Yields In Focus Again As 10-Year Falls Below 2.4%; Homebuilder Earnings Digested

The interest rate shuffle might continue today, with U.S. stocks apparently taking their cue from what’s going on in the Treasury market. A negative tone prevailed early as yields sank again.

A few weeks ago, stocks and Treasuries were both marching upward in sync, which is a bit unusual. Now, things have reverted to a more typical scenario, with the two diverging. Early Wednesday, as Treasuries rose and yields fell back below 2.4% on the 10-year note, U.S. indices ticked lower amid more concern that the rate decline might indicate rough waters ahead for the economy.

Some of the renewed focus on yields, when you get right down to it, might reflect the lack of other things to talk about this week. While there is some data out there, the earnings calendar is very light and the China tariff situation seems to have taken a back seat for now. As for Brexit, it’s looking so confusing right now that the market might not know what to make of it, so it’s not acting as a catalyst. The employment report next week followed by Financial sector earnings could be the market needs to get back to focusing more on fundamental discussions.

An Eye on Earnings

Speaking of earnings, there’s a smattering of them Wednesday. Homebuilder Lennar Corporation LEN missed third-party consensus on both earnings per share and revenue as it looked like some of the soft housing numbers we’ve seen lately might have come home to roost. However, the company offered a ray of hope in noting that mortgage rates have fallen and home prices have moderated, both of which could help the new home market to “correct itself.”

Meanwhile, KB Home KBH reported better-than-expected earnings after the close Tuesday, and its shares were up in pre-market trading. On the negative side, the homebuilder did say it saw fewer home sales in the quarter—with lower prices—and its revenue was down 7%, short of third-party estimates.

More earnings are on tap after the close, highlighted by Lululemon Athletica Inc LULU. Shares of LULU are outpacing the S&P 500 (SPX) so far this year, and the company raised guidance a couple of months ago.

Earnings estimates for Q1 continue to look pretty soft. As of Monday, research firm CFRA predicts S&P 500 Q1 earnings will fall 2.3% year-over-year, with seven out of 11 sectors in the red. This would be the first year-over-year earnings decline since the 2015-16 “earnings recession” when earnings fell year-over-year four quarters in a row 

On the data side, the only major number coming out today is the weekly U.S. crude stockpiles report. Last week saw a much bigger than expected draw of nearly 10 million barrels, and supplies are below the five-year average. U.S. crude prices hovered just under $60 a barrel early Wednesday, near four-month highs. Another big crude draw might indicate continued strength in the economy, though keep in mind that we’re heading into what’s seasonally a strong time for crude demand.

U.S. markets have been on a bit of a roller coaster over the last week amid all the rate worries, but remain solidly higher for the year as we near the end of Q1. At the end of trading Tuesday, the SPX was up 12.4% year-to-date, and the Nasdaq (COMP) was doing even better with nearly 16% gains. The small-cap Russell 2000 (RUT), which has been lagging the SPX lately, out-performed it Tuesday with 1% gains.

Recovery Tuesday

Tuesday’s rally looked broad and pretty convincing, with all S&P 500 sectors finishing in the green. Even Financials, which had struggled the last week amid worries about falling rates and what they might say about the economy, joined in the cheer. Financials—which seemed to take their cue from the stabilizing rates—were among the best performers of the day, rising more than 1%. Another star was Energy, also up more than 1% as crude oil prices jumped back to $60 a barrel amid expectations for falling U.S. inventories.

While cyclical sectors like Info Tech, Materials, and Industrials were also on the day’s leaderboard, the so-called “defensive” sectors like Utilities and Health Care also registered solid days, with Health Care getting a lift from strength in the biotech sector. Biotech had slumped over the last month following a hot start to 2019, and is typically a sector that does well when investors feel optimistic about the economy.

The strength on the defensive side of the field also could be seen in the Treasury market, where 10-year yields stayed near recent low levels just above 2.4%, down from around 2.7% at the start of the year and 3.2% at the end of last summer. The Fed’s meeting last week with no more rate hikes apparently in the works for 2019 continues to pull the market in two directions. On the one hand, companies and the economy in general don’t appear to face the threat of higher rates, but on the other, the Fed’s dovish stance raises concerns about the health of U.S. and world economies. The 10-year fell below 2.4% early Wednesday and is now back below where it was at the start of last year.

Data Don’t Send Positive Signal

More data poured in Tuesday, and it generally didn’t look too promising. February housing starts and building permits fell short of Wall Street analysts’ estimates, with housing starts sliding nearly 9% from a month earlier and single-family starts looking particularly weak. The housing market has generally been soft, but there are some hopes among economists that recent cheaper mortgage rates might give the sector a kick start. Home builder stocks traded mostly lower Tuesday on the fresh data, which didn’t offer much evidence of improvement.

The other data Tuesday was March consumer confidence, and it also came up shy of estimates and below the February number. Consumer confidence has now declined in five of the last six months, Briefing.com noted. However, there are plenty of signs of consumer health, too. 

It’s possible the weak data might have played a role in the market’s stepping back from sharp early gains Tuesday. Another factor could have been Apple Inc AAPL shares reversing from green to red after Bloomberg reported that a U.S. trade judge ruled against AAPL and for Qualcomm, Inc. QCOM in a patent case. The judge recommended that some imported AAPL iPhones should be blocked from the U.S. as a result. AAPL got an apparent lift early Wednesday when the U.S. International Trade Commission ruled against an import ban, media outlets reported.

VIX Settling Back Down

Volatility, which came roaring back last Friday, has spent the last two days retreating. By the end of the day Tuesday, the VIX was back below 15 after a jump to above 17 last week. While VIX seems to be hibernating a little for now, the quick rise on Friday could indicate a bit of jumpiness in the market. That means the turbulence may not be over yet, and could resurface if, for instance, some unexpected news comes in. Remember, U.S. and Chinese negotiators were meeting this week on trade, so it might be prudent to keep an ear open for any headlines or tweets that might come out of that.

Also, it might be worth considering that Friday is the last trading day of the quarter. Sometimes the quarter’s end is marked by some “window dressing” as fund managers shift positions before sending out quarterly statements. Investors might want to consider taking extra care in any moves they make this week because sometimes volume can pick up at times like these.

UP FOR AIR: After a sharp descent since mid-month, Financials (candlestick) finally had an up day Tuesday. That might have had something to with stabilizing 10-year Treasury yields (purple line), though they remain down significantly over the last few weeks. Data Source: S&P Dow Jones Indices, Cboe.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

GDP To Pay a Call: Thursday morning brings the government’s second estimate of Q4 gross domestic product, and analyst estimates going into the data are for a slight downward course. The Briefing.com consensus stands at 2.5%, down a tick from 2.6% last time out. Beyond the headline number, investors might want to also focus on the updated government estimate for consumer spending during Q4, which last came in at a 2.8% rise. That was down from well above 3% the previous two quarters, but still relatively strong in a category closely watched for signs of consumer health. The real question might be what personal spending (and GDP) ended up being in Q1, which closes out at the end of this week. We won’t find out until late last month, but the Atlanta Fed’s GDPNow indicator for Q1 rose to 1.3% on Tuesday, up from the previous 1.2%. The 1.3% is roughly in line with many economists’ estimates, and would be the lowest quarterly GDP growth since 2015.

Minding All the Gaps: Lost in the shuffle this week amid all the focus on inversion in the Treasury complex is that the gaps between a number of key Treasury yields have been stable or actually getting wider. While the three-month Treasury yield continued to hold about a four-basis point premium to the 10-year yield Tuesday, the spread between the two-year and 10-year yields widened to 15 basis points, up from single digits at its low. In addition, the spread between 10-year and 30-year yields has been pretty stable recently and is wider than it was at the start of the month. Some analysts who look back at the historic data say the three-month to 10-year inversion, at least in the past, hasn’t signaled imminent pain for the stock market, though you never can bet on history repeating. A more dramatic inversion in some of the longer-term yields might be more substantive, but at this point that hasn’t come too close to happening. 

A Little M&A With Those Fries?: In M&A news, McDonald’s Corporation MCD turned away momentarily from its focus on food to announce a planned $300 million purchase of Dynamic Yield Ltd., a digital start-up company that MCD says can help it improve its drive-through technology. This purchase could be seen as a sign of the times, because it reinforces the importance of technology across all aspects of the economy. Also on the M&A front this week, Uber Technologies announced it will acquire Middle East rival Careem Networks for $3.1 billion. Uber plans to have its IPO next month.

That’s two interesting M&A announcements this week alone, but M&A activity got off to a relatively slow start this year, according to Axios. Through roughly the first two months of 2019, M&A was well below the same pace a year ago despite a couple of major deals including Bristol-Myers Squibb’s BMY acquisition of Celgene Corporation CELG, a $74 billion deal. This year has a lot to live up to if it’s going to keep pace with last year’s historically strong M&A levels.

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