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Markets Soar Ahead on Powell Rate-Hike Comments

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Over the last few trading days, market participants had been treading gingerly ahead of Jerome Powell’s latest appearance, seemingly awaiting a gut punch from the Fed Chair that did not occur. Instead, Powell seemed to pave the way toward a 50 basis-point (bps) rate hike at its December 14th meeting, instead of the 75 bps we’ve seen in each of the past four Fed meetings. The market indices launched on the news: the Dow +737 points, +2.18%, the S&P 500 +3.09% and the Nasdaq zoomed ahead +484 points, or +4.41%. The small-cap Russell 200 was +2.57%.

In his comments, both pre-written and during a Q&A session at the Brookings Institution this afternoon, Powell allowed that “slowing down” rate hikes balanced risks to the economy, although he plainly stated we still have a long way to go to fight inflation. He’s not satisfied with current levels, and does not the Fed to slacken its grip too soon, lest inflation roar back again. Powell is also in no hurry to pivot toward lowering rates anytime soon, though he also stated he’s not interested in the Fed dragging the economy into recession.

Powell spoke at length about the labor market, during which he acknowledged hiring has slowed from its peak rates earlier this year. He also pointed to job openings — perhaps inferring today’s JOLTS figure of 10+ million job openings in October — being a major factor in inflation concerns going forward. The Covid pandemic reduced expected workforce by around 2 million early retirees from pre-pandemic estimates, and many of those workers aren’t coming back. This gives wage growth power to employees over employers, in a general sense.

So a 50 bps hike two weeks from today would bring us to a range of 4.25-4.50% for the end of the year, after a series of aggressive moves from 0-0.25% 10 months ago. While Powell did not suggest a stop level, it would likely stand to reason — from this juncture, anyhow — that at most two more 50 bps rate hikes would be in the cards. Of course, this suggests economic data continue moving at their current trajectories and not accounting for anything unexpected.

Tech stocks especially liked this dovish tone from Powell; after a punishing year-to-date down more than -27%, today’s bounce was most welcome. This is especially true for those companies who’d spent a long time under water in 2022, such as Meta (META - Free Report) +7.9% on the day. That said, all 11 sectors on the S&P 500 rose higher on this strong rally day. The question is: can the indices keep it going through the end of the year? (CRM - Free Report) is down -5% after hours, however, even though earnings and sales in the quarter outperformed expectations. Earnings of $1.40 per share easily surpassed the $1.21 in the Zacks consensus (no surprise here, by the way — CRM has no earnings misses going back to at least 2017), while revenues of $7.84 billion topped the $7.81 billion expected, +14% year over year. Guidance was also favorable for the innovator in salesforce automation and cloud computing.

Investors are selling the stock based largely on the announcement that co-CEO Bret Taylor will be stepping down from his post as of the end of January after six years leading Salesforce with co-founder and co-CEO Marc Benioff. This was an unexpected move, and the initial reaction is to see this as a negative development for the company. Salesforce also posted a slightly lower-than-expected Remaining Performance Obligation, suggesting demand for enterprise CRM is lagging.

Cloud services provider Snowflake (SNOW - Free Report) is having a really rough late-trading session, -13% at this hour, on beats for both top and bottom line numbers but lowered revenue guidance for next quarter to a range of $535-540 million; the Zacks consensus was $582 million. This is especially true after +67% sales growth in Q3 — 7% higher than expected — although like Salesforce, Snowflake also posted lower-than-expected Remaining Performance Obligations.

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