What a day, huh? Yesterday was a roller coaster day for the markets with traders having digested the State of the Union Address the night before and managing through earnings and a late afternoon Fed decision on rates. The Federal Reserve kept a key interest rate steady on Wednesday, but signaled it is on course to raise the benchmark rate at its next meeting in March.
Fed Chairwoman Janet Yellen, in her final policy meeting, and her colleagues voted to leave the benchmark federal funds rate in a range of 1.25%-1.5%, the central bank said in a statement. The decision was unanimous. Initially, the Dow Jones Industrial Average rose following the release of the policy statement, adding to morning gains. Yields on the benchmark 10-year Treasury reached 2.74% shortly after the statement. The policy statement released at the end of the two-day meeting had a hawkish tone, insisting that inflation would pick up in 2018. The statement also suggested that market-based measures of inflation compensation “have increased in recent months.” Economic growth was described as “solid.” In the meeting, the FOMC voted to select Powell to serve as its chairman beginning Saturday. He will be sworn in as chair of the Fed board of governors on Monday at 9 a.m.
Also yesterday, some key pieces of economic data showed continued strength in the economy and most importantly the labor markets. ADP said the U.S. economy added 234,000 private-sector jobs in January versus expectations by economists for 185,000. On Friday, investors will turn to the Nonfarm Payroll report for validation of the ADP report and signs of continued strength in the labor market.
EBAY said that it plans to take over crucial payments-processing duties for its core Marketplace e-commerce offering, a role that PayPal has handled for the e-commerce site under a deal signed when the two companies split in 2015. EBay said it expects to fully transition to the new system in 2021 with the help of a new payments partner, Adyen; the deal with PayPal runs through mid-2020, and eBay said that PayPal had agreed to a new agreement that will continue to allow buyers to pay with its services through at least 2023. “In the new intermediation model, we will simplify our relationship with sellers and plan to charge them a single fee for our Marketplace and payment services,” Chief Financial Officer Scott Schenkel said in a conference call. PayPal Chief Executive Daniel Schulman characterized the move as expected and baked in to PayPal’s forecasts and plans for some time, and noted the operating agreement signed at the time of the split precluded PayPal from working with some large potential partners. He called it “the best possible outcome for PayPal.”
PayPal beat analysts’ estimates when it reported results last night. The company reported fourth-quarter net income of $620 million, or 50 cents a share, compared with $390 million, or 32 cents a share, in the year-ago period. Adjusted earnings were 55 cents a share. Revenue rose to $3.74 billion from $2.98 billion in the year-ago period. Analysts surveyed by FactSet had estimated earnings of 48 cents a share on revenue of $3.63 billion. For the first quarter, analysts model earnings of 40 cents a share on revenue of $3.55 billion. PayPal said it expects first-quarter earnings of 41 cents to 43 cents a share on sales of $3.58 billion to $3.63 billion.
Mondelez International Inc. said revenue rose in the most recent quarter as its snacks powered sales growth outside of the United States. Overall for the fourth quarter, Mondelez reported a profit of $802 million, or 53 cents a share, up from $93 million, or 6 cents a share, a year earlier. On an adjusted basis, the company’s earnings rose to 57 cents a share from 44 cents. Revenue rose 2.8% $6.97 billion. Analysts polled by Thomson Reuters were looking for per-share earnings of 56 cents on $6.97 billion in sales. The company also issued a 2018 outlook that was in line with Wall Street expectations, forecasting double-digit growth in adjusted earnings. Analysts had forecast earnings growth of 11 percent.
Facebook Inc. reported earnings after the closing bell yesterday also, and profit was hit by changes to the tax law. Chief Executive Mark Zuckerberg said that recent changes to Facebook’s core News Feed had led users to spend a collective 50 million fewer hours a day on Facebook. But on the conference call, Facebook stated it was charging an average of more than 40% more for ads. The stock initially fell when the company released its earnings result but rebounded once the conference call started and a more profound explanation on how the company was monetizing those fewer engagement hours by users was offered. The social networking company reported fourth-quarter net income of $4.27 billion, or $1.44 a share, compared with $3.57 billion, or $1.21 a share, in the year-ago period. Earnings included a $.77 cents a share impact due to changes in the U.S. tax code. Revenue rose to $12.97 billion from $8.63 billion in the year-ago period. Analysts surveyed by FactSet had estimated $1.94 a share on revenue of $12.55 billion. For the first quarter, analysts model earnings of $1.23 a share on revenue of $11.12 billion.
Analysts are raising their bullish price targets for Facebook Inc.’s stock after the company’s results. “Strong demand from advertisers drove average ad pricing up 42%,” said KeyBanc Capital Markets analysts led by Andy Hargreaves in a note. Facebook’s earnings reveal “a very powerful ad platform,” the KeyBanc analysts also said. Keybanc reiterated its Buy rating and raised their price target to $245 from $220 per share.
Management “said news feed changes to promote meaningful interaction would likely not negatively impact ad rev growth. That’s our POV, too,” said RBC Capital Markets analyst led by Mark Mahaney. The RBC team hiked its price target to $250 from $230 and reiterated its outperform rating.
Amazon.com Inc. is scheduled to report fourth-quarter earnings on Thursday after the closing bell. Amazon is expected to report earnings of $1.88, up from $1.54 last year. The online retail giant has missed earnings estimates in two of the past five quarters. FactSet analysts expect sales of $59.75 billion, up from $43.74 billion last year. Analysts surveyed by FactSet, on average, expect Amazon Web Services revenue to rise nearly 41% to $4.97 billion from the year-ago quarter. Amazon has beat FactSet revenue expectations the past three quarters. Canaccord analyst Michael Graham, who has a buy rating and a $1,500 price target, said AWS appears to have settled into “a sustainable competitive situation” regarding Microsoft and Google, and for growth to remain high “for the foreseeable future.” Graham added, “we note that Azure has been growing at a much faster rate, has continued with a solid pace of announced price cuts, and anecdotally we have heard sporadic reports of IT managers more closely scrutinizing the switching costs as AWS looks relatively more expensive in some situations.”
After yesterday’s up, then down, then up again roller coaster market ride, U.S. equity futures will continue to try and recover the 2% it had last in the 1st two trading sessions of the week. All eyes will be on Amazon, Alphabet and Apple after the close, which may find the tech sector trading somewhat cautiously throughout regular trading hours. It’s a big earnings release for Apple, which has been heavily scrutinized coming into this earnings cycle. From throttling iPhone devices to claims of underwhelming iPhone X sales, the company will look to quell investor fears and analysts’ criticisms when it reports after the closing bell. Apple results usually don’t hit the tape until 4:25 p.m. EST.
The economic data calendar for today will be highlighted by auto sales and weekly jobless claims. ISM manufacturing index and construction spending will also be released at 10:00 a.m. EST. But again, investors will be anticipating the Nonfarm Payroll report due out tomorrow at 8:30 a.m. EST. After a disappointing December Nonfarm Payroll report, economists have lowered their expectations for job growth in January. Economists polled by MarketWatch expect to see the Nonfarm Payroll report show that 185,000 jobs were created in the month of January. The unemployment rate is expected to hold steady at 4.1 percent.
Volatility is peeling back from its recent breakout. The VIX recently trended above 15, but has since found itself in retreat and now showing signs of stabilization in the 13 range. 2018 has found markets expressing greater volatility, as fears of a near-term market pullback loom large with investors and traders. In a recent article by finomgroup.com, we recently highlighted the outsized .SPX option activity through much of January that led to an increasing VIX reading. Additionally, the article denoted the possible divergence that could come about as many of these .SPX expire on January 31, 2017 and the open interest for February .SPX options was not finding the same appetite amongst investors.
Moreover, finomgroup.com discussed the unusual activity in the VIX complex throughout January in a recent Half-Time show.
Amazon, Alphabet and Apple are all reporting after the closing bell and should provide some market fireworks! A 10-year Treasury yield rising to 2.75% is also weighing heavily with investors. It’s not hump day and it’s not Friday (TGIF)…we’re right in the meat of the trading week folks; let’s see what Thursday has in store!
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