Wall Street Breakfast: Fed Day

Fed Day

Traders widely expect the Federal Reserve to slow its pace of rate hikes to 25 basis points today, down from a 50 bps increase in December, which followed four back-to-back 75 bps hikes. It follows recent economic data that showed inflation decelerating over the past few months, giving evidence that rate hikes are starting to work. On Friday, core PCE inflation, the Fed’s preferred measure, came in at 4.4% Y/Y for December, though the overall figure still remains well above the central bank’s 2% goal.

Snapshot: The Fed’s rapid tightening, which started in March 2022, was intended to reduce demand for goods and services, and bring it more into balance with supply to ease inflationary pressures. Jay Powell and Co. are now assessing the impact of the tightening already in place, so keep a close eye on his press conference that starts at 2:30 PM ET. Of particular note will be whether the statement of “ongoing [interest rate] increases” will be included (it has been in every FOMC statement since last March).

Many recent remarks from Fed officials expect the terminal rate to exceed 5%, with none indicating a willingness to cut for the rest of the year. The Seeking Alpha community appears to agree, with 64% of respondents to this week’s Wall Street Breakfast survey believing that rates will hit 5% or more in 2023. Earlier in January, Minneapolis Fed President Neel Kashkari even said he sees the federal funds rate rising to 5.4% before pausing.

SA commentary: Stocks aren’t reflecting that outlook. Michael Kramer of Mott Capital Management points out that financial markets have eased to levels not seen since the spring of 2022 and may force the Fed to push back on the market’s dovish stance. SA contributor Logan Kane also writes that traders “are clamoring for a pivot,” while Chris Lau looks at five considerations after the Fed’s first rate hike of 2023. (106 comments)

As goes January…?

While Snap’s (SNAP) earnings may have jarred some sentiment, equities wrapped up January with some surprises as the benchmark S&P 500 (SP500) finished the month with a gain of 6.2%. The rally means that stocks hit the so-called “January Indicator Trifecta,” which gives the blue-chip index close to, if not a 100% historical probability of rising strongly for 2023 as a whole, according to Jeff Hirsch of the Stock Trader’s Almanac. The clear leaders of the S&P 500 have been sectors like Consumer Discretionary, Communication Services, Real Estate, IT and Materials, though individual players like Warner Bros. Discovery (WBD) and Tesla (TSLA) have stood out in January’s top 10 best-performing stocks. (7 comments)

Competitive edge

It’s “code red” at Google (GOOG, GOOGL) as the tech leader tries to respond quickly to the threat posed by ChatGPT. OpenAI’s chatbot has made waves since it went public late last year, and even prompted rival Microsoft (NASDAQ:MSFT) to take a multi-billion stake in the company. Google is now testing ChatGPT-like products that use its LaMDA technology (Language Model for Dialogue Applications), such as a chatbot called “Apprentice Bard” that could give detailed answers (even to recent events), as well as integrating new chat technology into its search engine. As AI turns into a significant investing conversation, this actively managed ETF – that makes its trading decisions based on artificial intelligence – doubled the return of the S&P 500 in January. (56 comments)

Water Rush

A Jan. 31 deadline to strike a deal on voluntarily cutting water use of the Colorado River has come and passed amid a historic drought and record low reservoir levels. While a proposal called the “consensus-based modeling alternative,” was jointly submitted by six Western states, California – the largest user of the Colorado River – is not on board. It plans to submit its own plan to protect one of America’s most important natural resources, which supplies water to 40M people. The federal government might now have to impose cuts that will likely end up in court, while Wall Street is smelling dollar signs from the latest crisis as water turns into a hot commodity.