Amazon And Apple Awaited: Risk-Off Trading Continues Ahead Of Earnings, Friday Jobs Data

(Thursday market open) After an interruption due to Fitch Ratings’ surprise downgrade of U.S. credit, Wall Street returns to its regularly scheduled programming with Amazon AMZN and Apple AAPL reporting earnings this afternoon.

Investors will barely have time to digest those mega-cap earnings before the July Nonfarm Payrolls report at 8:30 a.m. ET on Friday. It’s a whiplash-inducing transition from credit worries to two of the biggest U.S. companies to the jobs picture. Investors might want to brace for potential volatility in stocks and fixed income.

Volatility measured by the Cboe Volatility Index® (VIX) jumped from near three-year lows on Wednesday after Fitch shook up the markets. The VIX clawed above 16 after trading near 13 earlier this week. It remains below average, however, meaning it doesn’t suggest any major stock market choppiness straight ahead. However, major indexes turned lower again this morning as investors reacted to the 10-year Treasury note yield hitting its highest level since last November. This implies that investors remain in “risk-off” mode, embracing the perceived safety of fixed income.

The S&P 500® Index (SPX) and tech-focused Nasdaq Composite (COMP) both plummeted to three-week lows yesterday as a result of the ratings news as well as the rise of Treasury yields due to a surprisingly strong private jobs growth survey. Fitch’s downgrade prompted a retreat from higher-risk assets like equities, while U.S. Treasuries and the dollar both gained amid “risk-off” trading.

Morning rush

• The 10-year Treasury note yield (TNX) rose 6 basis points to 4.14%.
• The U.S. Dollar Index ($DXY) inched up to 102.71, near a one-month high.
• Cboe Volatility Index (VIX) futures jumped again to 16.77.
• WTI Crude Oil (/CL) fell slightly to $79.42 per barrel after a sharp drop yesterday

Just in

Q2 U.S. productivity data released by the Labor Department this morning looked solid, with a 3.7% increase versus the 2.3% consensus estimate and a revised decline of 1.2% in Q1. Unit labor costs rose less than expected, too, but were consistent with inflation that’s above the Fed’s target. The news looks good for the economy, but also could reinforce strength in yields.

Weekly initial jobless claims climbed just a touch to 227,000—not dramatically above the expected 225,000.

ISM services data are due soon after the open and may give more insight into the economic picture.

What to Watch

Jobs countdown: The mother of all monthly data, Nonfarm Payrolls, bows at 8:30 a.m. ET Friday. Here are consensus estimates from Trading Economics for July’s jobs report:

• Nonfarm Payrolls: 200,000, versus 209,000 in June
• Unemployment rate: 3.6%, versus 3.6% in June
• Average hourly earnings (month-over-month): 0.3%, versus 0.4% in June
• Average hourly earnings (year-over-year): 4.2%, versus 4.4% in June.

While jobs growth and unemployment numbers will grab headlines, don’t forget to watch wages. It’s another sensitive area that may be key to the market’s reaction, especially on the interest rate side. A “hot” jobs number could generate new worries about rate hikes from the Federal Reserve, perhaps adding pressure on Treasuries. That would potentially hurt growth sectors like info tech and consumer discretionary.

Consensus wage growth expectations are down from June but still higher than the Fed probably would like if it’s going to ease interest rate policy. Annual wage growth in the 3% region is more consistent with the Fed reaching its inflation target, says Kathy Jones, Schwab’s chief fixed income strategist.

Eye on the Fed

Futures trading indicates a 17% probability that the FOMC will raise rates at its September meeting, according to the CME FedWatch Tool. The probability for November is 29%. These numbers aren’t appreciably changed from yesterday.

Stocks in Spotlight

Amazon, Apple take center stage:. Both of these mega-caps report after the close. Analysts expect a slight year-over-year decline in earnings and revenue from Apple and a mild improvement from Amazon.

Apple revenues under scrutiny: Apple’s sales fell year-over-year in the two most recent quarters.

Last time out, Apple beat Wall Street’s expectations, driven by solid iPhone sales. At the same time, Mac, Services, and iPad revenue failed to meet analysts’ forecasts. That means those products could be in focus when Apple reports. Is Apple increasingly dependent on iPhone sales?

Apple’s Services segment—the division behind iCloud, Apple Pay, and more—is a margin leader. It continued to grow annually in the prior quarter, by 5.5%, but growth retreated sequentially. Quarterly improvement there would likely lift spirits in the margin camp.

Amazon cloudburst? There’s been a multi-quarter slowdown in growth for Amazon Web Services (AWS) amid competition from companies like Microsoft MSFT, Alphabet GOOGL, Oracle ORCL, and IBM IBM. AWS grew 16% year-over-year in Q1 to $21.4 billion—well below the level a year or two ago and down from 20% in Q4 2022. Amazon saw “companies spending more cautiously in this business environment.” Still, Amazon said last quarter that it likes the fundamentals in AWS and anticipates “much growth ahead.“Talking technicals: Wednesday’s selloff sent the SPX below its 20-day moving average of 4,517. It’s the first close below that moving average since late May and conceivably could generate some follow-through technical selling.

Deeper dive into downgrade: The surprise downgrade of U.S. credit this week rattled markets. To learn more about what this might mean, read the latest perspective from Kathy Jones, Schwab’s chief fixed income strategist. One key takeaway: The downgrade “isn’t likely to deter buyers of U.S. Treasuries,” she says. “There is no substitute for Treasuries in the global economy given the size and liquidity of the market.” Over the longer-term, she adds, inflation, central bank policy, and economic growth will be bigger drivers of bond yields.

CHART OF THE DAY: SUPPORT LOST. The tech-dominated Nasdaq 100 Index (NDX—candlesticks) fell more than 2% Wednesday as investors sold off some of the “riskier” parts of the market following the Fitch downgrade of U.S. credit. This resulted in NDX closing under its 20-day simple moving average (blue line) for the first time since May 4. That level has been a key support point for the NDX, and dropping below it could signal more weakness ahead. Data source: Nasdaq. 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

The power of two: So far this week, it’s come down to two numbers for Wall Street: 4,600 and 4%. The first is a key level of technical resistance for the S&P 500 Index (SPX). The other is a level breached by the 10-year Treasury note yield, near the 2023 high. Both numbers acted as potential roadblocks for stocks, which see-sawed on Monday and Tuesday before getting hit on Wednesday by the Fitch downgrade. Gains toward 4,600 in the SPX faced selling pressure, partly due to technical resistance, but it could also be a sign that investors might shy away from equities when Treasury yields offer high returns. Rising yields can also burden growth stocks dependent on borrowing to bulk up their operations and earnings, and they can sideline mergers and acquisitions (M&A) activity.

Auction block: Even before Fitch downgraded U.S. credit, Treasuries already faced pressure from a busy auction schedule. The U.S. government had been expected to issue roughly $102 billion in bonds this week, and a good chunk of that takes place today. This follows a larger-than-expected auction on Wednesday that weighed on Treasuries, boosting yields. One concern now versus, say, a couple of years ago, is that due to higher interest rates, the cost for the government to finance deficit spending is up substantially. Larger debt service payments can sometimes prevent the government from spending as much on economy-boosting things like defense and infrastructure, with bearish results for stocks. On a shorter-term basis, however, the issuance of new debt supply has often had less of an impact on Treasury yields than fundamentals like inflation.

Sentiment check: One recent worry is “frothiness,” or overbought conditions. The long rally fueled a “fear of missing out” (FOMO) trend, building bullish sentiment to above-normal levels. Too much bullishness can often be a bearish indicator, just as high levels of bearishness can be bullish. The Fitch downgrade might be a timely reminder that bad things can and do happen, perhaps deflating the frothiness. It’s unusual for the stock market to go long without a 3% to 5% setback, and some analysts have said that such a move could be healthy considering valuations are near their 2021–2022 highs and the recent heat in commodities. The SPX closed at 4,588 on Monday—the highest settlement so far this year. A 3% decline would put it near 4,450, near prior highs in mid-June and early July which might now represent technical support, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. A 5% drop would put the SPX near 4,360, a level last seen in June. The SPX suffered a 2% pullback in June but hasn’t fallen 3% or more since March. Whether it will is questionable, considering a “buy the dip” mentality that’s prevailed for some time.

Calendar

Aug. 4: July Nonfarm Payrolls and expected earnings from Dominion Energy (D), Enbridge (ENB), and Corebridge Financial (CRBG)

Aug. 7: June Consumer Credit and expected earnings from Palantir (PLTR) and BioNTech (BNTX)

Aug. 8: Expected earnings from Eli Lilly (LLY), Fox Corporation (FOXA), UPS (UPS), Lyft (LYFT), Wynn Resorts (WYNN), and AMC Entertainment (AMC)

Aug. 9: Expected earnings from Walt Disney (DIS)

Aug. 10: July Consumer Price Index (CPI and core CPI and expected earnings from Alibaba (BABA)

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

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