U.S. stocks take shelter ahead of event risks

U.S. STOCKS TAKE SHELTER AHEAD OF EVENT RISKS (1603 EST/2103 GMT)

Major U.S. stock indexes fell on Monday, dragged lower by declines in technology and other mega-cap shares, as investors looked toward a major week of events including central bank meetings and a slew of earnings reports.

The Nasdaq IXIC took the biggest hit, losing about 2%, while ending back below its 200-day moving average. That said, the IXIC is still on track for its biggest monthly gain since July of last year, and its best January performance since 2019.

The Dow Jones Industrial Average DJI snapped a six-session win streak. That was its longest run of gains since another six-day streak in October of last year. .

Nearly all S&P 500 SPX sectors ended red with energy SPN and tech S5INFT the weakest groups. Staples S5CONS were the only gainer, rising only about 0.1%.

Transports DJT, FANGs NNYFANG and chips SOX were among underperformers.

Here is a snapshot of where markets stood just shortly after Monday's closing bell:

(Terence Gabriel)

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SMALL UPTICK IN UNEMPLOYMENT RATE CAN SIGNAL RECESSION (1348 ET/1848 GMT)

Investors who foresee a soft landing cite the tight U.S. labor market with the unemployment rate at just 3.5% as reason to downplay any recession risk.

But a look at the 10 recessions since the end of World War II, excluding 1980 and during the pandemic, shows unemployment does not have to rise much to signal an economic slump, says Joseph LaVorgna, chief U.S. economist at SMBC Group.

With one exception, the unemployment rate rises before the economy peaks. The trough in that rate coincided once with the onset of recession, when it fell to 7.2% in June 1981 and economic activity peaked the next month, with the jobless rate steady, he said.

In 1953 and 1969, the unemployment rate increased only one-tenth before the onset of a recession. In 1973, the rate gained just two-tenths, while in 1948, 1957 and 1960 the it rose 0.4% before a recession ensued.

More recent recessions have experienced slightly larger increases before the peak in real GDP. The unemployment rate increased 0.5% ahead of the 1990 and 2001 downturns, and there was a 0.6% increase before the 2008-09 recession.

The pandemic and 1980 recessions were not considered because of their unique characteristics, he said.

"Whenever the next downturn begins, most people will not notice until it's too late," LaVorgna says in a note.

(Herbert Lash)

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MONTH-END AND THE FED WILL PROVE TO BE BITTER PILLS -MORGAN STANLEY (1238 EST/1738 GMT)

Stocks are off to a surprisingly strong 2023 start.

However, Mike Wilson, equity strategist at Morgan Stanley, believes the good news is now priced in, and month-end, coupled with the Fed's resolve to tame inflation will be a bitter pill for the market to swallow.

As Wilson sees it, recent price strength is more a reflection of the January seasonal effect and short covering after a tough end to December and a brutal 2022.

According to Wilson, the reality is that earnings are proving to be even worse than feared, especially when it comes to margins. Additionally, "investors seem to have forgotten the cardinal rule of 'Don't Fight the Fed.'"

Wilson thinks this week will serve as a stark reminder.

He also believes the combination of a Fed not pivoting to a dovish stance, coupled with the reality of the "worst earnings recession since 2008" is being mispriced once again.

Thus, Wilson expects the final leg of the bear market to emerge in short order.

(Terence Gabriel)

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LACK OF LAYOFFS IN INDUSTRIALS BODES WELL FOR SOFT LANDING - RBC (1219 EST/1719 GMT)

With the Fed rate decision waiting in the wings, and the January jobs report expected on Friday, market participants and members of the FOMC are scanning the labor market for any signs of loosening.

Layoffs are a good place to start.

In its December planned job cuts report, executive outplacement firm Challenger Gray and Christmas said that December layoff announcements were up 129% year-over-year, and for the entire year, 363,824 job cuts were announced, up 13% from 2021.

It comes as no surprise that the technology sector suffered the biggest hit, with headcount reductions of 97,171 announced last year, up 649% from 2021.

Major players in the tech and tech-adjacent space, including Meta Inc META, Amazon.com AMZN, Salesforce CRM Twitter, and Snap Inc (SNAP.O) revealed their job cut plans last year, and so far in 2023, Microsoft MSFT, Alphabet GOOG and IBM IBM have joined the fray.

But as interest-rate sensitive big tech sheds headcount in anticipation of an economic downturn, a note from RBC Capital Markets suggests industrials is the sector to watch.

"It's worth noting that big spikes in Industrial layoffs occurred during each of the big periods of economic stress that we examined," writes Lori Calvasina, head of U.S. equity strategy at RBC. "But this time around, industrial layoffs have remained extremely low."

"The lack of major layoffs in the industrial segment of the economy so far supports the soft landing thesis, in our view."

Judging from the Institute for Supply Management's (ISM) most recent PMI report, goods makers seem highly unlikely to start slashing their workforce.

Comments from respondents to ISM's most recent survey included phrases like "skilled labor shortages are huge," and "struggling to remain staffed."

The graphic below shows monthly announced layoffs in the tech and industrial sectors going back just prior to the onset of the global financial crisis:

Back to the Challenger data, the automotive industry won the dubious honor of second place in 2022, announcing 30,912 layoffs, up 195% year-over-year.

The prize for the biggest annual increase in layoffs goes to fintech, which soared 1,670% to 10,476 in the wake of the cryptocurrency meltdown.

(Stephen Culp)

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MORE COMPREHENSIVE 2022 Q2 JOBS DATA RAISE HARD LANDING RISK (1102 EST/1602 GMT)

When it comes to data on the U.S. labor force, benchmark revisions are usually of more interest to economists than the market, says Marc Chandler, chief market strategist at Bannockburn Global Forex.

A look at more comprehensive labor data in last year's second quarter indicates the U.S. jobs market wasn't as resilient at the time as many traders believed, he says.

"Revisions don't really capture the imagination of market participants," says Chandler. "This time because of the stark contrast with the official data, maybe they will."

The data gives ammunition to those who expect the Fed will cut interest rates later this year, but also suggests a harder landing may be in store because the U.S. economy is actually weaker than recent GDP numbers suggest, Chandler says.

"We've had a honeymoon period in which people think maybe you can have a soft landing. This raises questions about how soft of a landing," he says.

The difference between the number of gross job gains and gross job losses resulted in a net employment loss of 287,000 private sector jobs during the March to June period in 2022, the U.S. Bureau of Labor Statistics reported last week.

Research by the Federal Reserve Bank of Philadelphia that examined comprehensive labor data for the second quarter also indicates a weaker U.S. jobs market.

U.S. payroll jobs remained essentially flat from March through June last year rather than just over 1 million new jobs that were shown in BLS's current employment statistics (CES).

"In the aggregate, 10,500 net new jobs were added during the period rather than the 1,121,500 jobs estimated by the sum of the states; the U.S. CES estimated net growth of 1,047,000 jobs for the period," the Philly Fed said in a December report.

(Herbert Lash)

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U.S. STOCKS DIP AS BIG WEEK FOR EARNINGS, CENTRAL BANKS KICKS OFF (1003 EST/1503 GMT)

Wall Street's main indexes are mixed early on Monday as the busiest week of the earnings season gets underway, and ahead of key central bank meetings.

The IXIC quickly fell to test its 200-day moving average, around 11,495, which should now attempt to act as support. On Friday, the IXIC registered its first close back over this closely followed long-term moving average in more than a year.

So far on Monday, the IXIC has hit a low of 11,478. It is now back up to around 11,540. Chips SOX and FANGs NNYFANG are early underperformers, and tech S5INFT is among weaker S&P 500 sectors.

Defensive groups are among those SPX sectors in positive territory.

Markets await key central bank meetings including the Fed, ECB and BOE, as well as a number of earnings reports from tech titans coming this week.

Here is a snapshot of where markets stood around just after 1000 EST:

(Terence Gabriel)

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NASDAQ COMPOSITE: ANOTHER BRICK IN THE WALL FALLS (0900 EST/1400 GMT)

The Nasdaq Composite IXIC ended at about 11,622 on Friday. With this, the tech-heavy index scored its first close above its 200-day moving average in more than a year:

It was the first IXIC finish above this closely watched long-term moving average since January 14, 2022. Subsequent near touches throughout last year led to renewed selling pressure.

Bulls are still looking for the Nasdaq daily advance/decline (A/D) line QQSHF to confirm the Composite's feat. The A/D line remains just shy of its descending 200-DMA. This breadth measure has failed on its near touches of the long-term moving average since late-July 2021.

Meanwhile, with the market focused on the results of this week's FOMC meeting, due Wednesday at 2 PM EST, tech-titan earnings from Meta Platforms META after the close that same day, and results from Apple AAPL, Amazon.com AMZN, and Alphabet GOOG after the closing bell on Thursday, and the DJI DJI up six-straight sessions through Friday's close, it may not be much of a surprise that e-mini Nasdaq 100 futures NQ1! are suggesting an opening pullback on Monday.

The Composite is on track for its biggest monthly gain since July, and its best January rise since 2001.

The 200-DMA should now attempt to provide support for the IXIC just under 11,500.

(Terence Gabriel)

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