Rate Expectations: Stocks Struggle for Direction as Yields, Dollar Push Higher

(Thursday market open) Earnings season is having its last hurrah, but even solid results from a handful of major companies can’t compete with rising yields for attention on Wall Street. Major indexes remain under intense pressure from the fixed income market, and it’s hard to see a catalyst that would change that anytime soon.

Treasury yields continued their relentless march upward early Thursday, and the dollar and volatility also turned higher. This is a massive headwind for stocks. The benchmark 10-year Treasury yield is now just about 20 basis points below last fall’s peak as investors build in chances of higher interest rates lasting longer. For the stock market, it’s kind of a catch-22: Inflation needs to moderate and the economy needs to maintain itself somewhat at the same time. It’s a fine needle to thread.

Shares of both Salesforce CRM and Macy’s M rose double-digits in premarket trading after their earnings came in above analysts’ estimates. On the downside, Tesla TSLA shares dove nearly 7% after the company’s investor day. Investors appeared worried about the company’s heavy spending plans as it tries to build production volume.

Just in

Macy’s (M) took Wall Street by surprise with an impressive holiday quarter that exceeded analysts’ expectations on earnings per share (EPS) and revenue. Guidance looked down the middle compared with Wall Street’s estimates. Gross margin did fall, however, something the company blamed on “planned markdowns and promotions” that exceeded the year-ago levels when that type of activity had been difficult due to supply chain issues. Kroger’s (KR) earnings also recently hit the tape and appeared relatively strong.

Overseas, inflation in Europe as measured by its core Consumer Price Index for February again topped expectations. European Central Bank (ECB) President Christine Lagarde sounded a hawkish note on rates, saying increases may need to continue. Analysts expect a 50-basis-point ECB hike later this month.

Back at home, initial jobless claims remained near recent depths at 190,000, compared with analysts’ consensus of 197,000. Continuing claims fell slightly. These data continue to show no signs of softening in the hot U.S. labor market.

In case you’re wondering, tomorrow’s calendar doesn’t include the February Nonfarm Payrolls report. That’s due next Friday. So feel free to sleep in.

Morning rush

  • The 10-year Treasury note yield (TNX) rose 4 basis points to 4.04%.
  • The U.S. Dollar Index ($DXY) bounced to 104.9.
  • The Cboe Volatility Index® (VIX) futures climbed to 21.09.
  • WTI Crude Oil (/CL) has been rising all week and now trades at $78.11 per barrel.

Eye on the Fed

While the TNX scraped 4% for the first time in nearly four months yesterday, the more rate-sensitive 2-year Treasury note yield doesn’t tell a much happier story. It climbed about 8 basis points yesterday as Minneapolis Fed President Neel Kashkari—once known for his dovish views—said he’s “open-minded” about raising rates 25 or 50 basis points at the Federal Open Market Committee (FOMC) meeting later this month. He called recent economic data “concerning” in that it showed Fed policy not making progress as quickly as he’d like.

Kashkari did warn investors that one month of data might not tell the whole story. It’s a fresh calendar page, and there’s all sorts of February data between now and the March 21 – 22 FOMC meeting. Next week’s February Nonfarm Payrolls report and the mid-month February inflation data could potentially tell a different story than January’s disappointing tale. There was even some “bad news is good news” data Wednesday as The Wall Street Journal reported private job postings recently showed weakness.

It’s a 70% probability we’ll get a 25-basis-point hike at the FOMC meeting and 30% for a half-point hike, according to the CME FedWatch Tool. However, Kashkari said FOMC projections, also due at the meeting, are a more important signal. He added he’s prepared to push up his policy path on the Fed’s “dot-plot,” meaning he might raise his long-term rate views.

Fed Governor Christopher Waller is scheduled to speak at 4 p.m. ET today, addressing the economic outlook. His words could have an impact on overnight futures trading, so be aware if you’re planning to trade after the close.

Stocks in spotlight

Salesforce (CRM) knocked it out of the park with earnings late Wednesday, and investors awarded CRM by sending shares up 14% in premarket trading. The cloud-based software company exceeded expectations in every aspect of its quarter, beating analysts’ estimates on earnings per share (EPS), revenue, and guidance. It also announced an increase in its share repurchase program. This represented a nice rebound for CRM, recently dogged by a tough macro environment, layoffs, concerns about the departure of its co-CEO, and heavy competition. Its earnings release emphasized a solid cash flow, and the company’s cost-cutting focus as it tries to improve profits appeared well received. Still, CRM sounded a conservative note about business demand in coming quarters, something to keep in mind.

Broadcom (AVGO), due this afternoon, had strong earnings last time it reported and follows a powerful earnings report earlier this month from Nvidia (NVDA), also in the semiconductor arena. AVGO released aggressive guidance back in the fall, so it has some big numbers to live up to this time around. In its last earnings report, AVGO noted softer demand for consumer electronic devices and a slowing global economy. But in a call with investors reported by Barron’s, executives said the company has some advantages in cloud and infrastructure markets.

What to watch

Tomorrow morning brings the Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI), which follows yesterday’s ISM Manufacturing Index numbers that appeared to be mostly bearish for the market, if not the economy. The services sector is where much of the recent growth has been, and analysts expect that to show up in Friday’s report, due soon after the market opens. 

The consensus for headline services PMI is 54.5%, according to research firm Briefing.com. That’s above the 50 level that signifies expansion. Last time out, the New Orders category of the report rose meteorically from the previous 45.2% to 60.4%. Services is the largest segment of the U.S. economy. Any sign of a pullback in February’s report would likely be welcome by Fed-sensitive stock sectors like consumer discretionary.

Yesterday’s February ISM Manufacturing Index came in basically as expected but still in contraction at 47.7%. That’s the fourth straight month it’s been in the red, so to speak, but up from 47.4% in January. While the headline number wasn’t too impressive, a big jump in the New Orders category appeared to unsettle investors and may be one reason Treasury yields set new highs for their recent move Wednesday. New orders is the most forward-looking aspect of the report. Prices also jumped, not good news for inflation-weary Americans.

A non-data point to ponder today is the 200-day moving average (MA) of the S&P 500® index (SPX), which has been holding on for dear life the last week at around 3,940. The SPX actually dipped just below 3,940 at one point Wednesday before recovering to finish above it. The last time the SPX closed below the 200-day MA was about seven weeks ago; a finish under that level could potentially open the way to more technical selling.

Market minutes

Here’s how the major indexes performed Wednesday:

  • The Dow Jones Industrial Average® ($DJI) rose 0.02% to 32,661.
  • The Nasdaq Composite® ($COMP) fell 0.66% to 11,379.
  • The Russell 2000® (RUT) climbed 0.08% to 1,898.
  • The SPX slid 0.47% to 3,951.

If you want to know what stocks are doing without glancing at the major indexes, just check the bond market. Lately, higher yields and lower stock market values have an awfully close correlation.

  • That held true Wednesday when the TNX eclipsed 4% for the first time since November. While the largest industrial companies represented in the $DJI didn’t take too big a blow, more rate-sensitive growth stocks represented in the $COMP kept descending and have finished lower three of the last four sessions.
  • The $COMP is more dependent on future growth than other major indexes, and the current nearly 90-basis-point inversion between the 10-year and the 2-year Treasury yield indicates investors aren’t sold on the economy staying in growth mode under the weight of rising rates. Both info tech and communication service companies are heavily represented in the $COMP, and both stepped back Wednesday.
  • If you’re looking for green, industrials and materials stocks had decent sessions Wednesday, helped perhaps by signs of strength in China’s reopening economy. Energy also got a lift. Companies that might benefit from a revived China, including Caterpillar (CAT), 3M (MMM), Boeing (BA), Honeywell (HON), and Dow Chemical (DOW), all finished higher.

CHART OF THE DAY: SUPPORT BREAK. The Nasdaq Composite ($COMP—candlesticks) dropped below its 200-day MA (blue line) on Wednesday and came close to February lows just under that. The next line of technical support might be the 50-day MA (red line), which remains well below the market. The index hasn’t traded below the 50-day MA since mid-January. Data source: Nasdaq. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Retirement reset:  In some U.S. states, $1 million in savings will only comfortably last a retiree slightly more than 10 years, according to an analysis released last month by GoBankingRates. The news gets a bit worse from here. As of 2021, the Federal Reserve reported that about three-quarters of non-retired Americans had some retirement savings while the remaining 25% had none—a statistic largely unchanged since 2019. The same year, a Charles Schwab survey of 1,000 U.S. workers reported that the average respondent said they need $1.9 million to retire. As an investor, this might not be welcome news. Reaching $1 million, let alone $1.9 million, is a challenge. And many people can’t simply move to a cheaper state. However, starting early, making sure you balance your investments as you age, and staying invested—rather than trying to time the market—are at least initial steps toward building your retirement portfolio. 

Chips to shore: It’s prime time for the chip industry, and not only because AVGO reports today and Micron (MU) reports earnings later this month. Tuesday marked opening day for the $53 billion CHIPS Act, a program to incentivize domestic manufacturing of chips after years of offshoring. Top candidate companies to potentially benefit from government funds under the act include Taiwan Semiconductor Manufacturing (TSM), Intel (INTC), and Samsung ElectronicsThe Wall Street Journal reported. The subsidies could amount to several billion dollars in some cases. One thing to keep in mind: Not all chip makers will benefit equally from this legislation. Companies that design and manufacture their own chips, such as INTC, MU, and Texas Instruments (TXN), have more to gain. Companies that design chips but don’t manufacture them—including Nvidia (NVDA), Advanced Micro Devices (AMD), and Qualcomm (QCOM)—don’t necessarily benefit directly. More details on how companies can apply for funds under the act are due Thursday.

Profitable reading: Few investors generally take the time to review transcripts of company earnings calls. Too bad, because that’s where you can really sense the challenges firms face and even the mood executives convey. If you want to sum up retailer earnings calls to date—including some of the biggest like Walmart (WMT), Target (TGT), and Home Depot (HD)—it’s fair to say that despite progress on supply-chain snafus and a year under their belts dealing with inflation, profit margins remain a major concern. “Our growth in ’22 didn’t come easily,” TGT CEO Brian Cornell said in the company’s earnings call earlier this week. “It wasn’t nearly as profitable as we expected it to be over time.” Meanwhile, HD warned that operating margins could face an impact from the company’s initiative to increase worker pay. WMT said “macro pressures” could “obscure” margin expansion progress. Want to learn more? Consider a quick plow through the transcripts. It’s amazing what you can learn in five minutes, and it’s easy to find them for free online.


March 3: February ISM Non-Manufacturing Index

March 6: January Factory Orders

March 7: January Wholesale Inventories and expected earnings from Dick’s Sporting Goods (DKS)

March 8: January JOLTS Job Openings, ADP Employment, Fed Beige Book, and expected earnings from Campbell Soup (CPB)

March 9: Initial and Continuing Jobless Claims and expected earnings from JD.com (JD)

All amounts are in Canadian dollars.


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


Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

Market News and Data brought to you by Benzinga APIs
Posted In: MarketsConsumer DiscretionaryDepartment StoresTD Ameritrade
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!