Treasury Yields Could Provide Tailwind, But Disappointing European Data Clips Rally

(Wednesday market open) A sprinkle of caution threatened to rain on Wall Street’s rally parade early Wednesday as signs of stubborn inflation in Europe pushed markets lower across the Atlantic. It was more of a mixed picture on Wall Street in premarket trading as investors reacted to both the disappointing overseas data but also to rate-friendlier U.S. inflation, growth, and jobs data released this morning.

Rising prices in Spain and Germany served as a reminder that central banks may not be done tightening the screws just yet, despite Tuesday’s softer-than-expected U.S. jobs data. The data from Spain was particularly disappointing because in the prior month, the country appeared to be winning the inflation battle. That raised hopes that it might be in the vanguard of overall European improvement. Those hopes got dashed a bit this morning.

Another possible brake on Wall Street’s upward charge: rising crude prices. The American Petroleum Institute (API) reported a massive draw from U.S. stockpiles and this morning a hurricane headed toward the Gulf of Mexico, east of many oil and gas production sites. The prospect of even higher gas prices could potentially clip sizzling consumer spending that’s carried the economy much of this year. Yesterday’s August Consumer Confidence report from the Conference Board revealed respondents fretting about rising costs for gasoline and groceries.

Yesterday’s rally occurred amid lower-than-normal volume, which also takes a bit of frosting off the cake. Typically, lower volume suggests less market conviction, though this week might feature lower volume in general due to the coming three-day weekend. Volatility fell, however, typically a positive sign for equities.

The focus today turns to earnings from Salesforce CRM after the close, as well as the ADP National Employment Report and the government’s second estimate for Q2 Gross Domestic Product (GDP). The so-called “mega-caps” like Nvidia NVDA and Tesla TSLA that led the rally yesterday as Treasury yields crumbled on the soft U.S. data are mixed in premarket action.

Overall, the “risk-on” tone that dominated yesterday appears to be losing steam after the European data, but a softer dollar and low volatility remain potentially supportive factors.

Morning rush

• The 10-year Treasury note yield (TNX) ticked up slightly to 4.14%.
• The U.S. Dollar Index ($DXY) fell to 103.47.
• Cboe Volatility Index® (VIX) futures are steady near one-month lows at 14.5.
• WTI Crude Oil (/CL) futures climbed to $81.62 per barrel.

Just in

Yields drop on GDP: The market seldom reacts much to the government’s second estimate for GDP, but today might be an exception. Treasury yields ticked lower after a drop in the estimate to an annual rate of 2.1%, from the previous 2.4%. The closely watched consumption component of the report did rise slightly to 1.7% from the prior 1.6%, but prices components cooled. Significantly, the report’s Core PCE Price Index slipped to 3.6% from 3.7% in the first estimate.

Jobs growth edges lower: Private-sector jobs growth in August reached 177,000, ADP reported today, below the consensus estimate of 195,000. However, ADP upwardly revised July’s jobs growth to 371,000 from 324,000. It’s a mixed picture, and probably has no bearing on what we’ll see in the official government Nonfarm Payrolls data Friday. The 12-month average diversion between the two reports now stands at 129,000 per month.

Stay tuned for China’s monthly manufacturing PMI data due early Thursday in Beijing. Consensus, according to Trading Economics, is 49.4, up from 49.3 in July but still in contraction territory below 50. Anything above 50 might be seen as an encouraging sign that perhaps the economy is starting to benefit from recent stimulus.

Stocks in spotlight

Window on tech: Salesforce CRM and Broadcom AVGO report this afternoon and tomorrow, respectively.

Salesforce shares fell after its last earnings report despite exceeding analysts’ estimates. Investors were disappointed the company didn’t raise its full-year revenue outlook, media reported at the time. That puts guidance in the spotlight tomorrow as investors wonder if the outlook will stay conservative. Shares are roughly flat since the last earnings report after a summer rally fizzled.

Other companies expected to report today include Crowdstrike CRWD, Five Below FIVE and Okta OKTA.

What to watch

The final day of August might summon nostalgia for a summer that’s rapidly ending, but for investors it marks a critical day of data.

Tomorrow morning features Personal Consumption Expenditure (PCE) prices for July, a report the Federal Reserve watches very closely for inflation trends. Personal Spending and Personal Income for July also bow at 8:30 a.m. ET Thursday, providing the latest look at consumers after Tuesday’s August Consumer Confidence reading fell sharply from July.

In June, the overall PCE index slowed to a year-over-year increase of 3% from 3.8% in May. Core PCE, which excludes food and energy prices, fell to an annual rate of 4.1% from 4.6% the month before. The core rate had been holding at 4.6% to 4.7% earlier in the year but has slipped recently. That’s the one the Fed is probably watching most closely, because headline PCE likely saw impact from rising gasoline prices in July.

Analysts expect the following results for PCE prices, according to Trading Economics and Bloomberg:

• Headline PCE, month-over-month: +0.2%, unchanged from +0.2% in June
• Core PCE, month-over-month: +0.2%, unchanged from +0.2% in June
• Headline PCE, year-over-year: +3.3%, versus 3% in June
• Core PCE, year-over-year: +4.2%, versus 4.1% in June

Look beyond the big numbers and consider which components of PCE are driving overall inflation.

“If it’s services-oriented areas that are keeping things elevated, that’s more of an issue,” says Kevin Gordon, a senior investment strategist at the Schwab Center for Financial Research. “And if you see goods prices swing out of deflation and establish a new uptrend, there’s some potential worry there, too.”

Everything builds up this week to Friday’s Nonfarm Payrolls report for August. Consensus on Wall Street, according to Trading Economics, remains at 170,000 jobs added, down from 187,000 in July.

Eye on the Fed

As of this morning, the probability that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will maintain current rates after its September 19–20 meeting rose above 88%, according to the CME FedWatch Tool. Expectations that rates will be higher coming out of the FOMC meeting in November reached 48% this morning, compared to 42% a week ago.

Talking technicals: Yesterday’s forceful rally easily carried the SPX back above its 50-day moving average near 4,450. The Nasdaq 100 (NDX) and the Dow Jones Industrial Average ($DJI) also finished well above their respective 50-day moving averages, for a Wall Street hat trick. Key resistance for the SPX could now be near 4,600, the level where the index flamed out in July and in several early 2022 rallies. “Things do look more positive after yesterday’s rally, but sustained momentum will likely be contingent on Treasury yields behaving (or remaining subdued),” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Thinking cap

Ideas to mull as you trade or invest

Grain of salt: Yesterday’s July Job Openings and Labor Turnover Survey (JOLTS) lived up to its name, sending a jolt into the bond market after coming in well below expectations. The 10-year U.S. Treasury note yield almost instantly dipped 7 basis points on data showing just 8.827 million job openings, the lowest since March 2021 and well below expectations for around 9.5 million. Generally, job openings have followed a downward trend this year from record highs above 10 million. Those peaks raised fears of inflation, but the July reading suggested the labor market tightness coming out of the pandemic might finally be easing. Don’t get carried away by one month’s data, however. The JOLTS report is relatively old from the market’s perspective, because July ended four weeks ago. Also, this particular JOLTS report had the lowest response rate on record.

Look both ways: Yesterday’s weak JOLTS and Consumer Confidence data appeared to take pressure off the central bank for more rate hikes, and the markets seemed initially cheered by this aspect of the news. But on the other hand (there’s always an “other hand”), the numbers could suggest a growing recession threat. It’s a bit of a stretch to conclude that based on just one month of data, of course, and Friday’s jobs report might add clarity. But falling demand for workers accompanied by consumer caution doesn’t suggest a rip-roaring fundamental environment. Many retailers already issued conservative holiday-season guidance; if earnings data bears it out, it could suggest consumers pulling back. That could potentially hurt industries like housing, travel, electronic goods, and energy.

Mega’s might moderates: Mega-cap stocks approach the end of August swinging a little less weight than a few months ago. Going into Tuesday, the biggest eight stocks in the S&P 500 Index (SPX) had risen 67% this year through July 18—only to slide 6% since then. This hurt the valuations of these behemoths, which together now own a 12-month forward price-earnings (P/E) ratio of 27, down from above 30 in mid-June. Even with somewhat diminished prices and weightings, these eight stocks, which include Apple (AAPL), Nvidia (NVDA), Tesla (TSLA) and other well-known firms, constitute more than a quarter of the SPX by market cap. So they may swing a bit less weight, but still can throw a solid punch at the market if they move one way or another. That’s why it makes sense to look beyond the major indexes and into various sectors to get a better feel for the market’s overall performance.

Calendar

Aug. 31: Weekly Initial Jobless Claims, July Personal Consumption Expenditures (PCE) price index, July Personal Income and Spending, August Chicago Purchasing Managers Index (PMI), and expected earnings from Dell Technologies (DELL), Dollar General (DG), Hormel Foods (HRL), Lululemon Athletica (LULU), and UBS AG (UBS).

Sept. 1: August Employment Report, Construction Spending, and the Institute for Supply Management Manufacturing Index.

Sept. 4: U.S. markets are closed for Labor Day.

Sept. 5: July Factory Orders and expected earnings from GitLab Inc. (GTLB) and Zscaler Inc. (ZS).

Sept. 6: MBA Mortgage Applications Index, Trade Balance for July, Institute for Supply Management Non-Manufacturing Index for August, Fed’s Beige Book.

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

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