Central Bank Barrage: More Monetary Focus Ahead Including Powell Testimony After Beijing Cuts Rates

(Tuesday market open) If you didn’t get your fill of Federal Reserve last week, you’re going to love the next few days.

First comes Fed Chairman Jerome Powell’s semi-annual testimony to the House Financial Services Committee tomorrow morning, but he’s only the tip of the central bank iceberg. Two Fed governors also have nomination hearings in Congress, and more Fed speeches are coming later this week. Stocks slipped early Tuesday as investors geared for the Fed barrage.

The Federal Open Market Committee (FOMC) voted unanimously last Wednesday to leave rates unchanged, but several FOMC officials penciled in peak projected rates above 6% on their “dot plots,” implying at least two more hikes this year. There’s no way to know which policymakers were most hawkish, but St. Louis Fed President James Bullard has a reputation of supporting rate increases, and he spoke earlier today. Cleveland Fed President Loretta Mester, who has also beaten the drum on inflation this year, speaks twice this week.

More Fed remarks are on tap Thursday from Fed Governors Michelle Bowman and Chris Waller, though these are opening remarks, not full speeches. Powell moves on to the Senate for another morning of testimony Thursday. It’s unlikely he’ll reveal many surprises, but testimony to Congress can sometimes force the Fed chairman to address topics the press doesn’t ask about. As always, investors should stay on their toes for possible volatility when the Fed chairman is live, so to speak.

We’re coming off a week when the major indexes reached 14-month highs on strong economic data and hopes the Fed might be approaching the end of its rate hike cycle. The S&P 500® Index (SPX) was up 2.6% for the week, the benchmark’s strongest week since March, while the tech-heavy Nasdaq Composite (COMPX) index and blue-chip Dow Jones Industrial Average (DJIA) were up 3.2% and 1.2%, respectively. Still, the biggest companies, particularly in technology, continued to account for the lion’s share of market gains, while smaller companies lagged.

That said, there are signs of the rally broadening. The S&P 500 Equal-Weight Index (SPXEW) has gained ground on the SPX in recent weeks. The SPXEW weighs all members of the index equally, instead of by market cap, and can be a useful indicator of how all 500 stocks are doing, not just the top dogs.

Morning rush

• The 10-year Treasury note yield (TNX) rose 4 basis points to 3.76%.
• The U.S. Dollar Index ($DXY) climbed to 102.43 but remains near one-month lows.
• The Cboe Volatility Index® (VIX) futures rose to 14.36.
• WTI Crude Oil (/CL) inched up to $71.83 per barrel.

Just in

The data focus turns squarely toward housing now, starting with today’s May Housing Starts and Building Permits report. Shelter has played a nagging and persistent role in pushing up inflation for more than a year, and it’s partly because of a national home shortage.

From this morning’s data, it appears builders are quickly addressing the lack of housing. Housing starts jumped to 1.631 million in May on a seasonally adjusted basis, well above analysts’ expectations, which had been for starts to rise to 1.4 million from April’s 1.34 million. Permits climbed to 1.491 million in May, up from 1.417 million in April.

A few green shoots have popped up in housing after a tough year where would-be buyers struggled with high prices, rising mortgage rates, and not enough supply. Home builders recently reported demand improving as buyers adjust to elevated borrowing costs. April new home sales rose nearly 12% from a year earlier.

China returned to the headlines after the Peoples’ Bank of China cut two key lending rates on mortgages and business loans early today. Analysts had expected the move, which appears to be a reaction to recent slowness in the country’s pandemic reopening. Crude oil prices found support on ideas that Beijing’s stimulus could increase demand for the commodity, while the dollar bounced. Share prices in China slipped, however.

Eye on the Fed

Futures trading points to an 77% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.

Tomorrow’s testimony from Powell could provide more color on the Fed’s “hawkish pause” decision and might feature some committee members pressing Powell to pinpoint when the Fed will stop hiking rates. The possibility of higher unemployment as rates rise hasn’t played well with some committee members, judging from their comments during past Powell appearances on Capitol Hill.

Despite the pressure, it’s unlikely Powell will offer a timetable—but the latest FOMC “dot-plot” forecasts rates falling below 5% in 2024 and below 4% in 2025. Historically, these aren’t extremely high levels, but Congress, investors, and the business community got comfortable with near-zero rates for much of the 2008-2021 era, and some are still adjusting to the end of “easy money.”

A Bank of England (BoE) meeting will be held Thursday following inflation data from the country on Wednesday. Analysts expect a 25-basis-point hike as Britain continues to battle rising prices.

What to watch

Last week was a banner one for consumer discretionary stocks. Most of us are probably aware of Tesla’s TSLA long recent win streak, but companies like Domino’s DPZ, Nike NKE, Ford F, McDonald’s MCD, Home Depot HD, and MGM Resorts MGM also shined. Many of these companies posted multi-month highs or climbed above their 200-day moving averages, Briefing.com noted.

Last earnings season, executives at some well-known retailers cited consumer resilience despite rising prices. From a stock market standpoint, it’s interesting to see names like Home Depot and Target TGT, which have suffered long slumps, showing a little life. It could even be a sign of Wall Street’s rally starting to broaden as investors look for beaten-down companies to jump back into.

Stocks in the Spotlight

Stay tuned after the close for earnings from FedEx FDX. Shares flattened after an early-2023 rally and remain well below their 2021 peak. In its previous quarter, FedEx easily beat analysts’ earnings expectations and raised full-year guidance. The company’s been working to cut costs, so watch for the latest on that effort. That’s especially true for FedEx’s Express segment, where FedEx sees the greatest opportunity for cost reductions.

It also could be instructive to hear how inflation’s affecting demand—if FedEx addresses that. Volumes fell in the low single digits across all segments in FedEx’s fiscal Q3, though the company partly made up for that with higher revenue per shipment, it said in its March earnings presentation. Executives could also face questions about the business impact of a possible strike by United Parcel Service UPS employees. Members of the union at UPS voted last week to strike if they can’t reach an agreement with the company by July 31, when the current contract expires.

Darden Restaurants DRI, KB Home KBH, and CarMax KMX are other companies on the radar, as they’re expected to report this week 

CHART OF THE DAY: GAP NARROWS. After months of trailing the S&P 500 Index (SPX—candlesticks) by a vast amount, the  SPX Equal-weight Index’s (SPXEW—purple line) gap has closed by quite a bit since the end of May. This is evidence of the rally broadening, likely a healthy sign. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Thinking positive: It’s become almost rote to say consumers are pessimistic due to inflation and high borrowing costs. Maybe it’s time to rewrite the script, though it’s way too early for a final draft. The preliminary University of Michigan June Consumer Sentiment report Friday came in at 63.9, well above analysts’ expectations of 60.2 and a steep climb from the final May sentiment figure of 59.2. The upbeat headline figure might partly reflect positivity after resolution of the debt ceiling debate, as well as declining consumer expectations for one-year inflation. That figure fell to 3.3%, the lowest since early 2021. If consumers feel more positive, that could explain why consumer discretionary stocks are starting to come out of their shell, and why auto and airline manufacturers appear to be ramping up production.

The places you’ll go! Transports picked up traction this month, helped—as we noted last week—by relatively low fuel costs. Veteran analysts often view transports as a barometer for the broader market. That was the case both in early 2016 and again in the spring of 2020, when transports shifted into higher gear as the rest of Wall Street licked its wounds. FedEx earnings later today puts the spotlight back on transports, where the Dow Jones Transportation Average ($DJT) remains more than 10% below its late 2021 peak. Signs of life from the airlines—especially Delta (DAL) last week—helped the transport sector as summer’s travel season looks impressive so far. Delta’s decision to reinstate its dividend got investors excited not just about the company, but about airlines in general. U.S. air passenger levels recently reached rough parity with where they were this time in 2019, before the pandemic, according to the Transportation Security Administration.

In the long run … Last Wednesday’s Fed “dot-plot” of future rate projections showed how much has changed in just a year. For instance, in June 2022, FOMC policymakers believed rates would peak at around 3.25% to 3.5% this year (they’re now at 5% to 5.25% and expected to rise further). One thing that hasn’t changed much, however, is the Fed’s “long-term” rate projection, which remains near 2.5%. This isn’t that different from the June 2022 dot plot, which suggests the central bank still hopes that things can get back to a relatively normal and economically bullish 2% inflation and 2.5% rate environment. What’s the “long run?” The Fed doesn’t specify dates, but it’s basically 2026 and on. Astronauts are also projected to walk on the moon again that year.

Calendar

June 21: No major data or earnings expected.

June 22: May Existing Home Sales and May Leading Indicators and expected earnings from Darden Restaurants (DRI).

June 23: Expected earnings from CarMax (KMX)

June 26: Expected earnings from Carnival (CCL).

June 27: June Consumer Confidence, May New Home Sales, May Durable Orders, and expected earnings from Walgreen’s Boots Alliance (WBA).

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

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