Not Out of the Woods: Investors Await Fresh Data and Fed Comments

Not Out of the Woods: Investors Await Fresh Data and Fed Comments

(Tuesday Market Open) The “risk-on” pattern that dominated Wall Street ahead of Thanksgiving faces fresh challenges this week from China, the Fed, and a host of economic data. While China concerns appeared to ease a bit this morning as the country saw fewer new cases and loosened some restrictions, it’s too soon to say for sure if this ends the protests.

Much also depends on what Fed Chairman Jerome Powell says in his speech Wednesday and whether the jobs report Friday shows any sign of cooling in the labor market. However, when it comes to China or events in Ukraine, U.S. investors and even the Fed are powerless to do much more than watch.

That’s why the caution that crept in Monday may not fully dissipate right away even if these near-term China concerns ease appreciably and U.S. data feeds notions of a less hawkish Fed. Keep an eye on the Cboe Volatility Index® (VIX), which was fairly tame yesterday even as it rebounded from multi-month lows. A flirtation with 25 would suggest the recent rally is flagging and might even summon comparisons to last summer’s market enthusiasm that so quickly blew away.

Defensive sectors outperformed growth yesterday, though every sector finished lower. A couple of hawkish speeches from Fed officials didn’t help, either.

On the positive side, stocks with exposure to China including Apple AAPLWalt Disney DISCaterpillar CAT, and Nvidia NVDA perked up a bit early Tuesday, though none gained too much ground. These shares were under pressure Monday.

Morning Rush

  • The 10-year Treasury yield (TNX) fell 3 basis points to just under 3.67%, near last week’s low.
  • The U.S. Dollar Index ($DXY) fell slightly to 106.4.
  • Cboe Volatility Index (VIX) futures eased toward 22.
  • WTI Crude (/CL) rose 2% to $78.89.

The S&P 500 index® (SPX) could test technical support near 3,940 if it falls much further. The 100-day moving average of 3,918 is not far below that, and the psychological 3,900 level could be another test. Looking up, the 200-day moving average rests at 4,054, but last week’s intraday high of 4,034 may be a resistance point.

Data Dive

For the second early morning in a row, investors don’t have much data to pore over. The numbers outage ends shortly after today’s opening bell with the November Consumer Confidence report.

  • As we noted yesterday, consensus from Briefing.com is for a consumer confidence headline figure right on the 100.0 mark. That would be a slight retreat from 102.5 in October but still up solidly from summer lows. One thing to watch is one-year inflation expectations, which were 7% last month, up from 6.8% in September. Any change here could help pinpoint how much price pressure consumers feel.   
  • Things pick up with November’s Chicago PMI report on Wednesday morning. Though the report has a manufacturing component, it also surveys non-manufacturing firms. This means it offers a broad look at economic health in the nation’s third-largest metropolis. The patient hasn’t been so hale and hearty lately, and analysts expect tomorrow’s 10:45 a.m. ET report to show more of the same. The consensus headline estimate is 47.5, up slightly from 45.2 in October but still below 50, which could be welcomed if you’re a Fed official looking for signs of slowing economic growth.
  • And on that topic, nothing tells the full story of economic growth like the Gross Domestic Product (GDP). The government’s second estimate for Q3 GDP is due before the open Wednesday. Consensus is for growth of 2.7%, equal to the first estimate. A higher-than-expected estimate might drive ideas that the economy isn’t cooling down as quickly as the Fed would like. A lower number might also cause hand wringing among investors who could worry that it indicates a pending recession.
  • Soon after tomorrow’s open, we’ll also get the government’s Job Openings and Labor Turnover Survey, better known as the JOLTS Survey. Last time out, job openings of 10.7 million remained well above normal but were down slightly from summer peaks. Bullish investors would probably like to see this number continue falling to loosen up the tight labor market. When more workers compete for fewer jobs, that tends to keep wage pressure from boiling over and contributing to rising prices.

Looking back at Monday’s data, there wasn’t a lot to glean other than the November Dallas Fed Manufacturing Index results. It ticked up to -14.4 versus analysts’ average estimate of -21 and October’s -19.4, but new orders, shipments, hours worked, and delivery times all fell deeper into contractionary territory, Charles Schwab’s Managing Director and Chief Investment Strategist Liz Ann Sonders pointed out. She added that the report’s employment category fell to its lowest since July 2020. Last week, the Richmond Fed Manufacturing Index also saw a November decline.

Wednesday’s Q3 earnings calendar brings a couple of big tech names as it moves toward the end of the season. Synopsis (SNPS) and Salesforce (CRM) are expected to report that afternoon.

Thinking Cap

WTI Crude (/CL) rallied off 11-month lows yesterday amid rumors that OPEC and its allies would use next week’s meeting to trim production again. Futures rallied above $79 per barrel at times overnight after sinking below $74 early Monday.

This isn’t the first time that rumors about potential production cuts just happened to spread following a retreat in prices. We saw the same thing late September, the last time /CL dipped below $80 per barrel. Back then, /CL quickly rallied to $90 and above as OPEC and allies cut production by 2 million barrels per day.

U.S. supplies remain low, so the cartel does probably have the upper hand here in pushing up prices when it doesn’t like what it sees in the market. It can either jawbone or actually cut production. The next meeting is December 4, and it wouldn’t be surprising to see /CL prices look volatile between now and then.

Reviewing the Market Minutes

Both stocks and fixed income found themselves on the back foot as the new week began Monday, clipped by unrest in China that fueled concerns of possible economic slowdown there. A bunch of market metrics that had favored risk-on trading over the last few weeks turned tail, with yields, volatility, and the U.S. dollar all rising.

This acted like a giant brake on the stock market, especially for multinational companies with big exposure to China. Semiconductors were among the big losers, along with companies like Apple (AAPL) and Walt Disney (DIS). Think computer chips, theme parks, and phones, and then follow the dots across the Pacific to see why all these shares fell and could continue to face pressure if China doesn’t settle down.

Here’s how the major indexes performed Monday:

  • The Dow Jones Industrial Average® ($DJI) fell 497, or 1.45%, to 33,849.
  • The Nasdaq Composite® ($COMP) dropped 1.58% to 11,049.
  • The Russell 2000® (RUT) fell 2.05% to 1,830.
  • The SPX retreated 1.54% to 3,963.

Talking Technicals: Despite this little hop off the lows, WTI Crude (/CL) remains in a downtrend technically (see chart below) and would likely have to punch through the area roughly between $85 and $90 per barrel and stay there a while to break the pattern. That area also happens to correspond with the 50-day moving average, which is now around $85. It’s likely there’s decent buying interest not far below current prices as yesterday’s rebound from lows might have signaled. For one thing, /CL below $75 has been a rare thing over the last year, meaning commercial buyers might find such prices attractive. Also, the U.S. government has said it would consider buying /CL to restock the Strategic Petroleum Reserve (SPR) at prices near $70.

CHART OF THE DAY:  CRUDE SWINGSWTI Crude Oil futures (/CL—candlesticks) resumed its downtrend after moving higher though much of October. This could be the deflationary spark the Fed has been looking for. However, the September low appears to be holding for the moment. It’s possible a break below this low could help the Fed get its Christmas wish. Data source: CME. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Airport Lines Lengthen: Thanksgiving is traditionally one of the biggest travel weekends of the year, and 2022 was no exception. Even so, passenger numbers generally aren’t back to pre-pandemic 2019 levels, according to Transportation Security Administration (TSA) data. The agency said Sunday was the busiest day of the holiday period at U.S. airports as 2.56 million people inched slowly through security lines. That total was up just slightly from 2.45 million the same day a year earlier but down from 2.88 million in 2019. The day before Thanksgiving, TSA traffic totaled 2.455 million, down from 2.624 million in 2019 but up 6% from that same day in 2021. Airline shares have lacked direction most of November, and some airlines said they don’t expect to regain 2019 passenger capacity until next summer.

 

Black Friday Fails to Impress: Yesterday was “Cyber Monday,” so all the headline holiday shopping data kept coming in. An early report from Reuters citing Adobe Analytics suggested Cyber Monday sales hit a record $11.6 billion. That said, it’s hard to get too excited about numbers reported over the weekend, despite talk of how strong sales looked. Black Friday sales rose 2.3% year over year, according to a CNBC report that cited Adobe Analytics. Consumers spent a record $9.12 billion—not too shabby—but few would call 2.3% a stunning rise, particularly with inflation factored in. Retail stocks traded mixed on Monday in the wake of the Black Friday sales news. The National Retail Federation (NRF) had predicted 166.3 million Thanksgiving shoppers, many of them seeking deals. The NRF said earlier this month it expects total holiday sales to rise 6% to 8%. Last year saw a 13.5% rise over 2020, but comparisons might not be fair because 2020 was the heart of the pandemic. Even so, retailers may have work to do to reach that 6% to 8% estimate if Black Friday’s numbers were an indication.

Back to Basics: As the $DJI tumbled 400 points Monday on China concerns, the so-called “safe-haven” trades gained popularity. There’s no actual “safe haven” in the market, but when geopolitical tensions surface, investors worldwide generally gravitate toward the perceived stability of U.S. currency and “defensive” sectors. You could see that quite clearly in the $DJI; by midday, almost every component was down a percentage point or more. Some exceptions? Large U.S. health care firms like Amgen (AMGN), Johnson & Johnson (JNJ), and Merck (MRK), and consumer staples stocks like Procter & Gamble (PG). A couple notable U.S. consumer stocks with heavy exposure to the domestic market—Walmart (WMT) and Coca-Cola (KO)—also gained a little ground. With the exception of AMGN, any of those names might’ve been in your portfolio 20 or 30 years ago. These types of stocks, however, aren’t always ideal ports in a geopolitical storm in part because a rising dollar can hurt earnings for multinational U.S. companies.

Notable Calendar Items

Nov. 30: Chicago PMI, October Pending Home Sales, Q3 Gross Domestic Product (second estimate), and expected earnings from Hormel Foods (HRL) and Salesforce (CRM)

Dec. 1: October Construction Spending, October Personal Consumption Expenditure (PCE) prices, November ISM Manufacturing Index, October Construction Spending, and expected earnings from Kroger (KR)

Dec. 2: November Nonfarm Payrolls and expected earnings from Cracker Barrel (CBRL)

Dec. 5: November ISM Non-Manufacturing Index and October Factory Orders

Dec. 6: October Trade Balance and expected earnings from AutoZone (AZO) and Casey’s General (CASY)

Dec. 7: October Consumer Credit and expected earnings from Campbell Soup (CPB)

Dec. 8: Expected earnings from Broadcom (AVGO) and Costco (COST)

 

Posted In: TD AmeritradeMarkets