Three Things That Will Drive the Market Today

One: Wall Street Braces for Jerome Powell’s Interest Rate Decision

At 2:00 pm EST this afternoon, Jerome Powell will announce the results of the Fed’s two-day interest rate meeting. The chances that the Fed will make a cut to interest rates is 1%, according to fed fund Futures, meaning that we’re once again going to hang on every word that Chairman Powell speaks during the press conference at 2:30.

Given the data over the last two weeks, we may see the Fed take a harder line on their “Higher for Longer” approach.

Last week’s economic data flashed signs that the next consumer price index (CPI) readings – the cost of our “grocery cart” and how much it has gone up over the last month and year – may come in “hotter” than expected.

In other words, the data shows what you and I already know: Inflation is far from gone.

This is bad for the market. Jamie Dimon already made mention of the “S” word last week.

“S”tagflation is an economic condition that happens when prices are rising and the country’s economic growth stalls.

The last time our economy experienced Stagflation was 1970 and 1980. This is the economic “Third Rail” that Jerome Powell will try to avoid at all costs. It’s also more likely when trying to achieve a “soft landing” as the Fed has been doing for the last 18 months.

Careful what you wish for.

Watch for the market to trade with increased volatility this morning and a high likelihood that stocks will close at the lows of a tough day of selling unless Jerome Powell says something positive, not expected.

Two: ADP Payrolls Increase More than Expected

In what could be another blow to the fight against inflation, data this morning showed that private payrolls – as reported by ADP – grew at a much faster pace than expected.

ADP’s monthly private payroll report showed that companies added 192,000 workers to their payrolls for the month compared to expectations that we would see only 175,000 new jobs.

Last month, the same poll showed an increase of 208,000 that was just revised up from its original report of 184,000. The reports in March and April are often the result of early seasonal hiring, but this year’s numbers are very strong.

The other side of the report that will certainly be talked about around the table at the Fed’s interest rate meeting this morning has to do with wages.

Wages aren’t falling, they’re growing at 5.0% year-over-year. This represents an increase in the wages that’s higher than the 4.1% reported in March.

The combination of strong jobs growth and higher wages indicates even more pressure on overall prices and inflation.  Again, something that the Fed will be talking about as they prepare to kick the interest rate cut can down the street a little further.

Three: Technology Earnings Trip

We had a wide swath of earnings reported after the bell yesterday, but one area of the market is looking a little shakier after the reports.

Semiconductor company AMD (AMD) and server company Super Micro Computer (SMCI) announced earnings results that have some investors looking at the AI industry with a little question.

First, AMD. The company reported earnings per share results that were exactly what Wall Street expected, but there was a catch. The company generated that earnings-per-share (EPS) match on lighter than expected revenue.

So, AMD did not sell as many chips as had been expected. Year-over-year revenue growth for AMD was 2.2% compared to 10.2% from last quarter. That’s got some scratching their heads.

The company guided their revenue and EPS expectations close to Wall Street’s expectations.

Super Micro is making investors scratch their heads even harder.

The company beat earnings expectations by $0.91. They hit that number on lower-than-expected earnings. So, SMCI beat their EPS target by 16% on revenue that was 200% higher than last year’s revenue.

Here’s where it gets interesting…

Super Micro’s management guided revenue and EPS expectations higher for the next quarter and their full fiscal year.

And here’s where things get even more interesting…

Remember a few weeks ago when the company didn’t provide an update to revenue ahead of its earnings call?

Now we know why.

At the same time, I pointed out that the market has already told us what the price of the stock would be if they missed on earnings as the stock traded to $700 on April 19.

The stock is trading near that $700 price this morning. This is going to be a stock that investors are looking to buy at lower prices with the company’s positive outlook. I’m watching $700 as a targeted buy price and $500 as a “deep bargain” price for SMCI shares.

smci stock chart

The weaker performance of these companies – and others in the technology sector – has me looking a little deeper at the semiconductor sector in my next section.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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