Stocks Fall Monday Ahead of Fed Rate Hike, Apple Earnings

Stocks sank Monday ahead of a massive week for stocks as investors brace for another Fed rate hike accompanied by, likely, hawkish remarks, the January jobs report, and a plethora of big-name earnings reports.

The Fed

The big mover this week will be Wednesday afternoon’s Fed rate decision. Investors pricing in a quarter-point hike as inflation data continues to reflect declining prices, allowing the central bank to slow the rate of increase at it gets closer to the

Investors are all but certain on a 25 basis point hike, pricing in a 96.6% chance at the time of writing so attention will quickly turn to remarks by Fed Chair Jerome Powell as “when will the Fed pivot to rate reductions” has become the new question on a lot of minds.

We won’t be getting a new dot plot this time around, however, December’s Fed projections showed rate reductions slated to begin in late 2023 or early 2024 after reaching a terminal rate over 5%. While investors are expecting a hawkish Fed, they are looking for any sign that the end of the hiking cycle is near.

January Jobs Report

The January jobs report will be a key follow-up to the Fed on Friday as it stands to immediately put the ball back in the Fed’s court.

Economists expect nonfarm payrolls to have increased by 190,000 in January, following a net add of 223,000 jobs in December. Meanwhile, the private sector is projected to have added 175,000 jobs after adding 220,000 the month before. The unemployment rate is expected to rise to 3.6%, while hourly earnings are projected to match last month's 0.3% growth.

One of the key arguments for the Fed to keep tightening is the still-hot labor market. Despite rampant layoffs, unemployment remains historically low, while weekly jobless claims stay low and job openings are high.

In a note to clients, Alexandra Wilson-Elizondo, head of Multi-Asset Retail Investing at Goldman Sachs Asset Management said, "we need activity weakness to translate to job losses to address Powell’s preferred services ex-shelter inflation metric, where wages are the primary driver".

Essentially, investors need to know their audience, otherwise they stand to get burned by the Fed. Earnings season and improving or favorably worsening economic data can inject undue optimism in markets if they don’t.

Data Drops

While investors await the Fed and monthly jobs report, they will turn their attention to several other big economic data points due throughout the week.

The consumer confidence report is due Tuesday and is expected to show confidence edge lower to 108.1.

Meanwhile, the ISM manufacturing report is expected to show manufacturing activity dropping further into the contraction zone with a reading of 48.0%. Keep an eye on the Prices subindex here, as it hit its lowest level since April 2020 in December with a reading of 39.4%.

Lastly, the ISM non-manufacturing index, or the services index, is expected to return to expansion with a reading of 50.3%. Again, watch the Prices subindex as it remains high for services at 67.6% but has declined for three consecutive reports now.

Earnings

Lastly, it's earnings galore this week.

On the mega-cap side of things, Apple (AAPL), Amazon (AMZN), and Google (GOOG) are all due this week. These will be highly interesting following Microsoft’s (MSFT) report last week that showed a tough road ahead for cloud services and IoT device companies. For Google, watch out for any comments related to AI.

All three reports are due after market close Thursday.

Meanwhile, AMD (AMD) follows up on Intel’s (INTC) weak report as semiconductor investors hope for a less gloomy outlook when the chipmaker reports Tuesday afternoon.

Lastly, we have some legacy automakers in General Motors (GM) and Ford (F) that are going to follow up on Tesla’s (TSLA) report last week. Ford recently lowered the price of its Mustang Mach-E to compete with Tesla’s price cuts and said it plans to ramp up production of the Model Y-rival.

GM is due before market open Tuesday and Ford is due after close Thursday.