PFE - Wall Street Lunch: Powell Plays Santa

2023-12-13 17:23:14 ET

Summary

• The Federal Reserve keeps interest rates unchanged and signaled an end to the hiking cycle.
• Fed Chairman Jerome Powell leans dovish in his press conference and sidesteps pouring cold water on a stock and bond rally.
• Traders are pricing in rate cuts and a soft-landing scenario, with expectations of six cuts by the end of 2024.

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Chairman Jay Powell leans dovish after Fed keeps rates on hold . Fed projection pencil in 3 rate cuts next year. Stocks rally, Treasury yields fall as Dow Jones tops 37K .

This is an abridged transcript of the podcast

The Federal Reserve closed out the year keeping rates steady in the range of 5.25%-5.5%, as expected. It was third meeting in a row the FOMC has decided on no action and it also came with a clear indication that this unprecedented hiking cycle is over.

Market participants keyed in on the dot plot in the latest of Summary of Economic Projections. FOMC members are pricing in 75 basis points of cuts next year. The median forecast was a rate of 4.6%, down from 5.1% in September. The median of Core PCE inflation dipped to 2.4% from 2.6%, closer to the Fed’s target of 2%.

University of Michigan economist Justin Wolfers said that this dot-plot is the "admission that interest rates have gone as high as they're going, and at some point in 2024 we'll see two, three or four rate cuts."

Gregory Daco, economist at EY, called it a “more realistic view of the inflation outlook, acknowledging (1) strong disinflationary momentum (and 2) more dis-inflation in the pipeline

Chances of a first rate cut coming in March jumped from below 50% to 75%, according to fed funds futures trading. Traders are now pricing in six quarter-point rate cuts by the end of 2024, twice what the dot-plot says and more evidence that the markets are also buying into the soft-landing scenario big time.

Treasuries rallied sharply right after the release. The 2-year Treasury yield (US2Y), most closely tied to the fed funds rate, tumbled nearly 30 basis points, below 4.5%. The 10-year yield (US10Y) moved close to 4%, which would be a full percentage point from where it was in late October.

Stocks also saw a risk-on move, with the major averages jumping. The Dow Jones ( DJI ) set a new record high , closing above 37,000 for the first time. The S&P ( SP500 ) and Nasdaq ( COMP.IND ) closed up 1.4%.

And in contrast to previous post-decision press conferences, Fed Chairman Jay Powell decided not to stop the party.

Perhaps in a holiday giving mood, Powell admitted that it was unlikely the Fed will hike more and said that policymakers are thinking and talking about when it will be appropriate to cut rates .

Doves and stock bulls have been waiting for Powell to open the door to cuts, but in past meetings he has stuck steadfastly to the message that the Fed will be data dependent. Just two weeks ago Powell said it was too early to speculate on lower rates.

Mohamed El-Erian, adviser at Allianz, says the evolution of the chairman’s views from just 12 days ago “has turbocharged the collapse in yields.”

“The dynamic is a familiar one: A more dovish than expected Fed move makes markets insist on even more of a shift. The cumulative drop in yields over the last few weeks is extraordinary in every way,” he said,

Former Fed economist Claudi Sahm says “Jay is TeamSoftLanding and has been the entire time,” even when the staff put a recession in projections. And now he’s throwing shade to “gloomers.”

Moving to active stocks

Microsoft ( MSFT ) got a bullish initiation from Truist Securities, which initiated coverage with a Buy rating . Analyst Joel Fishbein, who also put a three-year price target of $600 on the stock, said Microsoft is likely to keep benefiting from AI, its Azure cloud services unit and Copilot, which could send shares higher and result in the compounding of strong gains.

J.P. Morgan named Alphabet ( GOOG ) ( GOOGL ) as one of its top picks for 2024 . Analyst Doug Anmuth says they project 11% gross revenue growth in constant currency, including 10% for search and other, 12% for YouTube and 23% for cloud revenue. J.P. Morgan also expects improvements in search and YouTube growth based on AI tools, the secular shift to digital advertising, continued monetization of YouTube Shorts and favorable comparisons.

Pfizer ( PFE ) slumped after the company announced lower-than-expected guidance for 2024 , including the impact of its new acquisition target Seagen (SGEN). Pfizer projects 2024 revenue of $58.5 billion to $61.5 billion and adjusted earnings per share to stand at $2.05 to $2.25. The consensus is revenue of $63.2 billion and EPS of $3.17.

In other news of note

The Night Agent: Season 1 was the most watched Netflix ( NFLX ) show or movie of the first half of 2023. The streaming company revealed data for every single production it has shown in a new report that will now be released twice a year.

The political thriller was the most watched title in the world with viewers spending 812 million hours watching the drama. Ginny & Georgia: Season 2 was the next-most-watched with 665 million hours. Together, viewers spent nearly 1.3 million hours on seasons one and two of Ginny & Georgia.

The company had previously declined to disclose this data.

And in the Wall Street Research Corner

HSBC set its 2024 S&P target at 5,000 .

Strategists say the projected 8% advance from current levels will arrive with "a soft-landing scenario" that "could pave the way for further upside.”

They say “market expectations are more optimistic heading into 2024 but far from euphoric."

HSBC says historically the S&P 500 returns an average of 22% between the first Fed pause and six months after the first cut – if a recession is avoided.

"We believe we are in one of those cycles. While growth should slow, we believe the US will avoid a recession. Since the Fed pause in July, the S&P 500 has been roughly flat."

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