Reads
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- The Dollar Is Stronger. Who Wins? Who Loses?
- In More Ways Than One, Fed’s Powell Showed His Strategy This Week
- Why the Fed Waited So Long to Do Something About Inflation
- Ukraine War, Inflation and Covid-19 Keep CFOs on Their Toes Over Forecasts
- U.S. Job Growth Was Sturdy in April, Economists Forecast
- Bankers Quit Jobs for Shot at Riches in ‘Wall Street of Crypto’
- Dubai Aerospace Writes Off $538 Million on Planes Tied to Russia
- Boeing Plans to Move Headquarters to Arlington, Va., From Chicago
- Why Musk’s Twitter Bid Has Shaken Tesla Investors
- Elon Musk’s Fixer Is Quietly Tending the World’s Biggest Fortune
- Facebook Deliberately Caused Havoc in Australia to Influence New Law, Whistleblowers Say
- European Tech Giant Shaken by Bullying Claims, Exodus of Women
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Market optimism continues to evaporate as headline after headline continues to roil investing sentiment. While there have been some relief rallies in recent sessions, or what some dub capitulation trades or a dead cat bounce, those have done little to affect the overall equity trade which has turned sour since the start of 2022. In its biggest one-day loss in two years, the benchmark S&P 500 Index plunged 3.6% on Thursday, the Dow lost 1,063 points and the tech-heavy Nasdaq closed the session down 5%.
Dose of bad news: First it was inflation and high oil prices, followed by the war in Ukraine. Then it was COVID lockdowns in China that triggered more fears about the supply chain. Lackluster guidance from earnings season didn't help the situation, while Powell's comments of "additional 50 basis point increases at the next couple of meetings" are still reverberating through the investing community. Yesterday's sharp selloff saw the CBOE Volatility Index, a fear gauge known as the VIX, advance nearly 8 points to as high as 33.15, far above its long-term median of 17.63.
Markets were temporarily supported by comments from Jerome Powell revealed that the central bank wasn't considering even bigger increases like 75 bps hikes (a move it hasn't done since '94), but "clearly, investors had second thoughts about the so-called 'dovish hike' from the Fed," said Rob Carnell, economist at ING. There is an increased probability of "rate hikes coming thick and fast, but little if any prospect of a turn in inflation any time soon." The flight to safety also did not materialize this time around (except for the dollar perhaps), with everything from gold to U.S. Treasuries joining the selloff on Wall Street.
Dimming the outlook: Powell is attempting to engineer a soft landing - in which interest rates are raised just enough that it doesn't cause a recession - but those risks are piling up. On Thursday, the Bank of England raised rates to the highest level since the financial crisis and warned that the economy will slide into recession, essentially admitting that a downturn would be needed to bring down price pressures. Other Western nations, like the U.S., are also set to continue their policy tightening cycles over the course of 2022, making it exceptionally hard to achieve both growth and low inflation and spelling further pain for the economy. (3 comments)
One of the things Powell emphasized during the FOMC meeting on Wednesday was the strength of the U.S. labor market. Today, we'll see just how strong it was in April as the Employment Situation report is published at 8:30 a.m. ET. Economists are expecting the U.S. economy to have added 391K non-farm payrolls last month, marginally lower than the 431K added in March, which itself declined from a whopping 750K in February (prior revisions will also be on watch).
Snapshot: Some are saying that a deceleration may be welcome this time around as a labor market that's too hot could intensify inflation or even lead to a wage-price spiral. "The labor market continues to barrel along. We need it, at this point in time, to slow down a bit because we’re going to blow past full employment and inflation is going to become a bigger problem than it already is," explained Mark Zandi, chief economist at Moody’s Analytics. "Ultimately, we need to get to something that's closer to no more than 100K a month."
Meanwhile, the unemployment rate is expected to have ticked down to 3.5% - bringing it to its pre-pandemic low - from 3.6% in the previous month. "That's why the Fed has put the labor market in their crosshairs and talked about reducing demand... but it's hard to see how we get from 1.9 to 1.2 job openings per worker," added Diane Swonk, chief economist at Grant Thornton. "It's hard to see that happening without hammering demand and increasing supply."
Other data points: With inflation at a 40-year high, investors and analysts will additionally be watching growth in average hourly earnings. The consensus estimate is a 5.5% Y/Y gain, easing off the 5.6% increase in March, though "inflation is going to eat away at that, so in real terms, year-over-year gains will likely be negative," commented Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. The last point of interest is whether more people come back into the workforce, with the labor force participation rate inking a 62.4% print in March, still below the 63.4% rate seen before the pandemic in February 2020.
Lots of headlines flowed out of the crude market on Thursday, triggering volatility in the oil market. WTI crude futures (CL1:COM) spiked to over $111 a barrel, before pulling back 4% in the span of two hours, while the benchmark returned to previous trading levels overnight. Earlier this week, the European Union shook up the space by announcing an embargo on Russian crude imports, which account for 25% of all Europe's oil needs. The latest:
Not adding up: After almost a year of the group marching ahead with monthly supply increases of 400K barrels per day, OPEC+ detailed plans of a modest output increase to 432K bpd. Importantly, it was generally agreed that the excess capacity in OPEC lies in Saudi Arabia and the UAE, so any genuine attempt to increase production would over-allocate quota to those countries. By changing course, the group appeared to acknowledge calls for more barrels, but the unserious details of the plan suggest OPEC+ is either unable or unwilling to increase production.
Looking for a refill: The Biden administration laid out plans to replenish the strategic petroleum reserve, minutes after IEA chief Fatih Birol said "we can release more oil if needed." Despite the mixed messaging, both statements should support crude markets as the government sells down a record 180M barrels from the SPR this year to tamp down energy prices. Under the new plan, the U.S. would initially buy back 60M barrels of crude in the fall, with the future delivery window "likely" to take place after the fiscal year that ends in September 2023.
Suing OPEC+: Versions of the legislation have failed for more than two decades, but the Senate Judiciary Committee passed a bill to bring antitrust lawsuits against OPEC and their allies. The No Oil Producing and Exporting Cartels bill, or "NOPEC," is designed to protect U.S. consumers from higher gasoline prices as a result of OPEC+ collusion, but even if it became law, enforcement would be challenging. White House Press Secretary Jen Psaki said the Biden administration had concerns about the "potential implications and unintended consequences" of the legislation, particularly amid the Ukraine crisis. (222 comments)
Investors haven't heard too much on the IPO market these days, and for good reason. Stocks have been under pressure since the beginning of the year, leading many companies to postpone their public debuts or look elsewhere for funding sources. In fact, the Renaissance IPO ETF (IPO), designed to offer exposure to a portfolio of the largest, most liquid, newly listed U.S. IPOs, is down 42% in 2022, compared with the 13% YTD decline for the S&P 500.
Commentary: "The second quarter so far has been brutal for IPOs, as rising interest rates have an especially large impact on the intrinsic valuations of growth stocks," explained Matthew Kennedy, an analyst at Renaissance Capital. "The dramatic fall in prices is also tied to excessive valuations we saw last year. So stocks have had further to fall." Just $3.3B has been raised for IPOs this year, compared with more than $56B in the same period in 2021, per data from Dealogic.
Looking to buck the lackluster listing trend, eyecare company Bausch + Lomb (BLCO) is trying its luck on public markets, listing today on the New York Stock Exchange. The firm is being spun out of Bausch Health (BHC), which will remain a majority shareholder following the deal. "Our mission is simple, yet powerful: helping you see better, to live better," according to the prospectus from the company, which makes contact lenses and solution, as well as surgical products, vitamin supplements and prescription eye medications.
By the numbers: Things are coming in lower than expected, with Bausch + Lomb pricing its stock at $18, below its targeted $21-$24 range. It's still selling 35M shares to raise $630M, valuing the eyecare giant at $6.3B to become the second-largest listing of the year. Revenues of $3.8B climbed 10% Y/Y in 2021, while net income came in at $193M vs. a loss in the prior year, though profits could feel some pressure in the near-term due to some debt that'll be inherited following Bausch's separation from its parent company. (11 comments)
Today's Markets
In Asia, Japan +0.7%. Hong Kong -3.8%. China -2.2%. India -1.6%.
In Europe, at midday, London -0.7%. Paris -1.1%. Frankfurt +1%.
Futures at 6:20, Dow -0.4%. S&P -0.5%. Nasdaq -0.6%. Crude +2.3% to $110.73. Gold +0.4% to $1882.60. Bitcoin -8.9% to $36,072.
Ten-year Treasury Yield +1 bps to 3.08%
Today's Economic Calendar
8:30 Non-farm payrolls
9:15 Fed's Williams Speech
11:00 Fed's Kashkari Speech
1:00 PM Baker-Hughes Rig Count
3:00 PM Consumer Credit
3:20 PM Fed's Bostic Speech
7:15 PM Fed's Waller Speech
7:15 PM Fed's Bullard Speech
8:00 PM Fed's Daly Speech