Setting The Timer For Minutes: Latest Fed Meeting Notes Will Be Eyed For Clues Into Thinking On Rates

(Wednesday market open) After the week’s bumpy start, investors await this afternoon’s Federal Open Market Committee (FOMC) meeting minutes for insight into the Federal Reserve’s thinking on future interest rates and inflation. For the moment, stocks wobble as the market digests housing data, Target TGT earnings, and Tuesday’s heavy losses.

Investors licked their wounds following the market’s descent to five-week lows for the S&P 500® Index (SPX) and Russell 2000 (RUT) and seven-week lows for the Nasdaq Composite (COMP). Concerns about China’s economy and overheated U.S. Retail Sales cast a pall. Technical selling was also a feature as major indexes and many “mega-cap” stocks broke below their 50-day moving averages.

Financials were among the weakest performers on Tuesday, with the KBW Regional Banking Index (KRX) dropping over 3% to a four-week low after Fitch Ratings warned of possible downgrades to many large U.S. banks.

Treasuries continue to call the shots. A spike in the 10-year U.S. Treasury note yield to nine-month highs above 4.2% on Tuesday kept stocks under pressure, and last year’s 15-year high of 4.33% isn’t far above current levels. Rising yields reflect concerns about heavy supply after recent government auctions, the Bank of Japan’s (BoJ) decision to adjust its yield-curve policy, and strong U.S. economic data.

Despite recent losses, investor sentiment appears to remain optimistic relative to the last few months and suggests there’s more “froth” to be taken out of the market, says Kevin Gordon, senior investment strategist at the Schwab Center or Financial Research. “The path of least resistance seems to be lower for now,” he adds.

Morning rush

• The 10-year Treasury note yield (TNX) eased slightly to 4.19%.
• The U.S. Dollar Index ($DXY) is relatively flat at 103.05.
• Cboe Volatility Index® (VIX) futures fell slightly to 16.37.
• WTI Crude Oil (/CL) is nearly flat at $81.18 per barrel.

Stocks in Spotlight

Target miss: Throughout earnings season, many companies saw their shares fall or barely gain despite decent results. The tables turned Wednesday: Target (TGT) missed analysts’ revenue estimate and issued lower-than-expected guidance only to see shares pop 8% in premarket trading. Investors appeared to focus on a better-than-expected earnings per share (EPS) outcome. The company’s been dealing with a bloated inventory and shares are down more than 50% since 2021, but the bar was extremely low going into the report. It’s possible this rally reflects relief that things weren’t even worse.

The retail news wasn’t all bad. TJX Companies (TJX), the parent company of TJ Maxx, topped earnings expectations and raised its sales, EPS, and profit margin outlook. It’s worth noting that TJ Maxx is a discount retailer; its strength and Target’s weakness suggest consumers are looking for bargains, which may bode well for Walmart’s WMT earnings tomorrow.

• Wall Street’s consensus is for a slight decrease in Walmart’s Q2 profit from a year ago, as prices have tempered somewhat. Investors might want to listen to how the company plans to respond if inflation reheats or other economic negatives surface.
• Cisco (CSCO) reports today after the close, and with its wide global reach it’s often a good barometer for overall info tech health. Shares went on a tear between May and July along with the rest of info tech, and they haven’t declined as much in August as some other large tech stocks.
• Last time out, Cisco narrowly beat analysts’ EPS and revenue estimates and raised guidance. One source of pressure then was a 23% drop in orders during Cisco’s fiscal Q3. Still, the company saw strength in software and subscription revenue thanks to positive trends in cloud computing, artificial intelligence, and security, an executive told Barron’s.

What to Watch

Industrial Production for July is due out just before the open today, and it’s fallen 0.5% each of the prior two months. Consensus from Briefing.com is for a slightly positive reading this time.

Home Ec: It’s a little bit of everything for July Housing Starts and Building Permits this morning. Starts came in at a seasonally adjusted annual rate of 1.452 million, and permits were 1.442 million. That put starts just above the Briefing.com consensus of 1.446 million, and permits just below the consensus of 1.46 million. Permits rose just barely from an upwardly revised June figure, while starts rose sharply from a June figure that was revised down significantly.

That’s a mouthful, but on the whole, the report didn’t signal massive changes in these numbers or any surprises that are likely to move the market much.

The Conference Board’s July Leading Economic Index (LEI) is a touchpoint to check Thursday morning after the open. It’s been in the dumps for more than a year, and analysts expect weakness to continue despite recent data suggesting economic improvement. For instance, the Retail Sales “Control Group”—a figure used in the calculation of Gross Domestic Product (GDP)—rose 1.0% month-over-month in July, doubling estimates.

Analysts expect leading indicators to slip 0.4% in July, a narrower decline than 0.7% in June. Still, a drop would mark the 16th-straight monthly decrease. This sort of long downtrend in the past has often preceded recessions. 

Eye on the Fed

Futures trading indicates an 9.4% probability that the FOMC will raise interest rates by 25 basis points next month, according to the CME FedWatch Tool. The probability of rates being 25 basis points higher than they are now after the November meeting is near 34%.  

Minutes from the July FOMC gathering are due out at 2 p.m. ET today and could provide insight into how much debate there was about raising rates by 25 basis points. That decision was unanimous following a pause at the June meeting; since then, however, some FOMC policymakers have suggested another pause. For more on the minutes, see below.

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CHART OF THE DAY: TRADING PLACES. Info tech (IXT—candlesticks) led all S&P sectors most of this summer before losing some ground this month. Taking its place, with the best one-month performance, is the S&P Energy sector (IXE–purple line). Data source: S&P Dow Jones Indices.Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Data raise stakes: Those who think government jobs are cushy probably shouldn’t envy Fed Chairman Jerome Powell. He and the Fed face tough decisions after raising the FOMC’s target range to 20-year highs. One wrong move and Powell could be in the hot seat. Just recently, weakness in China, soft U.S. manufacturing numbers, and falling U.S. jobs growth made the case for a Fed pause on rates to avoid a recession. Then yesterday’s U.S. July Retail Sales report blew estimates out of the water, and talk quickly shifted to keeping rates higher for longer to curb inflation. That would risk disappointing investors who’ve penciled in strong chances for a rate cut in the first half of next year followed by additional trims. “Stronger retail sales may not mean the Fed has to hike again, but that doesn’t support the market’s expectation of five rate cuts in 2024,” notes Schwab Chief Investment Strategist Liz Ann Sonders. Next week’s speech by Powell at an economic symposium in Jackson Hole now may be even more pivotal—and perhaps more hawkish as he comes under pressure to show the Fed’s inflation-fighting conviction.

It’s a bird, it’s a plane! Tuesday’s Empire State Manufacturing report raised eyebrows. An August reading of –19 wasn’t just below economists’ consensus estimate of –1.0 from Bloomberg—It was in the sub-basement. While the U.S. manufacturing economy has been soft for months, there’s also a growing sense that the Empire State reading is becoming unpredictable, to say the least. The volatility in readings over the last year is unprecedented, even looking back at the Great Financial Crisis of 2008–2009. August’s –19 followed 1.1 in July. It’s been all over the map this year, from above 30 to below –20 (a reading above zero indicates growth). That makes it difficult to find signals in this metric tracking business conditions in New York State. “It’s just the unique nature of this economic cycle,” says Schwab’s Kevin Gordon. “A lot of survey data has been driven by the surge in inflation, the Fed’s tightening cycle, fears of a recession, and other factors all jumbled together in a short period of time.”

Deeper dive into minutes: One thing to dig for in today’s Fed minutes is a sense of whether policymakers think rates are approaching levels that might cause more “breakage” in the economy. Those worries surfaced last spring when several U.S. banks failed. Then, on Tuesday, Fitch Ratings said it might lower its ratings on large U.S. banks. Another thing is whether FOMC members see factors besides rate hikes slowing things down. This could include tighter credit—recently seen in the Fed’s quarterly Senior Loan Officer Survey—or effects from the Fed’s quantitative tightening (QT) program. “The case for a soft landing is growing,” says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research, referencing Tuesday’s solid Retail Sales report. The Fed might be wary of risking that by tightening too much, but it’s perhaps even more worried about tightening too little or loosening too soon, based on Powell’s past comments.

Calendar

Aug. 17: July Leading Economic Indicators and expected earnings from Walmart (WMT), Applied Materials (AMAT), and Ross Stores (ROSS).

Aug. 18: Expected earnings from Deere (DE) and Estee Lauder (EL).

Aug. 21: Expected earnings from Zoom Video (ZM).

Aug. 22: July Existing Home Sales and expected earnings from Medtronic (MDT), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Macy’s (M), and Toll Brothers (TOL).

Aug. 23: July New Home Sales, and expected earnings from Foot Locker (FL), Kohl’s (KSS) and Nvidia (NVDA).

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

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