Wall Street Breakfast: What Moved Markets

Jun. 04, 2022 7:50 AM ETMETA, JPM, GM, GOOGL, TSLA, CRM, SEDG, GNRC, UA, AMZN, BBWI, REGN, CAH, HRL, MCK29 Comments10 Likes
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Stocks fell sharply on Friday to cap their eighth weekly loss out of the last nine, as a stronger than expected report on U.S. nonfarm payrolls suggested the labor market remains robust enough for the Federal Reserve to raise rates quickly. The benchmark 10-year Treasury yield climbed above 2.9% after the report, leading to outsized losses among tech stocks. Sentiment also was hurt by a report that Tesla's Elon Musk may be considering job cuts on worries over the economic outlook. Musk's misgivings followed comments earlier in the week from J.P. Morgan's Jamie Dimon, who said he foresees an economic "hurricane" ahead from the war in Ukraine and the Fed's tightening policies. All three of the major market indexes finished negative for the holiday-shortened week, with the S&P 500 shedding 1.2%, and the Dow Jones and Nasdaq each down by about 1%

Inflation fight

President Biden on Tuesday met with Fed Chairman Jerome Powell, who was formally sworn in last week for a second term as head of the U.S. central bank. The rare meeting at the Oval Office focused on inflation and the state of the economy, as prices continue to soar on everything from gasoline and food to transportation and housing. While the Fed has embarked on a cycle of quantitative tightening, many have criticized the central bank for being too slow in addressing the price pressures, while others say moving too severely could trigger a recession (or that the U.S. economy is already in one).

Snapshot: Last Friday, data from the Commerce Department showed that personal consumption expenditures, the Fed's favorite inflation gauge, rose 6.3% in April from a year earlier. While that was a deceleration from the 6.6% pace seen in the previous month, it's still more than three times the central bank's inflation target of 2%. Meanwhile, the more closely-watched inflation gauge, the consumer price index, inched down to 8.3% in April (from 8.5% in March), but is still at its highest level since the early 1980s.

A Memorial Day op-ed from President Biden also flagged the current high-priced environment, calling it America's "top economic challenge right now." In the article, he described that the "Federal Reserve has a primary responsibility to control inflation," but laid out a three-part plan of things that can be done on the fiscal and executive side. Among them: Containing oil costs, fixing broken supply chains and improve infrastructure, and reducing the federal deficit.

Go deeper: "There's a lot going on right now, but the idea we're going to be able to, you know, click a switch, bring down the cost of gasoline, is not likely in the near term, nor is it with regard to food," Biden later told reporters. Treasury Secretary Janet Yellen, who previously served as Fed Chair under the Obama administration, was also at the gathering at the Oval Office, but later admitted that she "was wrong about the path inflation would take" and that it wouldn't pose a long-term problem. "There have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly. At the time I didn't fully understand, but we recognize that now." (318 comments)

Stepping down

Sheryl Sandberg, one of the most powerful women in the business world, announced she would leave her COO role at Meta Platforms (FB), closing out a career at a company that helped transform social media. In the position, she was the longtime lieutenant to Mark Zuckerberg, with the two often appearing together at industry conferences and high-profile events. Meta veteran Javier Olivan will replace her as operating chief, after spending 15 years with the company and most recently serving as chief growth officer.

Quote: "When I took this job in 2008, I hoped I would be in this role for five years. Fourteen years later, it is time for me to write the next chapter of my life," Sandberg wrote in a statement. "I am not entirely sure what the future will bring - I have learned no one ever is. But I know it will include focusing more on my foundation and philanthropic work, which is more important to me than ever given how critical this moment is for women."

Sandberg has an impressive resume, building out Facebook's advertising model that is now the bulk of the company's revenue (it generated $115B in 2021). Her involvement also spanned functions that related to Instagram, WhatsApp and Messenger, and was often described as the "adult in the room" especially when Facebook was in its early stages. However, she did face some heat in recent years, especially over the Cambridge Analytica scandal, Russian disinformation and Facebook's influence on mental health.

Get out while the good is going? Meta's share price has fallen by over 50% from its peak last year due to struggles in advertising, slowing growth, rising costs and a broader selloff in tech stocks. In the meantime, it's trying to transform its business model into the metaverse, a collection of virtual worlds that could be a decade away. Sandberg will still serve on Meta's board of directors, but her direct reports will transition over the next few months and she'll depart in the fall. (134 comments)

Hurricane warning

Financials dropped the most out of any S&P 500 sector on Wednesday following a stark warning from JPMorgan (JPM) CEO Jamie Dimon. "You know, I said [last month] there's storm clouds but I'm going to change it... it's a hurricane," he declared at the Bernstein Strategic Decisions Conference, referencing a U.S. economy that is struggling with "fiscally induced growth, QT and the war in Ukraine." Just about every S&P 500 Financial sub-sector also ended the session in the red, including insurance, mortgage REITs, fintech and asset managers.

More from the conference: "Right now it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this," he told the room full of analysts and investors. "[But] that hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or - yes, Sandy or Andrew, or something like that. And it's - see, you better brace yourself. So, JPMorgan is bracing ourselves, and we're going to be very conservative in our balance sheet."

Dimon still predicts that U.S. consumers have some six to nine months of spending power left in their bank accounts as the government's pandemic stimulus runs out. That may help things in the near-term, but the Fed already "has" to embark on quantitative tightening because of too much liquidity in the system. "We've never had QT like this," he added, saying history books will be written about the new chapter of monetary policy as markets head into uncharted territory.

Outlook: "If you - look, if you go back to 2010 and say, 'Who are all the major buyers of Treasuries?' All that time it was central banks, foreign exchange managers, banks who were topping up their liquidity profiles, because we had to for regulations. All three, it's - it won't happen, this go-around. Banks are topped up, foreign exchange managers are topped up, the central bank would be selling, not buying, and governments have much for fiscal deficit to finance. That's a huge change in the flow of funds around the world. I don't know what the effect of that is. I'm prepared for - and you're talking about minimum huge volatility." (105 comments)

Robotaxi revolution

General Motors' (NYSE:GM) Cruise became the "first and only company to operate a commercial, driverless ride-hail service in a major U.S. city" after inking the appropriate permits in San Francisco. The green light was granted by the California Public Utilities Commission, allowing the GM subsidiary to charge a fare for its driverless rides. Cruise's cars are also fully electric and battery-powered, a big win for reducing emissions in the climate conscious San Francisco.

Quote: "Crossing the threshold into commercial operations isn’t just big news for Cruise alone. It is a major milestone for the shared mission of the AV industry to improve life in our cities," the company wrote in a blog post. "And it's a giant leap for our mission here at Cruise to save lives, help save the planet, and save people time and money."

Cruise has defended its safety track record by noting that its vehicles understand complex social dynamics and take safety actions as a default. Even San Francisco officials have conceded that the driverless Cruise AV appears to generally operate as a "cautious and compliant defensive driver." According to a tally by Reuters, Cruise AVs suffered 34 accidents involving bodily harm or over $1,000 in damage across nearly 3M miles of driving during a four-year span.

The competition: Alphabet's (GOOGL) Waymo began offering free autonomous rides to a limited number of SF natives last August and recently ditched the safety drivers on board. It has also completed "tens of thousands" of rides without a driver behind the wheel in the East Valley of Phoenix, Arizona. Meanwhile, Tesla's (TSLA) Elon Musk has often touted ambitious timeframes for the company's much-vaunted robotaxi (most recently promised for 2024), but the vehicle technology has yet to be fully delivered. (20 comments)

Oil drama

Crude prices weren't helped out from a decision by OPEC+ to turn on the taps, with a barrel of WTI climbing another $5 to the $117 level on Thursday. The oil group agreed to raise production by 648K barrels a day in both July and August, compared with 432K bpd each month per an earlier pledge. That's only a drop in the bucket (648K barrels is equivalent to 0.7% of daily global demand) and most OPEC members (except Saudi Arabia and the UAE) are already pumping at capacity. Russia's output has also fallen by about 1M bpd following Western sanctions over its invasion of Ukraine, and that could drop further to as much as 2M-3M.

Bigger picture: "The United States will continue to use all tools at our disposal to address energy prices pressures," Press Secretary Karine Jean-Pierre declared, recognizing OPEC+ chair Saudi Arabia in "achieving this consensus." The Saudis had previously rebuffed all requests by the U.S. to increase production as the Biden administration approached the royal family at an arm's length amid strained relations over the war in Yemen and the killing of journalist Jamal Khashoggi. Attempts have been made in recent weeks to repair the longstanding tensions as U.S. gasoline prices hit record highs and President Biden seeks to visit the Kingdom during a trip to the region later this month.

Elsewhere, National Economic Council Deputy Director Bharat Ramamurti revealed that the White House was considering a "windfall" profits tax for U.S. oil and gas producers, following a similar tax announcement in the U.K. and a proposal in the U.S. Senate. However, some strategists caution against taxing "windfall" profits in good times as it could discourage investment in the cyclical energy cycle and intensify prices at the pump. Since Monday, the national average for a gallon of regular gasoline has increased by $0.14 to $4.76, according to motoring group AAA.

Another shakeup: EU leaders reached an agreement to ban 90% of Russian crude by the end of the year as part of a sixth sanctions package the bloc is putting together against Moscow. Seaborne deliveries of Russian oil would be forbidden under the new arrangement, though it would include a temporary exemption for pipeline transfers until a solution is found that would meet the energy needs of Hungary and other landlocked countries like Slovakia and the Czech Republic. However, questions are swirling about the effectiveness of the ban, with more Russian oil than ever on board tankers heading to India and China. (130 comments)

"U.S. Indices
Dow -0.9% to 32,900. S&P 500 -1.2% to 4,109. Nasdaq -1.% to 12,013. Russell 2000 -0.3% to 1,883. CBOE Volatility Index -3.6% to 24.79.

S&P 500 Sectors
Consumer Staples -1.7%. Utilities -1.4%. Financials -2.1%. Telecom -0.2%. Healthcare -3.1%. Industrials flat. Information Technology -1.1%. Materials -1.%. Energy +1.2%. Consumer Discretionary flat.

World Indices
London -0.7% to 7,533. France -0.5% to 6,485. Germany 0.% to 14,460. Japan +3.7% to 27,762. China +2.1% to 3,195. Hong Kong +1.9% to 21,082. India +1.6% to 55,769.

Commodities and Bonds
Crude Oil WTI +4.5% to $120.26/bbl. Gold -0.2% to $1,853.9/oz. Natural Gas -2.2% to 8.539. Ten-Year Bond Yield -0.2 bps to 2.941.

Forex and Cryptos
EUR/USD -0.07%. USD/JPY +2.97%. GBP/USD -1.%. Bitcoin +2.3%. Litecoin -1.%. Ethereum -1.3%. XRP +1.2%.

Top S&P 500 Gainers
Salesforce (CRM) +14%. SolarEdge Technologies (SEDG) +12%. Generac Holdings (GNRC) +11%. Under Armour (UA) +10%. Amazon.com (AMZN) +10%.

Top S&P 500 Losers
Bath & Body Works (BBWI) -10%. Regeneron Pharmaceuticals (REGN) -8%. Cardinal Health (CAH) -7%. Hormel Foods (HRL) -7%. McKesson (MCK) -6%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section. "

This article was written by

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