and then to stop. This is not going to happen based on these disappointing inflation numbers recently, but the market needed a reminder that the Fed is not going to be as friendly as most investors thought.

If this explanation is not the correct one, then why did the market wait from the 8:30am time of the release of the P.P.I. report that things on the inflation front are not as rosy as some people believe until 2:40pm to go into that nosedive? (see below for details of the report).

Stocks have been churning recently as worries about sticky inflation joust against data suggesting the economy remains more resilient than feared. The worry is that persistently high inflation will push the Federal Reserve to get even more aggressive on interest rates. Such fears have been most clear in the bond market, where yields have jumped this month as traders raise their forecasts for how high the Fed will take them. .

The yield on the two-year Note rose to 4.67% from less than 4.60% before the inflation report’s release and from less than 4.10% earlier this month. It is now near its highest level since November, when the yield reached levels last seen in 2007.

The report showed that prices at the wholesale level were 6% higher last month than a year earlier. While that was a slowdown from December’s rate, it was worse than what economists expected. Perhaps more concerning was that inflation accelerated in January on a month-to-month basis even after stripping out prices for food and energy. .

Weekly jobless claims were less than expected, which was a sign that layoffs remain low across the economy. That is good news for workers and another signal of strength for the job market, but the Fed worries it could also add upward pressure on inflation.

Other reports showed the February Philadelphia Fed Index report plunged this month, while homebuilders broke ground on fewer homes last month than economists expected.

Altogether, the reports cast some doubt on investor hopes that the Federal Reserve could manage to slow the economy just enough to stamp out inflation but not so much that it creates a severe recession. Hopes for a “soft landing” for the economy nevertheless remain firmly in the market, with the S&P 500 still up 6.5% since the start of 2023.

Earnings reports this week include: yesterday  – Dow component CSCO higher plus ROKU,TWLO, LH, Z while QS, PARA, SHOP, SAM, TOST were  lower; today  – AMAT,   DKNG, DE higher and RDFN, DASH lower.

Economic reports will be the main focus this week with: yesterday – January P.P.I. came in stronger than expected with a monthly gain of 0.7% for a year over year advance of 6% while the core rate excluding food and energy increased by 0.5% for a year over year advance of 5.4%, January housing starts fell by 4.5%, weekly jobless claims fell by 1K to 194K, February Philadelphia Fed Manufacturing Index plunged to -24.3 which was the lowest since late 2020; today –  January import prices fell by 0.2% while export prices were up by 2,3%, January L.E.I. was lower by 0.3% for the 10th decline in a row.

Donald M. Selkin

Chief Market Strategist

 

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.