The market yesterday did not get the consumer inflation news that it had hoped to get. That connection was obvious in the selling that ensued in both the Treasury market and the stock market.
The Dow Jones Industrial Average had its worst day in nearly a year and the Russell 2000 suffered its biggest decline since June 2022. The 2-yr note yield, which is more sensitive to changes in the fed funds rate, jumped 20 basis points to 4.67% as the January CPI data was viewed as a basis for the Fed to push out the timing of the first rate cut.
In fact, the fed funds futures market, which had been eyeing the May FOMC meeting for the first rate cut, now thinks it will happen at the June FOMC meeting. By the way, when the year began, the market had the first rate cut set for the March FOMC meeting.
Market participants have been forced by some stronger-than-expected economic data to dial back their rate-cut expectations, but that doesn’t mean they have extinguished their rate-cut optimism. The fed funds futures market is still pricing in the probability of four rate cuts by the end of the year, but let’s just say there is a healthier level of respect in the pricing for the possibility that the Fed may not cut rates four times.
That view isn’t going to change much either following the annual revisions to the PPI data for the last five years released this morning. Granted December PPI was revised down to -0.2% month-over-month from the originally reported 0.1% decline, but with the hotter-than-expected January CPI data fresh on the market’s mind, it will remain pre-occupied with the thought of what’s ahead for the PPI data (and CPI data) and not what’s behind.
Following a rough outing yesterday, the 2-yr note yield is down four basis points today to 4.63% and the 10-yr note yield is is down one basis point to 4.31%. There is no other economic data of note today, but tomorrow is chock full of releases that include weekly initial claims, January retail sales, January import and export prices, January industrial production, December business inventories, and February readings for the NY Empire State Manufacturing Index, Philadelphia Fed Index, and NAHB Housing Market Index.
Currently, the S&P 500 futures are up 22 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 98 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 100 points and are trading 0.3% above fair value.
There is a rebound effort in the air, but truth be told, the rebound effort was in the air late yesterday when the S&P 500 rallied from roughly 4,920 to 4,950 in the final thirty minutes of trading. That buy-the-dip bid has carried over this morning, likely on a recall basis that it has typically paid to buy the dip.
It’s a version of “the trend is your friend… until it isn’t,” which is to say market participants look ready to test the idea at least and will watch how the price action goes to determine if there is some staying power today in a buy-the-dip trade.
There is some intriguing price action below the surface, most of it related to earnings news. Lyft (LYFT), for instance, is indicated 22% higher after delivering better-than-expected earnings and guidance, although there was a big gaffe in the guidance provided in the company’s press release. Specifically, that release said the company expected approximately 500 basis points of adjusted EBITDA margin expansion in FY24 when it should have said approximately 50 basis points.
On the flip side, Airbnb (ABNB) is down 4% in the wake of its Q4 report and outlook.
The mega-cap stocks, meanwhile, are all on the rebound themselves, which is providing an influential support structure for the equity futures.
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Originally Posted February 14, 2024 – Buy-the-dip bid is in the air
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