Early Strength Could Reflect Oversold Ideas, But Fed Speakers May Hold Key

(Tuesday Market Open) The Fed meeting is long over, but Fed officials are in the spotlight this morning as the market tries to come back from its recent swoon. Several Fed speakers are scheduled today, and their remarks, along with the path of rates, the dollar, and volatility, could all help determine whether pre-market strength has any staying power.

A little strength overnight in Europe and Asia appears to be spilling over into the U.S. this morning, but we’ll see if it has enough legs to make this a “turnaround Tuesday” after major U.S. indices skidded to their lowest closing levels since 2020 yesterday.

The selling may have gotten a little overdone the past few days, and things can get briefly oversold. But that doesn’t mean we’ll go screaming back to 4,000 in the S&P 500 Index (SPX). The U.S. Dollar Index ($DXY) is still above 113, and volatility remains elevated. All this indicates that the market isn’t over the fear that led to all this selling. Keep an eye today on the things that were spiking as the market made its way down, especially volatility. You need those to moderate or go lower, especially the Cboe Volatility Index® (VIX).

Potential Market Movers

Known as the market’s “fear index,” the VIX stood stubbornly around 32 during most of yesterday’s volatility, so we’ll see how jittery it gets today. It eased just slightly this morning but remained near three-month highs and was still above 30 before the opening bell.

There’s a decent amount of data today. Investors received August durable goods numbers and new S&P CoreLogic Case-Shiller housing data before the opening bell with CB consumer confidence and new home sales for August arriving immediately afterward.

Durable goods orders—a key indicator of business confidence—fell 0.2% in August, according to the U.S. Census Bureau. That was below the Briefing.com consensus for a 0.1% decline. Excluding transportation, durable orders rose 0.2%, also below consensus of 0.3%. This was the second consecutive month of falling headline durable goods orders. Inventories also climbed.

Several Federal Reserve leaders are scheduled to make public comments as well during the day. Appearing on CNBC this morning, Chicago Fed President Charles Evans said he’s “cautiously optimistic” the U.S. economy can avoid recession and expressed some concern that the Fed may be going too far, too fast, with rate hikes.

However, Cleveland Fed President Loretta Mester sounded more hawkish in comments she made. And Mester is a voter on the Federal Open Market Committee (FOMC). Evans is not.

Perhaps more important is this morning’s scheduled remarks by St. Louis Fed President James Bullard. He’s known to be a hawk, and he has the ability to really spook markets. Bullard is speaking in a panel discussion soon after the market opens, so if stocks make a sudden move, it might be worth checking what he said.

Meanwhile, tropical storm Ian was updated to a Category 2 hurricane by dinnertime last night because it’s projected to move closer to Florida’s Gulf Coast today and into Wednesday. According to the National Oceanic and Atmospheric Administration, of the 310 weather disasters costing $1 billion or more between 1980 and 2021, hurricanes have caused the most damage at more than $1.1 trillion total, averaging out to $20.5 billion per storm. They’re also responsible for the highest number of deaths: 6,697 between 1980 and 2021.

However, Ian’s path appears to be heading north, away from the Gulf’s main oil installations. WTI crude futures, which slid to nearly nine-month lows earlier this week amid recession fears, found some footing this morning and rebounded back to just below $78 a barrel.

While Q3 earnings season won’t move into full swing for another week, Tuesday’s reports include the following companies with their Monday closes: Cintas CTAS down 0.70%, Jabil JBL off 0.64% despite beating analysts’ revenue and earnings estimates, BlackBerry BB down 1.88%, Cal-Maine Foods CALM off 1.47%, and Cracker Barrel CBRL down 0.44%.

CBRL earnings beat Wall Street’s consensus estimate by $0.19, and revenue rose nearly 6% but came in just below consensus. The restaurant chain also delivered above-consensus revenue guidance, something that might whet investor appetites considering how closely the market is watching consumer demand amid recession worries.

Reviewing the Market Minutes

As the greenback outran most major currencies yesterday, U.S. stock indexes lost even more ground for a fifth straight session. The S&P 500® finished at 3,655.04 (a new closing low for the year), and the Dow Jones® ($DJI) finished in a bear market at 29,260.81.

Volume was somewhat off due to Monday’s Rosh Hashanah holiday, but it seemed not to matter.

The last week of September—what many consider the worst week of the worst stock performance month of the year—was off to an explosive start after the British pound briefly hit an all-time low of $1.0382 in reaction to sweeping tax and regulatory changes introduced by the new government last Friday. Despite the currency finishing the day slightly higher at $1.07, global investors seemed somewhat unnerved by the Bank of England’s statement later in the day that it’s prepared to raise U.K. rates further. The pound came back just a bit this morning, and U.S. Treasury rates eased from recent highs.

The falling pound may be something consumers and tourists love, but for traders and investors, the destination dollar poses a more complicated picture. As widespread hawkishness seemed to drive volatility across stock, currency, and bond markets yesterday, analysts wondered how U.S.-based multinationals will fare abroad as the Federal Reserve and other central banks now appear united in their determination to stem inflation by hiking rates.

By Monday’s close, Microsoft (MSFT), which lost 0.20%, McDonald’s Corp. (MCD), which fell 0.84%, and IBM (IBM), which is down 0.89%, were among major multinational firms losing ground during the day.

By the end of the session, the S&P 500 finished 1.03% lower, the Dow Jones fell 1.11%, and the Nasdaq ($COMP) lost 0.60% to finish at 10,802.92.

The U.S. Dollar Index ($DXY) hit 114.12, while gold sunk to a nearly 2.5-year low at $1,629 per ounce.

The 10-year Treasury yield hit its highest level since 2010 at 3.828%, while the 2-year Treasury yield now stands at 4.347%, extending the yield curve for yet another day, which many see as a predictor of recession.

Falling oil prices can also be seen as such an indicator because WTI crude futures finished Monday down another 3% to a nearly nine-month low of $76.34 per barrel.

 

CHART OF THE DAY: As of Monday, the U.S. Dollar Index ($DXY—candlesticks) was trading near levels that helped drive the dot-com bubble to burst in 2001.  Data Source: ICE. Chart source: the thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

HITTING THE CEILING? Real estate data company CoStar Group reported that July apartment rents fell for the first time in nearly two years, possibly offering real relief to tenants who watched rents rise steadily during the pandemic. According to The Wall Street Journal, CoStar’s data arrives as apartment-listing website Rent.com shoed a 2.8% decrease in rent for one-bedrooms during July. Realtor.com also noted a slight decrease in rents last month. It’s important to realize that rental housing, not owned housing, is a component of the Consumer Price Index.

BLACK OCTOBER? Yesterday, Amazon (AMZN) confirmed that it will do a second “Prime Day” October 11 and 12, which is probably one of the worst-kept retail secrets because news outlets began reporting suppliers were being contacted back in June. It’s the first time the online retail giant has sponsored the discount event twice in the same year. We all know AMZN tends to know a lot about its customers, but whether it knew how inflation-squeezed it would be by fall is another matter. A Bankrate.com survey released earlier this month said that about half of winter holiday shoppers plan on starting their holiday shopping by Halloween.

BUT HOW SQUEEZED? Deloitte’s latest State of the Consumer Tracker showed that since June the percentage of Americans putting off large purchases has actually decreased from 56% to 46%. The consulting firm also found that consumer spending on durable goods went up 1.5% in July for a second straight month of strong growth. What’s prying open their wallets? Falling gas prices. Since June, Deloitte said the percentage of Americans citing gas prices for inflation concerns fell from 87% to 61%.

Notable Calendar Items

Sep 28: Pending home sales and earnings from Paychex (PAYX)

Sep 29: Gross domestic product and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)

Sep 30: August PCE Price Index, Personal income and spending, Chicago PMI, and September Michigan Consumer Sentiment

Oct. 3: September ISM Manufacturing PMI

Oct. 4: August JOLTS job openings, August Factory Orders, and earnings from Acuity Brands (AYI)

Oct. 5: September ADP Nonfarm Employment, September ISM Non-Manufacturing Index, and Trade Balance

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