Get Ready for “Higher for Longer” and the Full Cost of the Labor Strikes 9/20/23

0:01Thank you, John. Thank you, Morgan. Live from the NASDAQ market site right here in the heart of New York City's Times Square is fast money. And here's what's on tap today. Hoping for a rate cut soon? Well, don't hold your breath. The Fed reiterating it plans to stay higher for longer, sending stocks sharply lower and yields to 16-plus-year highs. All the market reaction is coming up on the show. Plus, striking a blow, more than 4 million days of work lost as union members from Detroit to Hollywood and beyond hit the picket lines. So how much will this cost the economy? We've got a top labor economist who's going to break it down.

0:37And then later on, going old school, shares of IBM surging to their highs of the year. Why one analyst thinks this big tech vet can teach the new generation a thing or two. I'm Dominic Chiu in for Melissa Lee tonight. Coming to you from the Studio B at the NASDAQ. On the desk here tonight, we've got Tim Seymour, also Karen Finerman, Dan Nathan, Guy Adami as well. But we start with the warning that sent stocks tumbling today. Major indices all closing at or near their lows of the day after the Fed signaled one more rate hike before the year's end. The promise of higher for longer spooking stocks.

1:13The Nasdaq dropping more than 200 points. The tech heavy index now down 4 % in September alone on pace for its worst month of the year. CNBC's Steve Leisman is at the Fed with all the headlines out of the central bank. Steve, this was a scenario where we were expecting a hold and it happened. So what exactly gave today and why did the markets react so negatively? Well, I'll tell you, I was I was warning about higher for longer the past couple of days, but this is even higher than I thought. The Fed leaving rates unchanged expected as expected for the September meeting. But signaling is going to keep rates at a high level for an extended period in large measure because it sees the economy is stronger than previously forecast.

1:51The Fed kept us out for one more hike this year and raised the funds rate forecast for next year and in 2025 by a full half point. What it really did was take off the half of points of cuts that they originally had in their previous forecast. At the same time, the Fed doubled its growth outlook to 2.1 percent this year and boosted their numbers for next year as well. And all of that with less unemployment overall, pretty bullish on the economy. But Fed Chair Jay Powell explained more growth could mean higher rates. Rather than pointing to a sense of inflation having become more persistent, I wouldn't think that's not.

2:26We've seen inflation be more persistent over the course of the past year, but I wouldn't say that's something that's appeared in the recent data. It's more about stronger economic activity. So with an unchanged inflation forecast, what it all means is the Fed's real rate will actually get somewhat tighter next year, as in more restrictive. At the same time, working against the better growth story as the auto workers strike a potential government shutdown, higher bond yields and oil prices. maybe not individually a big deal, but together they could amount to something. The kicker to all this, a government shutdown could mean the Fed doesn't even have the data to know what's going on in the economy.

3:01That would make policymaking even harder than it is already in an uncertain environment. Dom? On balance, Steve, is the negative side of the economic story greater than the positive side, given everything you just laid out? I think if they persist in this idea of next year, of keeping rates high with lower inflation, That's a more restrictive story. And I think there is some danger here, Dom, that next year they snatch defeat from the jaws of victory. They're headed quite nicely to a soft landing, I think, here. But this idea, which, by the way, is the opposite of what John Williams from the New York Fed told the New York Times not too long ago, that if inflation comes down, the Fed has to pivot and lower the funds rate.

3:45It's not really doing that quite so much. It's going to allow things to become more restrictive. I think that would be a mistake next year. Steve, it's Karen. So, I mean, they have said they could be data dependent, right? That would be relevant data and sort of declaring victory on inflation. I think that would give them some leeway to back off the or I guess add back the cuts that they've taken out today. It could. What bothers me a little bit, Karen, is the forecast is for 2.5 % inflation next year, and yet they maintain that 5.1 % funds rate. Well, do the math. And by the way, if you look at their real neutral rate, it's a half a point.

4:25So they're talking about still being restrictive well into next year, four times the neutral rate. I don't understand that. Now, maybe there's a game going on here, a little chicken game, where the Fed doesn't really want to show its cards. that ultimately they are going to cut a lot next year relative to at least keeping rates, the real rate, not very much change. But right now, the outlook is for a more hawkish Fed. But as, you know, Krishna Guha called it earlier in a piece, he said, it's bullish and hawkish to put a couple animals together into a single phrase. Bulls and hawks. They were meant to be together.

5:02Steve Leisman, thank you very much. We'll see you later on. Tim, GlidePath. Dom, great to have you, first of all. Thank you very much. Based upon what Steve just said, GlidePath is what I think of. The Fed's on a GlidePath. GlidePath. Remember, we had someone on the show. There was some cat that came on the show. He told us what his nickname was, and that was probably the worst thing he ever did in his life. You don't ever make up your own nickname. So what is it? And what we heard from Steve was what we were hearing from the Fed. When you were just telling me about the economy, it's kind of like when your accountant says you're paying more taxes, so you should be happy.

5:35if the economy is doing better and the Fed actually has to hang in the pocket longer and be more hawkish. This was obviously what the message was today. The question is when the Fed says soft landing is not our baseline expectation, which is the point they made very clear, is that they don't have to see a soft landing? You know, look, we know what their mandate is, right? Their mandate is inflation and growth and essentially full employment. And so where does that leave the economy? I think that the Fed has no idea where the data is going. And I think that these comments today were very hawkish.

6:07They took 50 bips off of next year in terms of the ease that was expected. That's hawkish. But I think they have no idea. And I think the data that's coming through, they upgraded the economy. They upgraded the labor. And again, these are relative to where they were before. And I think, frankly, we have no idea where we're going to be in three months. It seems like, Guy, the situation now is the economy is in a good spot. So is the Fed having an easier time or a harder one with this? Well, first, I'm going to channel my inner Sonny Corleone and say, can you believe how hawkish the Fed was on Dan Nathan's birthday?

6:37Oh, happy birthday. Yeah, thanks. That was good. You snuck it right in. No, I mean, let's not confuse the issue. The Fed, they should not declare victory. By the way, they're trying to solve the problem that they created in the first place. And if I seem a little animated, it's because I am. I mean, they've gotten it all wrong all along. And they probably will continue to be as hawkish as they possibly can be into early next year. The market doesn't anticipate that. Look at the late move in HYG today, fell off a cliff as 10-year yields are now in the aftermarket, almost 4.4%. Neither one of those are bullish for stocks.

7:10So if we're looking at it through the lens of the stock market, this is not a good thing. Higher rates are not good for stocks. Yeah, through the lens of the stock market, it's kind of interesting. Look at it year over year. You know, the 10-year U.S. Treasury yield a year ago on my birthday was 3.4%. Now it's 4.4%. You just said making 16-year highs. Look at what crude's done year over year. Look at what the dollar now, you know, it's a little bit higher there. It's been obviously pretty volatile. I mean, the one thing to me that is interesting that sticks out like a sore thumb is the S &P 500 where it is.

7:37A year ago today, the S &P was at, you know, 3 ,800 or so. And you think about that. And I see this scenario for a soft landing. But when you think about the lag effect of all of this policy, right, that they've done over the last 18 months, I say to myself, something has to give. We have a 15 VIX now. A year ago, we had a 25 VIX. I just feel like we've just been very complacent here. And I think about some of the moves that we've had in some of the biggest stocks in the stock market. Apple today was down 2 percent. Microsoft down 2.5 percent. Both of them are down 11 percent from the all-time highs made in July.

8:10You know, the semiconductor index on a relative basis has not made new highs. The QQQ, the NASDAQ 100, appears to be rolling over a little bit. And I'm not even done. We can go beyond tech. We can look at the transports are not trading particularly well. Industrials are not trading particularly well. I think we have a situation where the S &P and the NASDAQ, I think, as a monolith, are kind of masking a lot of bad performance under the hood in the stock market. What's curious, Karen, two years ago on this day, your birthday two years ago, 30-year fixed-rate mortgages were a hair over 3%, like 3.02 % or something like that.

8:44Today, they're pushing 7.3%, more than double. The housing market has remained resilient. The stock market has remained resilient. For now. Now, fair enough, everything's a cycle. But even the stock markets remain resilient. Given 500 basis points worth of interest rate tightening, what exactly derails this if those things didn't? Well, something's got to give. I think, though, to the housing thing, because the market's rigged. There's no, you know, anybody with the mortgage isn't selling. So you have this sort of unusual situation of not as many houses for sale. I do think, though, the thing that's got to give is the market.

9:16To Guy's point, rates are higher, which should mean equity is lower. I mean, it's just math. equity risk premium. And so I feel that I want to be hedged in the more high flyer names that I have. So things like the IGV or short the Q's, things like that. But I'm always long, though. I'm going to net long for sure. So I think it's going to be painful. It's going to be painful for sure. So that brings up this discussion about more on the stock market overall. For that, we're going to bring in Stuart Kaiser, who's made his way to the desk over here. He's city's Head of equity trading strategy. You've heard the banter so far.

9:49It's got to be akin maybe to what your discussions are like on the trading desk right now about just the push and pull in the market, is it not? Yeah, I mean, I think you hit it right there. It's a push and pull. It's the positives from lower inflation and a positive GDP revision get offset by 50 basis points less hikes. And I think tactically speaking, the rates are what drove the market lower today. But I think if you're an equity investor, you're looking a couple of weeks or months out, then that positive growth outlook has to be what you're more focused on. And you have to take the view that if equities are strong, but growth starts to weaken, that the Fed ultimately is going to not be as stern as they've been recently.

10:26We've had a lot of clients tell us, it's easy for the Fed to talk caucus when the job market looks like this. Show a little weakness to the job market, and let's see if they change their vocabulary a bit. Is there any expectation that you could see weakness in the job market? There's been talk about it for maybe a year at this point. Look, I mean, you had the Jolts report a few weeks ago. That showed some loosening, but that was quickly followed up by what I would call a pretty strong non-farm payrolls report. So there's no clue of it yet. Some folks would say, well, the strikes, and then you get Amazon telling you they're going to hire 250 ,000 new employees.

10:55A quarter million people, yeah. Yeah, so we're not seeing any weakness in the labor market. I think if you are seeing any cracks on the labor-slash-consumer side, it would be more on the credit card spending side. Our credit card data does show lower spending. A lot of the retailers talked about higher delinquencies. So is that a canary in the coal mine? And we'll see. But that's certainly something folks are focused on. So, Stuart, you talk to obviously a lot of very smart investors who are moving very large pools of capital around the market. What do you make of just the level, I think, of complacency?

11:21You just heard me say, I think under the hood, there's some things, there's some cracks that are starting to happen here a little bit. But I was like the one thing when I was listening to this presser today, I was looking at some of these high growth tech stocks sell off really hard. I went to the options market. I looked at the QQQ and I looked at the next Friday, the 29th. OK, seven trading days from now. And they cost me one percent of the ETF price. That seems really cheap, especially when you have. So talk to me about like the level of complacency and what the market is pricing, because I bought those.

11:49I'm like, you know what, I'll sit on those for a week and see how I do. Look, I think year to date, you've been rewarded for sort of just embracing the good news. Right. You know, why are yields and equities higher the last year? Because economic growth data has massively surprised consensus expectations over that window. So I think what you've seen the last two to four weeks is that started to shift a little bit, right? You know, the growth isn't beating by as much. Yields are rising for less good reasons. And you're starting to get some pressure. But look, anybody who's faded tech this year has ultimately regretted it.

12:16And I think that's why you see a lot of upsides still priced into that space. And the last thing I would say is scarcity. Frankly, there's a scarcity of large cap growth stocks and also a scarcity of positive consensus revisions. So if you can find stocks that have that, you know, people are kind of reluctant to walk away from them. So, Stuart, let me ask you something about labor. So this is we're never expected to have an unemployment level of this this low and sustained. Does that take away some of the room that the Fed has? What's considered an acceptable reversal in labor markets before they need to sort of turn turn dovish?

12:50I mean, it's a great question, because if you took the message at Jackson Hole, I think Chair Powell was reminding folks that, hey, we're willing to pay a growth price to make sure inflation comes in. Right. Today, though, they revised up the growth, the growth number. So, look, acceptable. I think, you know, the Fed has messaged pretty consistently that, you know, if we create some job losses and that's the cost of inflation lower, then they're going to do that. Whether they follow through on it when the data appears, I think, is the ultimate question, right? On our view, a soft landing, and in this case, I mean, a non-recession or a gross slowdown would mean, you know, your unemployment rate stays below 4.5 percent.

13:25If you get a recession, it's sort of above 4.5. So I think that's kind of a Mason-Dixon line for us. And Stuart, before we let you go, what do you think? What's your favorite spot to be in, given that backdrop? Yeah, look, you know, gun to our head, we're still positive on equities. I still think there's a window here where once the markets digest the move higher in rates, they're going to reorient themselves to the positive growth stuff. I mentioned scarcity in tech. It's an area that we still like. I would say the caveat here, though, as mentioned earlier, is higher rates eat on tech a lot more than they eat on other spots.

13:56And you might argue that the higher rates with the positive growth impulse might warm you up to cyclicals a little bit. It's been very narrow leadership. So if we get a broadening in leadership, I think quite positive. All right. Stuart Kaiser at City, thank you very much. Great to get your thoughts here. I wonder, folks, if we talk about this overall, there's got to be a feeling that there's a good spot to be in. If it's not technology, if it's not energy, which has been an outperformer over the last several months. Is there a consensus among you guys? Is it cash? Short end of the curve? 5 % in the bank?

14:28But there are reasons why energy is going to be resilient, and I think there's a valuation justification there. I think I would be a little bit more concerned around some of the industrials, which always look relatively cheap. I think tech's going to be defensive. Again, you can't tell me, both based upon history and where the balance sheets are and the ability to buy back stock and manufacture earnings for the top five or six tech companies in the world, and they will be where people run for defensive. I think in the short run, look, the S &P is getting very close to that 100 day. There's no reason why we shouldn't have a little test there.

14:59Higher rates here for a little bit. But, you know, 41.50 would be a great level if you could make a call here. And I'm not making a call. I'm saying tactically, though, I think markets can trade back a little bit because we haven't had anything more than a 5 % move in the S &P. Before then you get into the dynamics are the Fed put is in the market. And until the Fed proves us wrong, we won't know that till next year. I think equities are going to trade as if the Fed has to jump in. Whatever he said today is something that can be very different in three months. So I think you're buying the market as you get into, you know, late October into those those year and months.

15:30And then you just take the market you have in front of you. I mean, the whole dynamic with the market over the last year. And we did. I think it was right to bring up where we were a year ago and where we were two years ago is time has been the biggest dynamic here. This is all taking a lot longer to play out. It's been a lot longer for the Fed. It's been a lot longer for the labor market. But there are certain things that I think are guaranteed when it comes to a market that right now trades in a multiple. It doesn't deserve. Karen, wasn't your final trade yesterday? Yes. Yeah. One year. Short duration treasuries.

15:59You watched our show yesterday. You know, I make it a point to try to pay attention. Yes. The risk reward seems compelling. But I mean, I think that to Tim's point, this. Well, I don't know. I guess I should say I'm staying long, even though I am afraid. I do think the next direction is down, just rates. I think we're going to have trouble selling this many bonds. So, yeah, supply an issue coming up. All right. Next on the show here, we've got some earnings action. Shares of KB Home, also FedEx on the move after reporting their latest results. We've got all the details coming up next. Plus, IPOs in retrograde.

16:38Arm and Instacart nearly giving back all of their first day gains. Will other new offerings follow suit? We'll debate that when Fast Money returns after this break.

16:55Welcome back to Fast Money. An earnings alert right now on FedEx and KB Home. Those stocks moving in opposite directions, as you can see. FedEx shares rising after giving a strong outlook for the year, up 5.5%. Our Frank Holland has the details. Hi, Frank. Well, hey there, Dom. You know, investors are clearly buying the cost-cutting and transformation plans that FedEx is currently in the middle of. The company added it eliminated$1.8 billion in costs permanently while still beating on EPS and, as you mentioned, raising the low end of EPS guidance. Looking deeper into the numbers, Express missed revenue and margin estimates while ground beat on both.

17:27Margin for ground, that's the e-commerce focused division of FedEx at 13.3 percent. We saw some margin expansion here, and that's compared to a sub-10 percent estimate. And again, expansion, 8.5 percent just a year ago. So FedEx also gained some premium business during the UPS teamsters negotiations, and that appeared to help these results. Really, the only surprise in this report was freight missing on revenue estimates. It was believed that FedEx benefited from the bankruptcy of Yellow, another trucking company in the same space. So in the report, Raj Subramanian, CEO, spoke about the plans to turn FedEx into one company as opposed to three divisions and also that cost cutting, saying in part, First quarter results improved primarily due to the execution of the company's drive program initiatives and continued focus on revenue quality, partially offset by ongoing demand weakness.

18:14Their weakness appears to be centered on the express air delivery business, where average revenue per package fell by 8 percent, while ground revenue increased by 3 percent and freight by 2 percent. The call starts at 530 Eastern, expecting commentary on the holiday quarter and the macro environment that gave FedEx the confidence to raise its full year EPS guidance. Back over to you. All right. Thank you very much, Frank Holland. Let's trade FedEx. Guy, what do you think? So, look, if you had to make a choice between a huge beat on EPS or revenue, I'll take it on the EPS side. And Karen was talking about this before the show.

18:44I mean, they're operating better. And you see it in operating margins. For them to come in at 7.3%, she was expecting 6%. That's actually significant. So, good for them. It makes the stock actually look cheaper now, given the beat, than it was prior to earnings. And it should actually be able to build on this. FedEx has been, listen, they've been their own worst enemy for the last three or four years. But this indicates to me, at least, maybe they're finally getting their act together. Yeah, I think they're finally getting their act together. And, I mean, they had a lot of margin to gain to get closer to UPS.

19:14And I'm along UPS now. I think that there was a little bit of that either switching or people who want to hedge their bets. If UPS goes on strike, they've got to be able to ship packages. So they lost a little business there. I like UPS. I don't love them saying ongoing weakness, although it was air freight. But they're sort of right in the center of e-commerce. And I'd rather see a little better revenue also. All right. UPS getting a bit of a bump there as well in the back of FedEx. Moving on now to KB Home. Those shares are lower despite the company posting a beat on both the top and the bottom lines.

19:51Let's get out to Steve Kovac back in Englewood Cliffs for more details on KB Home's quarter. Steve. Hey there, Dom. Yeah, those beats on the top and bottom lines for KB Home third quarter. EPS was a beat at$1.80 versus$1.43 expected. Revenues beat as well,$1.59 billion versus the$1.48 billion expected. But look, shares are down due to a sales decline on the top line compared to last year. Companies citing tough comparisons to the strong quarter a year ago, but CEOs saying in the release 2023 will be more profitable than the company originally guided towards. Revenue was$1.59 billion, like I said, down from more than$1.8 billion in that year-ago quarter.

20:32KB Home also saying net orders increased 52 % to$3 ,097, crediting improving demand and lower cancellation rates compared to last year because buyers were canceling due to the rising interest rates back in 2022. Call just getting started, Dom, and we'll be back with any updates that are moving the stock. All right, Steve Kovac with the latest on KB. Thank you very much. Let's trade it. Karen, you're up for a KB home. Good or bad? Or is the housing market and homebuilders price for perfection? I don't think it's price for perfection. I do think that sentiment could change. Right. I do think they're I mean, they've been able to execute.

21:09They've been able to also think the price might come down. But we've seen margins hang in there. So the cost may be going down. But I think sentiment can change if we see rates higher. I just think the sentiment will change regardless of how the underlying earnings go. What do you think? Well, I think the stock's up 50 percent this year. I think the housing data that came in earlier in the week doesn't necessarily hit KB. And I'm talking about the NHB index. I'm talking about multifamily starts that were down 11 percent. And over the last couple of months is close to 20 percent. I think there's just a reality to the housing market in terms of interest rates and where some of these some of these deals in terms of apartment houses and a lot of the stuff that's been supporting the broader market.

21:46I think that whole thesis is is under some some some heavy headwinds. I think housing stocks have had their best run of 23, and I think they're going lower, not because the valuations are terrible, and it's certainly not because their balance sheets are weak. It's interesting, Dom. A lot of folks have kind of poo-pooed the student loan repayment that's starting up next month and everything. Think about all these housing dynamics. Think about a lot of the things that have changed, you know what I mean, this work-from-home environment and all this sort of stuff that's happened on a very low-rate environment until now, right?