Seven Prevailing Market Topics: Updates Week of Jan 16

In this post I’ll cover the latest news and data points around the seven prevailing topics driving my market outlook.

This quote from Bloomberg last week succinctly captured the sentiments bulls and bears will be grappling with in the weeks ahead.

Will bulls overzealously banking on rate cuts for both stock and bond gains be proven wrong, and therefore need to reverse course? Will bears prove too extreme in expecting geopolitical risk or a softer labor market to significantly crimp growth, and therefore miss out on a major rally? The process of how these gaps get resolved will be where the trading opportunities are.

Bloomberg

Inflation

The Consumer Price Index (CPI) on an annualized basis came in hotter than expected (released Jan 11).

CPI: An increase of 0.3% from November vs. an expected 0.2%; an increase of 3.4% from a year ago vs. an expected 3.2%

Wall Street Journal

Core CPI, which strips out volatile food and energy prices: An increase of 0.3% from November, in line with expectations; an increase of 3.9% from a year ago, vs. an expected 3.8%

Wall Street Journal

The numbers are a sign that inflationary pressures remained firm headed into 2024. Housing costs contributed to more than half of the increase last month, according to the Labor Department, while motor vehicle insurance and medical care costs rose too—indicating that inflationary pressures remain steady for services.

Wall Street Journal

Labor Market

2024 kicked off with more layoffs from the tech sector.

Google is laying off hundreds of staff that work on its digital assistant, hardware, and engineering teams as it continues to cut costs. The move comes as Google, part of Alphabet, has seen its core search business face more pressure from rival AI offerings from Microsoft and OpenAI. It’s the latest in a slew of tech companies to announce layoffs already this year, echoing what happened at the start of 2023. Amazon is cutting workers in its Prime Video and Twitch units and Unity Software is planning to slash 25% of its workforce.

Bloomberg

Citigroup during their earnings call announced future layoffs as well.

Citigroup is pressing ahead with its multi-year restructuring plan. On Friday, the bank said it planned to trim some 20,000 jobs from its workforce by the end of 2026.

Wall Street Journal

On Thursday we’ll get a new release of Unemployment Claims data.

Interest Rate Policy

At the end of 2023 the sentiment on Wall Street was that multiple interest rate cuts were coming in 2024.

JPMorgan in their earnings release are forecasting multiple rate cuts this year.

JPMorgan forecast lending profits would slide to $88 billion for 2024, minus its volatile markets business. Their forecast assumes 6 rate cuts in the new year, a decline in deposits and muted loan growth.

Wall Street Journal

Yet the confidence behind the interest rate cuts sentiment is starting to wane.

The CME Fed Fund Futures probabilities table currently shows a 65.2% chance of the first rate cut coming in March.

Delivering a speech today, Fed Governor Christopher Waller gave no indication that the first cut would come in March.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added. “In many previous cycles … the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”

CNBC

This sentiment was echoed by Fed President Loretta Mester last week:

Federal Reserve Bank of Cleveland President Loretta Mester said it was premature to consider cutting interest rates as soon as the US central bank’s March meeting.

Bloomberg

It’s starting to feel that Steve Eisman may have it right. What will be the catalyst for the Fed to start aggressively cutting rates? If there is no recession, and if inflation does start to pick up again, the Fed may not rush to cutting rates.

The Magnificent Seven

The big headline from last week was that three out of the seven (Google, Meta, & Amazon) announced a new round of layoffs.

Performance of the Magnificent Seven YTD:

  • Apple -1.88%
  • Microsoft +4.39%
  • Google +2.84%
  • Amazon +1.07%
  • Nvidia +14.5%
  • Meta +4.59%
  • Tesla -12.06%

Artificial Intelligence

An interesting article from the Wall Street Journal on an opportunity to fuse AI with Blockchain technology.

Tech vendors FICO, a data-analytics firm, and the blockchain-focused startup Casper Labs say they are applying the technology to track the process of building and training AI algorithms.

Blockchain can be used to track exactly what data an algorithm was trained on, when, by whom, as well as what other steps were taken to vet and verify that data, said Scott Zoldi, FICO’s chief analytics officer.

In AI governance, no such established methods exist, giving blockchain the rare opportunity to become an industry standard.

With the Bitcoin Spot ETF approved last week, it seems that Blockchain technology is here to stay. Can the technology find an application for vetting AI algorithms?

Earnings Releases

Bank Earnings kicked off this past Friday and continued today. Regional bank PNC jumped out with their poor results.

PNC reported a sharp decline in profit, kicking off earnings from regional banks. The results were dragged down by a $515 million charge to replenish a Federal Deposit Insurance Corp. fund used to make uninsured depositors whole, after the failure of Silicon Valley Bank and Signature Bank in early 2023. PNC also reported $150 million in workforce reduction charges. It disclosed last quarter that it would lay off thousands of employees.

Wall Street Journal

2024 Election

The Republican Primary was kicked off yesterday in Iowa.

Trump cruised to victory in the Iowa Republican presidential caucuses and established himself as the party’s clear frontrunner. This put Trump on track for a Biden rematch. A Trump victory in November could result in sweeping changes for US policies on trade, overseas conflicts, taxes and civil rights, concerns that will no doubt be front of mind for business leaders and policy makers at the World Economic Forum in Davos today.

Bloomberg

It appears that Donald Trump will run away with the Republican nomination.

On the Democratic side, Congressman Dean Phillips is starting to make some noise as a potential alternative to Joe Biden.

Recently he made appearances on the All-In Podcast, The Megyn Kelly Show, and joined a Twitter spaces with Jason Calacanis, Bill Ackman, and Elon Musk.

Bill Ackman also just donated $1 Million to Dean’s campaign.

The Wall Street Journal’s headline calls Dean’s candidacy a “long shot”. It will be interesting to watch if sentiment shifts in the coming months.

Ackman compared his donation to Phillips to successful venture investments he has made in his career, saying that he expected that Phillips would eventually beat Biden in the primary.

Wall Street Journal

While Phillips is unlikely to replace Biden as the Democratic nominee, his campaign underscores the hurdles facing Biden in 2024. Voters are pessimistic about the economy, despite data showing its resilience, and are broadly unsatisfied with both Biden and Trump. Republicans in Iowa will caucus on Monday, the first contest in the GOP presidential primary, and Trump is expected to dominate the field.

Wall Street Journal