Crude and Bonds Take Off in Different Directions as Economic Worries Rise

(Wednesday Market Open) Recession fears gripped the markets this morning as investors heard fresh job cut news while bracing for the release of December’s Federal Open Market Committee (FOMC) meeting minutes this afternoon. Even so, major indexes turned slightly higher before the bell. 

Salesforce (CRM) said Wednesday it would cut 10% of its payroll and shutter some offices. Its stock rose nearly 4% in premarket trading. The CRM layoffs are noteworthy because it’s hard to find a business in almost any industry that doesn’t use their products to some extent.

That came after analyst downgrades to Apple AAPL and Microsoft MSFT, with one analyst expressing concerns about MSFT’s cloud business, now one of its most important growth engines. Still, AAPL shares rose after its downgrade, perhaps a sign that market participants feel the bad news is already factored into the downtrodden stock.

Together, the downgrades and layoffs could dial in a risk-off atmosphere early on. CRM, AAPL, and MSFT are three tech titans that cover a lot of global consumer and business territory. In addition, weak manufacturing data from Europe and this morning’s steep drop in mortgage applications might limit early gains.

The December Fed minutes, due at 2 p.m. ET, could provide insight into the FOMC’s decision to raise rates by 50 basis points after a record-setting four-straight 75-basis-point increases. More importantly, it could shed light on what led FOMC members to plug in a higher terminal, or peak, level for rates.

Two more important data points will arrive this morning: the November Job Openings and Labor Turnover Survey (JOLTS) and Institute of Supply Management (ISM) Manufacturing data. If it happens, a JOLTS drop below 10 million open positions would likely be good news to the Federal Reserve. However, with recession fears picking up, a sharp drop in JOLTS could get people worried. Investors may be hoping for a “Goldilocks” number that’s not too weak or strong. More on ISM below.

Morning Rush

• The 10-year Treasury yield (TNX) dropped a steep 10 basis points to 3.69%.
• The U.S. Dollar Index ($DXY) was flat at 104.1.
• Cboe Volatility Index® (VIX) futures were flat near 22.9.
• WTI Crude Oil (/CL) plunged more than 3% to $74.33 per barrel.

The VIX began 2023 with a little rally, and that might’ve been one factor clipping Tuesday’s early upward move in stocks. Why did the VIX pop? Perhaps, it reflected hedging as the new year began. Some fund managers might be taking new long positions in stocks but also purchasing possible protection through buying volatility at the same time.

Crude oil dove along with the TNX early on. The first could be a sign of concern that consumer and business demand may fall for the essential commodity. The second could reflect market participants embracing so-called “safety” in fixed income, though no investment is truly safe.

Data Docket

Today’s December ISM Manufacturing report could be a market mover, and it’s due just after the open at 10 a.m. ET. Consensus is now 48.5%, according to Briefing.com, down from 49% in November. Any number under 50% indicates contraction. Last week’s December Chicago Purchasing Managers’ Index (PMI) bounced back slightly from November’s extremely weak reading but remained in contraction territory.

Everything this week builds up to Friday’s December Nonfarm Payrolls release before the opening bell.

• Early consensus is for jobs growth of 210,000, according to Briefing.com, down from 263,000 in November.
• The Fed has been watching closely to see if its higher interest rate policy has slowed the economy, so a number like 210,000 might be seen as a sign of progress on that front. However, it’s still a historically high number. Generally, any monthly growth of 200,000 or above indicates a pretty healthy jobs market. We’re in a “good news is bad news” scenario, so such a number might not provide stocks much support. For that, it might take a really soft number like 100,000 or below.
• The leisure and hospitality industry was a large job gainer in November and remains a category to watch Friday. Retail jobs growth has been sinking lately, another trend to watch. While these two categories tend not to offer the highest-paying salaries, shrinkage in their numbers can have wider implications. When more jobs are created in higher-paying sectors, wage growth can sometimes move faster.
• Even if jobs growth isn’t outstanding, any sign of wage growth Friday could keep inflation worries percolating. The average analyst projection is for September hourly pay to be up 0.4%, down from 0.6% in November but still a historically elevated level. The wage number, especially if it’s well above expectations, might pack a punch that’s bigger than the jobs number. The Fed worries that high inflation could spark a wage-price spiral that could be tough to defeat. Wages rose 5.1% year over year in November compared with 4.9% the previous month. That’s the wrong direction from the Fed’s point of view.

Reviewing the Market Minutes

The new year began a lot like the old one finished, with major indexes unable to hold on to an early rally amid stumbles by the mega-caps. At the same time, the S&P 500® index (SPX) repeated another late-2022 habit of bouncing back from midday lows below 3,700, managing once again to keep its grip on the technical support level of 3,800.

Both AAPL and Tesla (TSLA) continued their respective descents Tuesday, most notably TSLA with its 12% drop. TSLA’s Q4 deliveries came in about 20,000 below the average analyst estimate. It’s hard for the major indexes to have much traction when stocks valued like AAPL are struggling, simply due to the market-weighted impact of a nearly $2 trillion stock.

On the bright side, a couple of growth sectors—communication services and financials—were near the top of the leader board, a sign that maybe some investors are throwing their hat back into riskier channels. One day isn’t a trend, however, and this morning’s bond rally also raises questions about risk appetite.

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI), fell 0.3%, or 10.88 points, to 33,163.
• The Nasdaq Composite®($COMP) slid 0.76% to 10,386.
• The Russell 2000®(RUT) dropped 0.6% to 1,750.
• The SPX fell 15.36 points, or 0.4%, to 3,824.

Talking Technicals: WTI Crude futures (/CL) remain in a downtrend and lost ground Tuesday to start the year, falling below $77 per barrel at times (see chart below). Long-term support is seen $62.

CHART OF THE DAY: CRUDE SLUMBER RETURNING? WTI Crude Oil futures (/CL–candlesticks) appear to be resuming their 2022 downtrend in 2023. Oil opened the new year trading lower after testing the upper end of its downtrending channel. If the commodity falls, its next major level of resistance appears to be around the $62 level. Per the Stock Trader’s Almanac, historically, the crude oil seasonal cycle has found a bottom in February and then prices rise as the Northern Hemisphere starts waking from its winter slumber and gets up and moving again, thus resulting in higher demand. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Earnings Appetizer: Consider this week the amuse-bouche of Q4 data just before the heaping earnings smorgasbord arrives. Morsels from the consumer space start the meal with Walgreens Boots Alliance (WBA) and Conagra (CAG) expected to report before the bell Thursday.

Last time, WBA beat sales expectations but warned that a rising dollar could pressure its business in the months ahead. The dollar eased during Q4, so perhaps that helped WBA’s bottom line last quarter. However, the drugstore giant faces tough comparisons. In the year-ago quarter, Walgreens was making lots of money in its COVID-19 vaccine business, which has likely slowed a bit. Back in October, WBA offered fiscal-year earnings-per-share guidance of $4.45 to $4.65—watch to see if that gets adjusted. Investors seem cautious, pushing shares down recently.

WBA is one of 30 stocks in the $DJI, so a very strong or poor WBA earnings performance could have an impact on the $DJI’s movement tomorrow.

Greener Pastures: Did the dollar decide to take December off? If so, the vacation appears to have extended into January. The $DXY has traded in a very tight range between 103.5 and 104.9 since December 14, almost three weeks ago. It’s quite a change from last summer when the greenback frequently put stocks on defense with sharp moves upward almost daily. Its dive from those 20-year highs near 115 back below 105 in November gave Wall Street a nice wind at its back, helping revive hopes that a weaker dollar could take some pressure of Q4 earnings.

It could help, but at current levels near 104, the earnings impact might not be much. Consider this: Even at 104, the $DXY remains above its 2017 pre-pandemic high of just more than 103 and not far below its the 200-day moving average near 106. In other words, the dollar remains pricey. If U.S. multinationals had hoped a rapidly falling dollar would boost earnings anytime soon, they might be disappointed now. One company that expected the dollar to weigh on Q4 growth was WBA.

New Year, Same FedWatch: The dollar’s future direction, of course, depends to some extent on the Fed’s next move. The FOMC won’t make a rate decision this month—that’s scheduled for February 1. So far, the futures market has baked in around 70% odds that the FOMC will hike rates just 25 basis points that day. That’s according to the CME FedWatch Tool, which is predicting the lowest Fed rate increase since the current rate hike cycle began last March. If the Fed does hike by 25 basis points, that would put its target rate between 4.5% and 4.75%, and then the question would likely be whether the Fed plans another hike in March or a possible pause. The FOMC’s December dot-plot showed a 2023 terminal, or peak, rate of between 5% and 5.25%. Futures traders don’t seem convinced. There’s a more than 40% chance that rates won’t rise above 5% this year, according to FedWatch.

Notable Calendar Items

Jan. 5: Initial weekly Jobless Claims and expected earnings from Walgreens Boots Alliance (WBA), Bed Bath & Beyond (BBBY), and Conagra (CAG)

Jan. 6: December Nonfarm Payrolls, November Factory Orders, and December ISM Non-Manufacturing Index

Jan. 9: November Consumer Credit

Jan. 10: November Wholesale Inventories and expected earnings from Albertson’s (ACI)

Jan. 11: Expected earnings from KB Home (KBH)

Jan. 12: December Consumer Price Index (CPI) and expected earnings from Delta (DAL) and Taiwan Semiconductor (TSM)

Jan. 13: January University of Michigan Consumer Sentiment and expected earnings from JP Morgan (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC)

Jan: 16: Dr. Martin Luther King, Jr.’s birthday observance. Markets closed.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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