Waiting In Wings: Market Preps For Disney Earnings Later Today, CPI Tomorrow, As China Reports Deflation

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(Wednesday market open) Following Tuesday’s turbulence sparked by the Moody’s downgrade of several banks, investors get back to their knitting today waiting for Walt Disney DIS earnings and crucial inflation data. Major indexes rose in premarket trading despite more evidence of weakness in China’s economy.

Tomorrow morning’s July Consumer Price Index (CPI) and Friday’s July Producer Price Index (PPI) might help determine where the market heads the remainder of the week and into next as investors continue to keep a watchful eye on Federal Reserve interest rate policy.

June’s lighter inflation data suggested the Fed’s prescription of steep rate hikes might have cooled the feverish price environment. But the Fed and investors likely want more than one month of data before signing a clean bill of health. Monthly CPI and core CPI are expected to rise 0.2% monthly, as they did in June. (Read more below.)

Walt Disney takes the stage this afternoon when the entertainment giant reports earnings. Theme parks and cruises likely glowed, analysts predict. The question is whether Disney can arrest losses in its video streaming division and deal with challenges on the broadcast TV side.

Morning rush

The 10-year Treasury note yield (TNX) inched up to 4.03%.
The U.S. Dollar Index ($DXY) is steady at 102.42.
Cboe Volatility Index® (VIX) futures fell to 15.61.
WTI Crude Oil (/CL) rose to $83.79 per barrel after hitting a new 2023 high earlier today.

Crude has been in an uptrend for weeks, lifted by OPEC+ production cuts. U.S. production remains steady this summer but hasn’t ticked higher despite rising prices.

Just in

Deflated: Consumer prices in China dropped 0.3% year-over-year in July—the first decrease since early 2021. The reading had been flat in June. This offers more evidence that China’s economy continues to struggle coming out of the COVID-19 shutdowns.

China’s inflation data follow the country’s lackluster July import and export numbers released on Tuesday. Those shouldn’t have surprised investors, considering global manufacturing PMI has been below 50 for 11 straight months, notes Michelle Gibley, Schwab’s director of international research. Anything under 50 signals retraction. Yesterday’s soft Chinese data supported bond prices as inflation fears eased slightly, while prices slid for industrial metals used in manufacturing.

China is known as the “factory of the world,” so weakness in its exports could imply declining demand for goods in places like Europe and North America.

Stocks in Spotlight

Walt Disney (DIS) investors remain concerned about the company’s mounting losses in streaming, lack of box-office sizzle, and challenges in broadcast television. Disney lost more than $4 billion over the last four quarters in streaming as content costs outpaced subscription revenue.

Consider listening for updates on cost-cutting, subscriber numbers, and possible impact from the strike by Hollywood writers and actors, among many other issues. Analysts expect earnings per share (EPS) of $0.88, down from $1.09 in the same quarter a year ago, and revenue down 5% year-over-year to $20.44 billion.

Overall, the market has seen a trend toward buying on weakness. That’s evident early Wednesday, as mega-cap stocks like Apple AAPL, Microsoft MSFT, and Tesla TSLA that struggled recently rose in premarket trading.

What to Watch

At what price? The release of July CPI and PPI data this week could trigger volatility if they point toward stalling inflation progress.

Here are the consensus estimates for CPI, according to Trading Economics:

July CPI: 0.2% versus 0.2% in June
July core CPI: 0.2% versus 0.2% in June
July annual CPI: 3.3% versus 3% in June
July annual core CPI: 4.8% versus 4.8% in June.

Keep in mind that year-over-year comparisons are tougher than a month ago, when the comparison was to the worst 2022 inflation gains. The Fed’s inflation goal is 2%.

In June, consumer prices declined month-over-month for several closely watched items, including airfares, cars and trucks, and furniture. Shelter costs continued to make up 70% of the increase in CPI. Apartment construction has been strong recently, Reuters reported last month, suggesting rental prices might head lower. Also, the San Francisco Federal Reserve issued a report this week predicting that “shelter inflation is likely to slow significantly over the next 18 months” as a result of interest-rate hikes.

Eye on the Fed

Futures trading indicates a 13.5% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its September meeting, according to the CME FedWatch Tool. The probability of rates being 25 basis points higher after the November meeting is 30%.

Talking technicals: Yesterday saw technical resilience for the major indexes that could fuel bullish hopes—assuming CPI data don’t hold any unpleasant surprises that spike volatility. Yes, the S&P 500® Index (SPX) just barely missed closing at 4,500, but it finished very close to that level, which is where buyers have shown up recently. It also descended almost to technical support of 4,450 intraday yesterday before rebounding. That coincided with both the Nasdaq (COMP) and the Nasdaq 100® (NDX) scraping against their 50-day moving averages but managing to finish above those levels. “Indexes closed well off intraday lows and near the highs of the day, which is bullish price action,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. He adds that both Apple and Microsoft recently suffered roughly 10% corrections from recent highs, which perhaps brought buyers in.

CHART OF THE DAY: DANCING WITH CRUDE. The crude oil (/CL) market has been volatile this year, but one thing hasn’t changed: Investors think prices will fall over the long term. The red line shows the futures curve from now out to 2026 while the yellow line shows the curve back in January. Front-month crude was cheaper back then compared with today, but futures contracts show less and less change as you go farther out on the curve and still predict mid-$60’s per barrel in a few years. The main difference seven months later is a steeper drop priced in. Data source: CME Group. 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

Says who? Before Moody’s downgraded 10 U.S. regional banks yesterday, the S&P Regional Bank Select Industry Index (SPSIRBK) had risen 37% since its last scare in early May, when a small bank failed. That failure followed two others earlier this year. The prospect of these being isolated problems led the sector to claw higher this summer. Fears eased more during Q2 earnings season as deposits appeared to stabilize and profits got padded by solid net interest income, though Moody’s on Tuesday cited “growing profitability pressures” in many bank earnings. Even on Monday, the day before the Moody’s downgrade, the regional bank index rose nearly 1%. If you’re trying to figure out who’s right—Moody’s or the market—consider both. It’s up to investors to do their homework and avoid investing in banks saddled with falling deposits and rising liabilities. Unfortunately, the downgrade came after most of the industry reported earnings, meaning there likely will be few updates until October. Potential investors should read transcripts of the regional banks’ Q2 earnings calls and perhaps even their filings with the U.S. Securities and Exchange Commission (SEC). Moody’s also had some interesting observations. The regional bank sector remains down 40% from its 2022 high.

Birds of a feather: Earlier this week, monster mega-caps Apple and Microsoft traded down around 10% from their recent all-time closing highs. While correlation isn’t causation, struggles for the SPX coincided with the poor performance of its two largest components, which together form more than 10% of SPX market capitalization. History shows that when these two whales begin sinking, nearby boats also take on water. Apple suffered two downturns of 20% or more from highest to lowest close in 2022; the SPX sank 20% during the first and 12% during the second. You can’t chalk up all of that to simple market weightings. Instead, it’s possible investors watching their biggest holdings lose ground got discouraged. The struggles for Apple, Microsoft, and info tech last year came as U.S. Treasury yields soared and the Fed raised rates. That hasn’t changed. Differences now include today’s weaker dollar, signs of improvement in the personal computer sector, and hopes that rate hikes are nearing an end.

Labor pains: U.S. jobs growth below 200,000 in both June and July was the lowest since the pandemic and welcomed by bulls. After all, the Fed has made no secret it wants the labor market to cool and perhaps stamp out one source of rising prices in the economy. However, the news might be like a lemon candy—sweet on the outside but sour within. There’s concern that jobs growth isn’t slowing because employers have all the workers they need—a trend that might signal less wage pressure and retreating inflation fears. Instead, some analysts worry that lower jobs growth reflects employers unable to fill positions. This might explain why wages keep rising more than expected, because when labor is scarce, salaries tend to rise as firms seek talent. Labor force participation has been stuck at a historically low 62.6% for months, suggesting there just aren’t many more people entering the workforce and presenting another potential challenge for companies trying to hire without breaking the bank.