Markets Today: Stocks Lower on Recession and Debt Ceiling Risks

Morning Markets

March S&P 500 futures (ESH23) this morning are down -0.92%, and March Nasdaq 100 E-Mini futures (NQH23) are down -1.03%. 

U.S. stock index futures this morning are trading lower on continued recession concerns sparked by yesterday’s weak Dec U.S. retail sales report of -1.1% and Dec manufacturing production report of -1.3% m/m.

This morning’s U.S. economic reports were mixed but tilted a bit toward the stronger side.  The U.S. Dec housing starts report of -1.4% to 1.382 million units was stronger than expectations for a decline to 1.358 million units, but the Dec building permits report of -1.6% to 1.330 million was weaker than expectations for a rise to 1.365 million.

The Jan Philadelphia Fed business outlook index rose to -8.9 from Dec’s revised -13.7, which was stronger than expectations of a rise to -11.0.

Today’s unemployment claims report was slightly stronger than expected.  Weekly U.S. initial unemployment claims fell -15,000 to 190,000, which showed a stronger labor market than expectations for a rise to 214,000. In addition, continuing claims rose by +13,000 to 1.647 million, which showed a stronger labor market than expectations for a rise to 1.655 million.

Stocks are seeing continued downward pressure today after several Fed officials yesterday kept up their hawkish comments about the need for more interest rate hikes despite expectations for a weak economy this year.  The market is discounting a 100% chance that the FOMC at its meeting in less than two weeks on Jan 31-Feb 1 will raise its federal funds rate target by another +25 bp to 4.50/4.75% from the current range of 4.25%/4.50%.  The effective federal funds rate is currently at 4.33% and FOMC members are predicting a funds rate of 5.1% by the end of this year, up +77 bp from the current level.

The markets are also concerned about an impending debt ceiling crisis as Congress is expected to have difficulty passing a debt ceiling hike or suspension by the Treasury’s X-date in June when the Treasury will run out of borrowing authority and cash to pay all its bills, possibly resulting in a U.S. sovereign default on Treasury security interest and principal.  The Treasury hit the debt ceiling today and is beginning to use extraordinary measures, which will last only through early-June, according to Treasury Secretary Yellen.

Stocks are also seeing downward pressure today from higher T-note yields.  The 10-year T-note yield this morning is up +4.4 bp at 3.413%, retracing a small part of Wednesday’s sharp -17.8 bp decline due to this morning’s slightly stronger-than-expected U.S. economic reports.

The Euro Stoxx 50 index this morning is sharply lower by -1.78%.  ECB President Lagarde today kept up the ECB’s hawkish tone and said that inflation “is way too high.”  She said, “We shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.” 

On the brighter side for stocks, Ms. Lagarde also said that a “small contraction” in the Eurozone economy is now more likely than a recession.  She said, “It’s not a brilliant year but it’s a lot better than we have feared.”

European stocks are also being undercut by a general strike today in France in response to government plans to modify the nation’s pension law.

The Shanghai Composite Stock index today closed +0.49%, and Japan’s Nikkei Stock index closed down -1.44%.

Pre-Market U.S. Stock Movers

Alcoa (AA) is sharply lower by more than -6% in pre-market trading after the company reported disappointing Q4 earnings sparked by lower aluminum prices and higher materials and production costs, a common theme for other miners and commodity-producing companies.

Discover Financial (DFS) is down more than -8% after the company said it expects charge-offs in the range of 3.5-3.9% this year, higher than market expectations of 2.8%.  The report heightened worries about a recession and consumer spending in 2023.

Procter & Gamble (PG) is down more than -3% in pre-market trading after reporting that volume sales growth is slowing more than expected. 

KeyCorp (KEY) is down more than -2% in pre-market trading after reporting weaker-than-expected Q4 revenue.

Allstate (ALL) is down by more than -5% after reporting a adjusted net loss for Q4 that was larger than market expectations.

IBM (IBM) is down -0.5% in pre-market trading despite an upgrade to market perform from underperform at MoffettNathanson, which is predicting an improvement in IT services demand in 2023.

Today’s U.S. Earnings Reports (1/19/2023)

Comerica Inc (CMA), Fastenal Co (FAST), Fifth Third Bancorp (FITB), KeyCorp (KEY), M&T Bank Corp (MTB), Netflix Inc (NFLX), Northern Trust Corp (NTRS), PPG Industries Inc (PPG), Procter & Gamble Co/The (PG), SVB Financial Group (SIVB), Truist Financial Corp (TFC).

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