Wall Street Breakfast: What Moved Markets

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Wall Street Breakfast

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Stocks cut much of their earlier losses Friday to finish mixed while maintaining weekly gains, after the monthly U.S. jobs report showed the Federal Reserve's aggressive interest rate increases have not yet cooled the strong labor market. Stocks fell sharply after the data revealed non-farm payrolls rose by a greater than expected 263,000 and the unemployment rate held steady at 3.7% in November, but investors were able to shake off the report, leaning on Fed Chairman Jerome Powell's mid-week remarks that suggested a slower pace of rate hikes. The dollar and U.S. Treasury yields also reversed from initial gains to finish lower. For the week, the three major stock market indexes finished higher, with the Nasdaq rising 2.1%, the S&P 500 adding 1.1% and the Dow Jones edging up by 0.2%

Softening stance

A lot has happened since protests erupted across China in response to zero-COVID policies. After initially shaking markets on Monday, a relief rally took hold on Tuesday as a Chinese State Council press conference signaled that further changes to current measures might be in the making, while top leaders continue to signal a more pragmatic approach. "With the decreasing toxicity of the Omicron variant, the increasing vaccination rate and the accumulating experience of outbreak control and prevention, China's pandemic containment faces a new stage and mission," Vice Premier Sun Chunlan told the National Health Commission.

Policy watch: A landmark shift has already begun in Beijing, which will permit low-risk people with COVID to isolate at home for a week if they desire. The new stance will start in the Chaoyang district, which contains the city's growing central business district and many foreign embassies, and is likely to serve as a model for other areas. A previous approach mandated that COVID positive individuals be sent to government quarantine sites - regardless of severity - to stop community transmission as soon as it was detected.

Earlier this week, health authorities released a plan to boost elderly vaccination, while closely watching the virus as "it evolves and mutates." Officials also relaxed lockdown measures in the northeastern city of Jinzhou and the southern hub of Guangzhou, as well as Xinjiang's capital of Urumqi. The city was the site of a deadly fire that killed 10 people, and first triggered the nationwide protests featuring blank sheets of white paper that were raised as a symbol of defiance.

Why is it happening now? Xi Jinping has been at the helm for nearly a decade, but over most of that period, the benefits of a booming economy were widely felt across China. Things have slowed sharply due to zero-COVID policies, and many workers are now finding it difficult to make a living amid severe restrictions and lockdowns. The current measures are also unpredictable and being seen as irrational, especially as the Chinese watch a maskless World Cup and compare it to the strict protocols of the 2022 Beijing Winter Games. (40 comments)

NATO membership

At a two-day summit in the Romanian capital of Bucharest, the North Atlantic Treaty Organization doubled down on a vow to make Ukraine a member of the military alliance. It was 14 years ago (in the same city) that foreign ministers first pledged that Kyiv would eventually become a constituent, and they still "firmly stand behind our commitment." In recent weeks, Russian missile and drone attacks have targeted civilian infrastructure across the country, with strikes that have heavily damaged Ukraine's power, water and energy infrastructure.

Quote: "NATO's door is open," Secretary-General Jens Stoltenberg said before chairing the meeting. "President Putin cannot deny sovereign nations to make their own sovereign decisions that are not a threat to Russia. I think what he's afraid of is democracy and freedom, and that's the main challenge for him."

It's not yet clear what Ukraine's borders would look like if it would join the alliance, but the country must now solely focus on defeating Russia. Troops and pro-Moscow separatists are holding parts of the south and east, while the Crimean Peninsula remains annexed and President Volodymyr Zelenskyy says the nation will keep fighting until it recovers all occupied land. NATO promised more arms for Ukraine at the meeting, as well as equipment to help restore power supplies, though the alliance is still debating whether to provide more advanced defense systems like the Patriot.

Go deeper: A military buildup is likely to be another boon for stocks like Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Raytheon Technologies (NYSE:RTX), which have had a phenomenal year on the back of the increases in defense spending. All current 30 NATO nations have agreed to spend at least 2% of their GDPs on defense by 2025, and while only a third of those members have met the threshold, the latest developments should accelerate a drive for achieving their targets. Finland and Sweden are also poised to become NATO members soon amid concerns that Russia might target them next. (89 comments)

Bear no longer

Volatility predicted, and volatility there was. A speech from Fed Chair Jay Powell on Wednesday sent markets flying amid signals that the central bank could begin slowing its aggressive interest rate increases. When the dust settled at the end of the session, the Nasdaq Composite (COMP.IND) closed up a whopping 4.4%, while the S&P 500 (SP500) and the Dow (DJI) finished the day ahead by 3.1% and 2.2%, respectively.

Snapshot: While Powell warned that the Fed might have to retain restrictive policy for some time - as policymakers needed to see "substantially more evidence" of falling inflation - he buoyed markets with a less-hawkish stance on the pace of interest hikes and by raising hopes that a soft landing was "very plausible." "It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting," the Fed chief said in prepared remarks for an event hosted by The Brookings Institution.

"Despite some promising developments, we have a long way to go in restoring price stability," Powell continued. "My colleagues and I do not want to overtighten because... cutting rates is not something we want to do soon. The truth is that the path ahead for inflation remains highly uncertain. That's why we’re slowing down and going to try to find our way to what that right level is. It can't be that we can go on for five years at a very high level of inflation and that it doesn’t work its way into the wage and price setting process pretty quickly. That's a serious concern."

Getting technical: Wednesday's move resulted in the Dow Jones Industrial Average rising more than 20% since Sept. 30 - its lowest point of the year - meaning it is now officially in bull market territory. Elsewhere, the benchmark S&P 500 is up 17% from its YTD low, and while tech-heavy Nasdaq still has some ways to go, it has rebounded nearly 14%. (122 comments)

Rail strike avoided

On Thursday, the Senate passed a bill by an 80 to 15 margin that would avert a rail strike, only a day after it passed in the House. The measure was then sent to the desk of President Biden, who had urged Congress to act quickly before a Dec. 9 strike deadline. The legislation enacts a new contract that provides railroad workers with a 24% increase in wages from 2020 through 2024, immediate payouts averaging $11,000 upon ratification, as well as an additional paid day off on top of existing vacation time.

Bigger picture: By some estimates, the railroads impact about a third to about 45% of all freight in the U.S., meaning a strike could trigger knock-on effects for many industries and become another inflationary threat. It would also likely cost the nation $2B in economic output per day if things went off the rails. To prepare for a shutdown, railroads even stop accepting security-sensitive shipments, such as chemicals to treat drinking water.

A separate vote on adding seven days of paid sick leave to the agreement failed in the Senate, which had been one of the main sticking points during negotiations between the railroads and unions. Arguments against stated that congressional modifications to the contract would set a dangerous precedent, though others felt that it should finally be a standard practice for the sector. "I have long been a supporter of paid sick leave for workers in all industries - not just the rail industry - and my fight for that critical benefit continues," President Biden declared, though it's unclear what actions he might take on the contentious issue.

Related Tickers: Canadian Pacific Railway (CP), Canadian National Railway (CNI), CSX Corp. (CSX), Union Pacific (UNP), Berkshire Hathaway (BRK.A, BRK.B) and Norfolk Southern (NSC). (43 comments)

2022 DealBook Summit

Some of the biggest names in business were interviewed this week at the annual New York Times DealBook Summit, where "every topic is fair game, and no question is out of bounds." Investors tuned in as Amazon (NASDAQ:AMZN) CEO Andy Jassy took the stage to provide some important insights into the company and the overall economy. Not only is Amazon one of the biggest employers in the country, but it can easily size up trends taking place across the retail space, while Amazon Web Services (responsible for the bulk of the company's profits) supports nearly a third of all cloud businesses.

Economic environment: "It's very clear that consumers are spending, but they are being very careful on trying to stretch their dollars. People care a lot about getting a bargain right now. They were attracted to stocking stuffers in an even more pervasive way than normal. In discretionary categories like computers, electronics or TVs, you see consumers trading down models just to try and get more for their money. In difficult and uncertain economies, we've found over time that consumers are very careful about who they partner with and they go with companies that are going to provide a great customer experience."

Layoffs: "It's the time of year that our leaders take a look at where they want to spend resources and where they should adjust. This year we had the lens of a very uncertain economic environment, as well as having hired very aggressively over the last several years. I think as we went through our plans, you just started seeing pretty similar trends, that the economy was more uncertain and things that were different than before, and we just felt that we needed to streamline our costs. One of the first things we did was to pause incremental hiring, but as we went through the plans, we realized we needed to be more slim on our resources."

Organized labor: "This is one of many topics in this country that is very hard to discuss and debate. The truth is, employees get to choose. It's not up to us, it is up to them. What we tell employees in our fulfillment centers is that we think they are better off without a union for a few reasons. If employees can make the experience better for customers or their fellow teammates - they can go fix it rather than a bureaucratic and slow [process]. We like to hear from all our employees, as opposed to being filtered through one or two voices, and it also champions an 'us vs. them' mentality that is not as productive. We have compelling benefits like a $19 minimum wage, full health insurance, 401k, up to 20 weeks of parental leave and a career choice program for an advanced education. In the U.S., only one of our facilities voted for a union in Staten Island. There were a lot of irregularities in that vote and it's working its way through the legal process."

Media: "Our Prime Video offering and all of that content is a really important ingredient when people choose to sign up for Prime or not. It's always something that has driven Prime subscriptions, but increasingly you are seeing more and more people signing up to Prime because of the video content. That's very attractive, and even when they sign up to Prime for the video content, they tend to spend money with us in our e-commerce offerings. I do think over time, we do have opportunities to make our Prime Video business a standalone business. What we want to do is provide the world with the best selection of streaming content for customers."

U.S. Indices
Dow +0.2% to 34,430. S&P 500 +1.1% to 4,072. Nasdaq +2.1% to 11,462. Russell 2000 +1.1% to 1,890. CBOE Volatility Index -7% to 19.06.

S&P 500 Sectors
Consumer Staples +1.1%. Utilities +0.1%. Financials -0.6%. Telecom +3.3%. Healthcare +1.9%. Industrials +1%. Information Technology +1.3%. Materials +1.5%. Energy -2.%. Consumer Discretionary +2.1%.

World Indices
London +0.9% to 7,556. France +0.4% to 6,742. Germany -0.1% to 14,529. Japan -1.8% to 27,778. China +1.8% to 3,156. Hong Kong +6.3% to 18,675. India +0.9% to 62,869.

Commodities and Bonds
Crude Oil WTI +5.3% to $80.34/bbl. Gold +3.3% to $1,811.4/oz. Natural Gas -15.1% to 6.222. Ten-Year Bond Yield -0.2 bps to 3.492.

Forex and Cryptos
EUR/USD +1.33%. USD/JPY -3.46%. GBP/USD +1.63%. Bitcoin +3.6%. Litecoin +1.1%. Ethereum +7.%. XRP -0.5%.

Top S&P 500 Gainers
Catalent (CTLT) +26%. Etsy (ETSY) +17%. PVH (PVH) +15%. Wynn Resorts (WYNN) +14%. Fidelity National Information Services (FIS) +12%.

Top S&P 500 Losers
NetApp (NTAP) -8%. Charles River Laboratories International (CRL) -8%. Valero Energy (VLO) -7%. Costco Wholesale (COST) -6%. EQT (EQT) -5%.

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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