Stocks fell across the board this week as investors digested the minutes from the latest Fed meeting, an inflation update, and earnings reports.
Fed Minutes
The minutes from the latest Fed meeting, held Jan. 31 to Feb. 1, didn’t really surprise investors following a string of worse-than-expected inflation readings and a continued tight labor market - but still left them wanting.
The Fed continued to note the effects the labor market is having on inflation and that “ongoing” rate hikes will be needed to bring prices back down.
While markets currently suggest 73% chance of another quarter-point rate hike at the next, this is down from before the minutes, while chances for a bigger increase have risen. The Fed noted that despite the unanimous passing of a hike to a target rate of 4.5%-4.75%, there were an undefined and unnamed “few” that supported a 50 basis point hike.
The members who supported a stronger move argued that larger hikes towards their expected terminal rate would “more quickly bring the target range close to the levels” that members think will be sufficient to bring back down inflation.
Inflation
The Fed minutes set the stage for its preferred inflation gauge, with members noting “that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases”.
While those reports were great and fueled a nice rally at the turn of the year, the Fed stressed that “substantially more evidence of progress across a broader range of prices” is needed.
Well, this PCE report didn’t quite show any of those good signs. In fact, the disinflation we had been noting was nowhere to be found today.
Headline and core PCE rose 0.6% against estimates set at 0.4%. Worse yet, yearly inflation increased to 5.4% from 5.3%, while core rates rose to 4.7% from 4.6%.
Meanwhile, personal spending surged 1.8%, topping estimates of 1.3%, and personal income rose 0.6%, below estimates for a 0.9% rise.
This report certainly didn’t check any boxes for investors, at least not any good ones, as it is likely to add more conviction to a hawkish Fed.
Earnings Roundup
Earnings reports continued to be mixed as economic bellwethers headlined, a chipmaker questioned Moore’s Law, and a tech company reached GAAP profitability.
Bellwethers, stocks whose performance is often viewed as indicative of larger economic trends, Walmart (WMT) and Home Depot (HD) both reported Tuesday morning.
Walmart topped estimates but soured the report with downside first quarter and full-year 2023 earnings guidance while declining to provide first quarter comparable sales guidance. Encouragingly, Walmart noted continued strength in the high-income category.
Home Depot topped earnings estimates, missed revenues, and issued downside full-year 2024 earnings guidance accompanied by in-line revenue guidance for the year. Home Depot raised its dividend by 10% and said it will invest $1 billion in its employees to continue attracting high-level talent.
Meanwhile, chipmaking powerhouse NVIDIA (NVDA) reported a strong beat and raise that saw it rally. Investors were willing to ignore a 21% decline year-over-year in revenues as the company noted that artificial intelligence seeing an “inflection point” in the space and talked about bringing its DGX AI supercomputer to markets as a service.
On the call, NVIDIA President and CEO Jensen Huang said “we've accelerated and advanced AI processing by a million x over the last decade. Moore's Law, in its best days, would have delivered 100x in a decade.”
Lastly, Palantir (PLTR) got a rare win after reporting GAAP profitability for the first time in the fourth quarter and saying it expects to be profitable for the year.
Palantir surged as this suggested the company could be on track to achieve profitability faster than previously expected, as its CEO said in past reports that the goal was profitability by 2025.
Interestingly, CEO Alex Karp said many companies would be interested in buying the company’s software and/or Palantir itself while touting that demand for its AI services surged following the release of ChatGPT.
All told, stocks fell this week. The S&P 500 fell 2.67%, while the Nasdaq was the biggest loser with a 3.33% decline. The Dow slid 2.98% and the Russell 2000 dropped 3.15%.
