You're a mean one, Mr Grinch: Stocks tank in the wake of solid data

YOU'RE A MEAN ONE, MR GRINCH: STOCKS TANK IN THE WAKE OF SOLID DATA (1616 EST/2146 GMT)

Wall Street was in no mood for unexpected services sector strength or an upside surprise in factory orders, with all three major U.S. stock indexes ending the session deep in negative territory.

All three shed more than 1%, with the tech-heavy Nasdaq IXIC suffering the steepest loss, down 1.9% on the day.

As with Friday's blowout jobs report, evidence of economic resilience - usually cause to celebrate - is stoking fears that Powell & Co will keep interest rates higher, longer.

Nearly all boats dropped with the receding tide, with banks (.SPXBK) plunging 4.2%, and economically sensitive transports DJT and smallcaps RUT sliding 3.3% and 2.8%, respectively.

Amid a catalyst desert, investors have little to do but fret until a week from tomorrow, when crucial consumer price data (CPI) is released just as the Federal Reserve convenes for its next monetary policy meeting.

Analysts expect CPI to show a cooling in headline inflation but an increase in the core measure, which strips out volatile food and energy prices.

As for the Fed, financial markets have priced in a 77% likelihood of a 50 basis point interest rate hike, according to CME's FedWatch tool, a welcome slowdown after a barrage of super-sized 75 bp increases.

Here's your closing snapshot:

(Stephen Culp)

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STRONGER DATA A ‘REALITY CHECK’, FED COULD GO HIGHER FOR LONGER (1345 EST/1845 GMT)

Surprisingly resilient jobs and spending data last week has “delivered a reality check” and makes it more likely that the Federal Reserve could hike rates higher and for longer than many expect, according to Barclays Capital.

Data on Friday showed that U.S. employers hired more workers than expected in November and increased wages, shrugging off mounting worries of a recession. That followed a survey on Thursday showing that U.S. consumer spending increased solidly in October.

“The US economy is holding up better than we had expected,” Barclays said in a report. “This likely reinforces the need for the Fed to proceed with its plan for further aggressive rate hikes.”

To protect against this possibility the bank recommends investors be short front-end rates.

“We still think the Fed will step down its hiking pace next week but note upside risks,” Barclays said. “We recommend positioning for tail scenarios of 'higher for longer' and a deeper recession.”

The U.S. central bank is expected to hike rates by an additional 50 basis points when it concludes its two-day meeting on Dec. 14. Fed funds futures traders are pricing for the fed funds rates to peak at 4.99% in May. (FEDWATCH)

(Karen Brettell)

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CRYPTO COLLAPSE AND OTHER SURPRISES IN STORE FOR 2023 (1330 EST/1830 GMT)

Crypto assets have had a tough year, but the worst may not over yet. According to a note by Standard Chartered on Sunday, crypto could be in for an ugly "surprise" in 2023 if the current collapse spreads.

Bitcoin, the world's largest cryptocurrency, is down 63% so far this year, as risk off sentiment weighed on digital assets and crypto firms succumbed to liquidity squeezes and investor withdrawals.

In their surprise scenario for 2023, Standard Chartered's global head of research Eric Robertsen sees the bursting of the crypto bubble to continue, with Bitcoin BTCUSD falling to $5,000.

The digital currency hit $69,000, its all-time high in November 2021.

The collapse of crypto could in turn boost gold and see it reclaim the title of safe haven as equities resume their bear market and the correlation between equity and bond prices shifts back to negative, added Robertsen.

Other surprise scenarios that the markets may be ignoring or under-pricing, according to Robertsen, include:

1. Brent oil falls to $40 per barrel as global recession crushes demand for oil.

2. EUR-USD rallies to $1.25 on political stability and economic recovery as weaker energy prices and peace in the region lead to a peace dividend.

3. The FOMC cuts rates by 200bps in 2023 as layoffs spread from the tech sector to housing and retail to industrials and financial services and the Fed discovers the U.S. economy wasn’t so resilient after all.

4. The NDX 100 falls another 50% to 6,000 as next-generation technology companies see a surge in bankruptcies in 2023, echoing the digital assets crisis.

5. USD-CNH falls to 6.40 as China surprises with aggressive reopening.

6. Good weather combines with the peace dividend to cool food prices, fueling fears of deflation.

7. Republicans impeach U.S. President Joe Biden and the U.S. political environment deteriorates further before the 2024 election.

All in all, market volatility could remain "extremely high" in 2023.

(Bansari Mayur Kamdar)

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MID-CAPS 2022'S MAN-OF-STEEL, SMALL-CAPS 2023'S MIGHTY MOUSE? (1247 EST/1747 GMT)

It's been a rough year for stocks in 2022 regardless of which strata of market cap you may hail from.

Indeed, with less than a month of trading to go, the S&P 500 SPX is last off nearly 16% for the year, or its biggest yearly decline since 2008.

That said, both small and mid-caps have held up somewhat better.

The S&P 600 small-cap index (.SPCY) is last off more than 13% this year, while the S&P 400 mid-cap index MID is off just over 11% in 2022.

Using Refinitiv data back to 1994, and prior to this year, the SPX has outperformed the IDX and the SPCY in 14 of the 27 years (52%). The SPCY has outperformed the SPX and the IDX eight times or about 30% of the time. The IDX has outperformed the SPX and the SPCY just 5 times, or about 19% of the time.

In the wake of the five years when mid-caps provided the best relative performance, the SPCY proved to be the next year's hero. The SPCY outperformed the SPX and IDX in all five of the following years (100%), posting an average gain of 10.5% (median 12.3%).

Thus, as the market approaches year-end, traders will be watching to see how these indexes perform down the homestretch.

2022 has also been a year where small-cap tech has outperformed large-cap tech. The Invesco small-cap tech ETF PSCT is down about 18% this year vs a more than 23% loss for the Technology Select Sector SPDR Fund XLK.

And of note, despite fresh bear-market lows for the SPX and Nasdaq IXIC in October, the small-cap Russell 2000 RUT did not take out its June lows.

Meanwhile, in a recent presentation on their year ahead outlook, BofA said they expect small caps are likely to outperform large caps in 2023.

(Terence Gabriel)

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Q4 U.S. EARNINGS ESTIMATE SLIPS FURTHER (1212 EST/1712 GMT)

The forecast for fourth-quarter S&P 500 SPX earnings dipped further in the past week, with analysts now expecting earnings for the period to decline 0.6% from the year-ago quarter, according to IBES data from Refinitiv as of Friday.

A week earlier, analysts were expecting a decline of 0.4% in earnings for the quarter.

The biggest year-over-year earnings declines are expected in materials S5MATR, estimated down 21.6%; communication services S5TELS, seen down 20.8%; and in consumer discretionary S5COND, seen down 14.3%, based on the data.

Analysts also project an 8.3% year-over-year drop in earnings from the heavily weighted technology S5INFT sector. A week earlier, they were expecting a 7.8% decline in technology earnings for the fourth quarter.

Investors are focused on estimates for the fourth quarter after some big disappointments in the third-quarter reporting period, which is all but finished. Earnings for the third quarter rose just 4.4% from the year before, per Refinitiv data.

A decline in fourth-quarter earnings would be the first quarterly decline in S&P 500 earnings since the third quarter of 2020, based on Refinitiv data.

(Caroline Valetkevitch)

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THANK YOU FOR YOUR SERVICES: PMI, FACTORY ORDERS (1121 EST/1621 GMT)

In the ongoing brawl between services and manufacturing sectors, the former appears to be landing more punches.

Customer-facing services suffered the brunt of COVID lockdowns as demand shifted to goods, but have roared back to life since restrictions were lifted.

Indeed, spending on services was solely responsible for the personal consumption contribution to third-quarter GDP, a fact which plainly demonstrates the demand pivot back to services remains in full swing.

That pivot is also apparent in the Institute for Supply Management's (ISM) non-manufacturing purchasing managers' index (PMI) (USNMPI=ECI), which showed activity in the services sector unexpectedly expanding at an accelerated pace last month.

The index landed at 56.5, a 2.1-point advance, in defiance of the 53.3 consensus.

A PMI number over 50 indicates monthly expansion.

This marks the series' 30th consecutive month in expansion territory and demonstrates a fairly stark divergence from ISM's manufacturing PMI released on Thursday, which showed the sector dipping into contraction for the first time since the pandemic shutdown drove the global economy to its knees.

"Based on comments from Business Survey Committee respondents, increased capacity and shorter lead times have resulted in a continued improvement in supply chain and logistics performance," writes Anthony Nieves, chair of ISM's Services Business Survey Committee. "A new fiscal period and the holiday season have contributed to stronger business activity and increased employment."

The commentary from survey participants back up Nieves' sunny words, with remarks such as "new business requests are solid," and "supply chain issues are stabilizing" offsetting concerns about the tight labor market and inflation.

Inflation, in fact, was a sore point. The prices paid element barely budged from its elevated perch.

Here we see a breakdown of some of the index's components:

S&P Global also released its final take on PMI (USMPSF=ECI), which came in at 46.2, just a hair better than its initial "flash" reading released mid-November.

"The survey data are providing a timely signal that the health of the US economy is deteriorating at a marked rate," says Chris Williamson, chief business economist at S&P Global Market Intelligence. "A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly."

S&P Global and ISM differ in the weight they apply to their various components (new order, employment, etc.)

The graphic below handily demonstrates the extent to which the dueling PMIs disagree, which is more pronounced on the services side.

Finally, new orders for U.S. factory goods (USFORD=ECI) grew by an even 1% in October, arriving north of the 0.7% economists projected.

But of course October is ancient history, harkening back to a time when ISM's manufacturing PMI was still clinging to expansion territory:

The Commerce Department also updated their initial durable goods data, which showed new orders for core capital goods (which strips away aircraft and defense, and is widely considered a barometer for corporate spending plans), were a tad weaker than originally reported, rising 0.6% in a partial rebound from September's 0.8% drop.

A broad sell-off dragged Wall Street lower in morning trading, although the indexes were last off earlier lows.

Airlines provided a rare glimpse of green, with the S&P 1500 airlines index (.SPCOMAIR) taking off.

(Stephen Culp)

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STOCKS BROADLY RED, SERVICES SECTOR ACTIVITY PICKS UP(1010 EST/1510 GMT)

Stocks opened broadly lower on Monday as investors worry that the recent rally may be overstretched and after data showed that U.S. services industry activity unexpectedly picked up in November.

Morgan Stanley’s chief U.S. equity strategist Michael Wilson said that he recommends investors take profits, after the S&P 500 reached the bank’s targets of 4,000-4,150. The index has bounced from a two-year low of 3,492 on Oct. 13.

Stocks extended losses after data on Monday showed that U.S. services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy.

It comes after Friday’s jobs report for November showed better than expected jobs gains and higher than expected wage growth. That has raised the prospect that the U.S. Federal Reserve may raise rates higher and longer than previously expected.

Trading may be choppy this week as investors wait on highly anticipated consumer price inflation data due next week, which will be followed by the Fed's interest rate decision. The U.S. central bank is expected to hike rates by another 50 basis points when it concludes its two-day meeting on Dec. 14. (FEDWATCH)

The S&P 500 SPX was the weakest major index, dropping 1.06%. All major S&P 500 subsectors were in the red.

Here is where markets stand in early trading: