U.S. Jobless Claims and British Rates Jump, While Stocks Feel Pressure After Three-Straight Drops

(Thursday market open) A surprise 50-basis-point rate hike this morning from the Bank of England (BoE) and more tough talk yesterday from Federal Reserve Chairman Jerome Powell combined to pressure stocks early Thursday. Major indexes are lower for the fourth day in a row as investors await additional remarks from Powell and examine another elevated U.S. jobless claims report.

The stock market has hit a “slick patch,” as one analyst described it, over the last few days. Even so, the S&P 500® Index (SPX) is roughly steady over the last week and up around 4% from a month ago. It’s down just 2% from recent 14-month highs. One could argue this week’s action represents a healthy pullback after the long rally, though of course things could decline further.

In one potentially positive sign, the “bad breadth” plaguing Wall Street might be easing. Lagging sectors like industrials, consumer discretionary, and materials joined info tech in the leaders’ circle over the last five days. Even health care perked up a bit.

While more work is needed for a robust rally that lifts all boats, so to speak, the narrow focus on info tech and communications services seems marginally broader. The so-called “mega-caps” skidded on Wednesday, but the market didn’t completely fall out of bed—perhaps signaling growing strength outside of those popular names.

It’s also encouraging that volatility continues to sink despite this week’s losses. The Cboe Volatility Index® (VIX) posted a new three-year low just above 13 yesterday. A lower VIX sometimes, though not always, indicates less chance of dramatic SPX moves.

Morning rush

• The 10-year Treasury note yield (TNX) is steady at 3.75%.
• The U.S. Dollar Index ($DXY) is steady at 102.08.
• The Cboe Volatility Index® (VIX) futures climbed to 13.86.
• WTI Crude Oil (/CL) fell to $71.10 per barrel.

Just in

Rate leap: After the release of higher-than-expected British inflation figures yesterday, the market began building in elevated chances of a 50-basis-point BoE hike. Today, the central bank delivered exactly that, highlighting how inflation continues to plague the British economy. Some analysts note that Brexit-related factors have made inflation more intractable in Britain than in the rest of Europe, where there’s been more progress on price pressures. However, European stock indexes are sharply lower today, and the weakness appears to be spilling into U.S. trading. The dollar index remained near one-month lows after the rate move. 

Job seekers update: U.S. weekly Initial Jobless Claims hit 264,000 last week, the government said this morning. That was steady with an upwardly revised 264,000 for the prior week, and the third week in a row of elevated levels near 260,000.

The rising claims—which are up from below 200,000 a week earlier this year—could be seen as bullish or bearish. The bearish argument would be that it’s a sign of economic strain. The bullish stance would be that it’s possible fuel for the Fed to stop its tightening. The initial read on today’s data is that it’s relatively neutral, but keep an eye on the trend, as it’s one of the more high-frequency official indicators available.

Eye on the Fed

Futures trading points to a 74% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool. That’s about even with yesterday and up from 67% a week ago.

Powell didn’t pacify during his appearance yesterday before the House Financial Services Committee, and he moves on to the Senate this morning. His remarks appeared to weigh on stocks, although what he said wasn’t all that different from his remarks last week after the Fed meeting.

Powell cited a “very tight” labor market where job growth has been “robust” so far this year. He noted that inflation remains too high and it will take a lot of work to get it back to the Fed’s 2% target. There was no red meat for bullish investors hoping Powell might hint some hesitation about more rate hikes. Instead, he made it clear that last week’s “pause” could be brief. Other Fed officials have indicated likewise.

Despite this, the futures market dialed down chances of a July rate hike by the end of the day Wednesday to around 71% from 77% before Powell spoke. This could have keyed off his comments to Congress about higher interest rates and slower output growth weighing on business fixed investment.

Powell isn’t the only Fed speaker today. Two Fed Governors—Michelle Bowman and Christopher Waller—are also on the calendar. Waller gave opening comments earlier today at a conference in Ireland. Bowman also delivers opening comments at a Fed event this morning.

What to Watch

Existing home sales may have hit the tape by the time you read this. Consensus on Wall Street had been for the headline to be unchanged from April at a seasonally adjusted 4.28 million units in May, according to Briefing.com. The existing home market cooled this year as many owners don’t want to sell when it might mean buying a new home at a higher mortgage rate.

Usually Fridays are busy data days, but not this week. Tomorrow’s calendar is surprisingly light.

Stocks in the Spotlight

Shares of homebuilder KB Home KBH looked sturdier in premarket trading after the company posted a beat on earnings late Wednesday. This followed last week’s positive tidings from competing homebuilder Lennar LEN.  Revenue and earnings both topped Wall Street’s estimates for KB Home, and the company raised guidance. A 1% increase in net orders represented what the company called a “significant improvement” from a 49% drop in Q1, but the average selling price dropped.

Volume lagged on the New York Stock Exchange yesterday, and advancing shares outnumbered decliners despite the SPX finishing lower. Tech was the weak spot on Wednesday, as semiconductors took it on the chin. This could reflect profit-taking after the massive rally in that sector. Speaking of semiconductors, Micron MU announced plans to build a new assembly facility in Gujarat, India. It’s an $825 million investment for a plant that will help the company address demand for multiple product types, Micron says in a press release.

CHART OF THE DAY: IT’S EASY BEING GREEN. The U.S. dollar index ($DXY—candlesticks) continues trading in a narrow range between roughly 100 and 105, where it’s been most of the last six months. In contrast, the dollar was all over the map last year, ranging from below 95 to above 114. The dollar index hasn’t had such a rangebound year as this one since 2019. Data source: ICE. 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

Commodities corner: Any investor with a portfolio tilted toward commodity-related stocks in the materials sector could be pardoned for not noticing this year’s Wall Street rally. Shares of stocks dependent on commodity prices have underperformed almost across the board in 2023, whether the industry is agriculture, precious metals, or energy. Commodity prices are on track to close out a fifth-consecutive quarter of losses, the worst stretch so far this century, according to Jeffrey Kleintop, Schwab’s chief global investment strategist. Meanwhile, materials stocks are up about 3% this year versus 14% for the SPX. This five-quarter crumble could bode well for commodities, if historic trends hold (no guarantee of that, naturally). Commodities haven’t had a longer stretch of quarterly losses in more than 40 years, since a downturn that ended in 1982. Copper, a key industrial commodity, flexed its muscles recently, arguably a good sign for commodities, materials stocks, and perhaps the global economy.

Musical chairs: Earlier this year, a large gap formed between market expectations for the future path of U.S. interest rates and the Fed’s forecasts. The Fed projected a hawkish view and investors expected rate cuts before the end of 2023. The gap narrowed in May as it became clear the Fed would stick to its guns and the economy seemed resilient despite rising borrowing costs and regional bank turmoil. It’s probably no coincidence that the narrowing gap corresponded with the stock market’s May and June rally, the thinking being that higher rates wouldn’t necessarily put the economy into a severe recession. The Fed’s stance may also have given investors a bit more confidence that too much economic growth, rather than weakness, was the main issue. Since the Fed’s pause last week—accompanied by its updated dot plot projecting two more rate hikes this year—the market and the central bank are at odds again. Futures trading suggests investors see just one more 2023 rate rise. Looking out a year, the CME FedWatch tool indicates strong chances of two to three rate cuts, which would be ahead of the pace the Fed’s projections suggest. Market participants apparently think the economy will cry “Uncle” before the Fed sees that happening.

Bull or bear? Market sentiment really flipped the tables over the last month, and that’s generally not great news for stocks. Bullish sentiment among investors hit 45.2% last week, according to the American Association of Individual Investors (AAII), up from 27.4% in late May. Bearish sentiment declined to 22.7% last week from 39.7% a month ago. Weak sentiment is often seen as a contrarian indicator, suggesting that bearish trading is close to its limit and the market can rally. A higher bullish sentiment is also contrarian, but for opposite reasons. The historic average is 37.5% bullish, so we’re well above that now. Sentiment isn’t quite into “frothy” territory that would represent significant risk of downside, notes Liz Ann Sonders, Schwab’s chief investment strategist. On the other hand, she adds, the sentiment scale is no longer tipped toward pessimism (meaning “wall of worry” support for stocks is likely fading). That’s a reference to the old saying that stocks climb a “wall of worry.” 

Calendar

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).

June 28: Expected earnings from General Mills (GIS).

June 29: Q1 Gross Domestic Product (third estimate), May Pending Home Sales, and expected earnings from Nike (NKE), McCormick (MKC), and Rite Aid (RAD).

June 30: May Personal Consumption Expenditures (PCE) prices, May Personal Income and Personal Spending, Final June University of Michigan Consumer Sentiment.

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

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