In anticipation of FOMC and QRA
Paid subscriber analysis
A lot to cover today:
A quick review of four Mag7 earnings: overall, beating expectations. Next week we get AMZN and AAPL.
Economic data was not good: GDP much lower than expected (at 1.6% for Q1), and PCE inflation came in slightly higher at 2.7%.
Two key events coming up on May 1st!
Major fiscal policy decision (QRA): will the Treasury pump the markets again? A decrease in long term bond issuance ensures we get a pump.
Major monetary policy meeting (FOMC): the Fed will not cut, no doubt there, but all eyes are on the tone of the presser: dovish will reignite the bulls, hawkish could trigger a second-leg sell-off.
Important to observe all events relative to one another.
The first big earnings week from this earnings season has passed. It gave us quite the ride. What started as a bounce from Friday’s lows, ended up getting almost completely reversed on Thursday after META’s earnings, and then, like nothing happened, Friday ended up with a powerful rally.
First up from the Mag7 was TSLA on Tuesday, who came under expectations, but with some decent forward guidance. Its price bounced to 6% in after hours, and went soaring the next day, to over 10%.
Then we got META on Wed, and it was the exact opposite (just like NFLX the week before). META beat earnings, but poor forward guidance sent the stock down 14% in after hours trading, bringing down the entire market with it. However, on Thursday, the market already started to bounce back and META closed the gap down to a -10% for the day.
Then on Thu close we got both MSFT and GOOGL beating expectations, where GOOGL was particularly attractive announcing they would be paying a dividend for the first time. They went up 10% overnight.
So overall, 4 companies reported, 3 beat, one missed, and we had three supportive rallies, the strongest one coming after MSFT and GOOGL.
On the macro front however, the news was not good.
GDP numbers came in much lower than expected on Thursday morning - 1.6% for Q1, almost 50% lower than where most analysts saw them (around 3%). We often referred to the GDPNow estimates from the Atlanta Fed. They kept giving the same estimates of between 2.5 and 3% for Q1. Well, this got revised down steeply, and immediately spurred talks of stagflation (low growth, rising inflation). We’re not there yet, obviously, which is probably why the initial reaction on Thursday was oversold.
All in all, after breaking a major technical level the previous week, this one was all about the short-term bounce-back. And good earnings certainly made the push up more sustainable.
Don’t forget, we are still in a bull market structurally, so any correction as big as the one from last week presents an opportunity to buy the dip. The question is when is this optimal? Have we missed it, or is there still time?
“The” event coming up on May 1st
First, just a quick reminder why the culmination of both QRA and FOMC in the same day carry such an important impact on markets, and have carried it ever since the government deficit grew so huge (since COVID) in that it renders a massive impact on bond supply, and by extension the equity market.
On July 31st 2023: the Treasury announced a significant increase in the supply of long-term bonds, marking the beginning of a three-month-long sell-off. Yields went up from 3.9% to 5%, SPX lost 500 points (11% correction). July 31st was the market high for 2023 until then.
On November 1st 2023: Treasury announced the decision on Monday, but the composition of bond purchases came out on Wednesday morning, while FOMC delivered its very anticipated pause in hikes by the end of day. Markets rallied powerfully after that, making 15% gains in the next two months. October 27th marked the low for the second half of 2023.
On February 1st 2024: bad for bonds, but no impact on equities. The Treasury decided to increase coupon issuance for Q2 and this did indeed push bond prices down again, and yields shot up over the next 3 months. The 2Y yield went from 4.2% to 5%, the 10Y yield went from 3.9% to 4.7%. So a very similar reaction on the bond market to last summer. But there was not even a remotely similar impact on the equities market. At least not immediately. Equities kept making new highs in Feb and Mar, and only saw the correction starting in April, when the actual bond issuance started taking place (in Q2). We did warn about this on a few occasions, but this was probably not the only cause of the equities market correction.
The chart says it all:
Post-July QRA and FOMC - bonds down, equities down.
Post-Nov QRA and FOMC - bonds up, equities up
Post-Feb QRA and FOMC - bonds down, equities up
Start of Q2 (when new issuance began) - the bond market lag (?): bonds down, equities down