US stocks are lower on Wednesday as investors digest yesterday’s State of the Union and Fed Chair Powell’s speech but mostly new information across Communication Services and Tech.
Looking under the surface of the S&P 500, the Communication Services sector is leading the index lower on Wednesday as the market digests fresh earnings results from across the sector and headlines from Alphabet’s AI event today.
Tech and Communication Services stocks outperformed for much of the pandemic era as they enabled connectivity, working from home, and mobility during lockdown isolation. Today, investors are likely grappling with some of these companies’ “next-step newer age” concepts.
Any rally in tech stocks feels entirely speculative at this point, and clearly, investors are looking into 2024, given high multiples and questionable earnings in 2023
While the strong NFP has resulted in the fading of recession odds, it has diminished rate-cut pricing at a shorter horizon. At the heart of the matter are inflation concerns and worries that the robust employment data augur a potential rebound in price pressures. One can only imagine the seismic meltdown in the event of a negative surprise on the inflation front. So, let’s hope the inflation data continues to cooperate.
And with markets still trading, “bad news is good”; perhaps a soggy (Preliminary UoM) Consumer Sentiment can provide some hope to the rate pause crew, but perish the thought of the Inflation Expectations components soaring.
Since investors are disinclined to believe the central bank’s policy posturing, economic data, hard or soft, will hold sway.
The US dollar remains firm as US rate cut expectations fade while the faltering China reopening risk rally continues to stymie Asia FX.
Markets were positioning long Asia FX for diverging growth trends between China and US. Still, in the wake of the strong payroll print and the rewind of the anti-China play, traders have shifted Asia FX sentiment from buy all to hold.
Asia-Pac currencies have high export linkages with China, which is positive on a China reopening bounce; however, they are absent from the top 10 Carry baskets, given Asian central banks have raised rates much less and to lower levels than others. Hence in a higher US rates environment, a much bigger pickup in China activity data needs to fuel the “China factor” to overcome the lack of a “carry factor.”