Let's just go ahead and say the Fed is done hiking rates. It certainly seems that way to markets, after they paused yesterday for the second time in a row. The 10-year Treasury yield is taking another big leg down this morning, to just 4.65%. That will take some pressure off of mortgage rates. Stocks are up. Bitcoin is back to nearly $36,000.
This is great news for those banking on a year-end stock market rally. But history would caution against believing that the end of a Fed tightening cycle is a good time to be uber-bullish. In fact, you typically want to sell the last hike, as Bank of America's Michael Hartnett has pointed out. Why? Because the recession is coming.
Indeed, the sharp drop in bond yields is happening for three big reasons right now. One, Treasury's latest supply issuance came in slightly lighter than expected. Two, the Fed is apparently done hiking. And three--the economic data is weakening.
Yesterday we also got the key monthly ISM manufacturing report. Unfortunately, it was quite poor. It erased the previous few months of improvement towards the "50" reading that indicates manufacturing growth, and instead slipped all the way back down to 46.7. That level "has historically been associated with a 1% real GDP growth rate," noted Roth MKM's Michael Darda. And we've been sub-50 for twelve straight months now, the longest such streak since the Great Recession.
Sure enough, the Atlanta Fed revised its fourth-quarter GDP estimate down to just 1.2% after the ISM number, suggesting the third quarter GDP spurt could already be ancient history. On top of that, new and continued jobless claims were higher than expected this morning, and the private sector ADP jobs report slowed to just 113,000 new positions last month. We'll see what the government's official tally in the morning brings.
And stock market bulls like to roll their eyes at the continued "recession is coming!" warnings, but even they would have to admit that corporate guidance has been notably weak as we move throughout this earnings season. "Fourth quarter earnings estimates are dropping fast," our Bob Pisani reported yesterday. The originally expected 11% year-on-year gain is now less than 8%.
Boeing, for instance, has gone from expecting earnings growth to instead expecting a 66-cent-per-share loss. 3M, Corning, Pentair, and Polaris are also among the major companies who issued lower fourth-quarter earnings guidance than was expected. Norweigian Cruise and Canada Goose are others, and we have yet to hear from most major retailers. In another cautionary sign, Target's CEO told Squawk Box this morning that shoppers are now even pulling back on groceries.
"The profit squeeze finally begins," wrote Piper Sandler's Nancy Lazar after combing through results thus far. She warns there is more downside to come, both for earnings and the economy. And she notes that it isn't taking "longer than usual" for the Fed's hikes to have an effect; the historical average since 1958 is that it takes 10 quarters from the first hike to the recession. We're only six quarters in right now.
So yes, today's "risk on" scramble is a welcome fillip for hard-hit market spots like the Ark Innovation ETF, which is surging 7% as components like Roku and Shopify soar. But falling bond yields may only provide temporary relief if they're followed by a much weaker economy.
See you at 1 p.m!
Kelly
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