Not A Four-Letter Word: "Risk" Embraced To Start Week Despite Rising Treasury Yields

(Monday market open) After a lackluster start to the month, Wall Street turns its collective attention to critical U.S. inflation data and a European Central Bank (ECB) meeting later this week.

Things are looking up so far as investors seem slightly less risk-averse this morning. Tesla TSLA shares bounced in premarket trading after Morgan Stanley MS upgraded the automaker, saying software and services revenue could be key drivers. The dollar and crude oil eased slightly, removing some of the pressure on stocks, but the 10-year Treasury yield once again hit 4.3%. Investors are also looking ahead to Apple’s AAPL iPhone event tomorrow (see more below), and to the Federal Reserve’s meeting next week.

Bullish investors didn’t have much to cheer about last week. Only energy and utilities kept their heads above water, making September the third straight month to start off in the red. Tech shares fell more than 2%, worse than the 1.3% decline in the S&P 500® Index (SPX), amid concerns about China’s economy and Beijing’s targeting of the iPhone.

Surprisingly, volatility didn’t heat up as markets cooled down last week. The muted Cboe Volatility Index® (VIX) could be a sign that despite many concerns, traders don’t expect any of them to cause a market meltdown, notes Randy Frederick, managing director, trading and derivatives at the Schwab Center for Financial Research. The implied daily move in the SPX (based on the VIX), is a narrow 36 points in either direction.

Keep an eye on small-cap stocks, which had a rough week. Softness in this part of the market can reflect worries about the U.S. economy, because small-caps tend to have more of their sales at home.

Morning rush

• The 10-year Treasury note yield (TNX) rose to 4.3%, near recent multi-year highs.
• The U.S. Dollar Index ($DXY) dipped to 104.74 as the yen rallied on hopes Japan could turn away from negative rates.
• Cboe Volatility Index® (VIX) futures steadied at 14.23.
• WTI Crude Oil (/CL) futures were slightly lower at $86.99 per barrel.

What to watch

Crucial data is packed into mid-week, with August Consumer Price Index (CPI) on Wednesday followed by the August Producer Price Index (PPI) and August Retail Sales on Thursday. Together, those could influence the Fed’s thinking ahead of its meeting next week.

CPI is expected to rise to 3.6% on an annual basis from the prior reading of 3.2%, while core CPI (stripping out food and energy) is expected to rise by 4.3% versus the prior reading of 4.7%, says Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. “Despite the improvement in core, inflation is still too high for the Fed,” he says. “The question now for the market will likely be how long the Fed hold rates at elevated levels versus the potential for another rate hike this cycle.”

Headline CPI, which includes food and energy, is likely to accelerate in part due to rising U.S. gas prices. One question is whether higher energy prices ultimately leak into core prices, as they sometimes do since energy powers the economy. The Fed will likely watch for any impact on core inflation if the energy market doesn’t cool off.

Month-over-month CPI is seen rising 0.6% while core monthly CPI is seen up 0.2%, according to Trading Economics. Both rose 0.2% in July.

ECB insights: The ECB holds its policy meeting this week, with a decision and press conference scheduled Thursday morning, U.S. time. The ECB has raised rates at nine straight meetings, but economists expect a pause at this one, Reuters reports. European stocks are up just 7% year-to-date, versus 16% for the SPX.

Stocks in Spotlight

Earnings ahead: A few company reports are on the calendar this week, including Oracle ORCL, Adobe ADBE, and Lennar LEN. Along with that, U.S. auto companies and their workers approach a Thursday deadline to settle their differences.

Cloud on horizon: Oracle reports after the close today, and investors will check if the software vendor’s cloud business continued to grow as quickly as in the prior quarter. Oracle’s revenue rose 17% year-over-year in the quarter that ended in May, supported by a 23% jump in cloud services and license support. Cloud infrastructure, a smaller business for Oracle where it seeks to compete with industry leaders like Amazon AMZN and Alphabet GOOGL, climbed 76%.

Look for any updates today on Oracle’s generative artificial intelligence (AI) cloud service, which competes with Microsoft’s MSFT OpenAI. Consensus for Oracle earnings per share is $1.14 on revenue of $12.46 billion, according to Earnings Whispers.

Strike watch: It’s a big week for Ford F, General Motors GM, and Stellantis STLA, the parent company of Jeep, which face expiration of their contracts with the United Auto Workers (UAW) Thursday.

iPhone greeting: It’s also an important week for Apple after the company was recently in the news for all the wrong reasons. China’s crackdown on use of iPhones by government employees sent shares down 6% in two days. Apple also felt pressure from Chinese company Huawei’s introduction of a competing phone.

Sugar rush: JM Smucker SJM has agreed to buy Hostess Brands TWNK. Could this mean a jelly-filled Twinkie coming to a store near you soon? Inquiring minds want to know.

Eye on the Fed

As of this morning, the probability that the Federal Open Market Committee (FOMC) will maintain current rates after its September 19–20 meeting is 93%, according to the CME FedWatch Tool. The tool pegs the probability of rates being higher after the November meeting at around 40%. The Fed’s quiet period has begun ahead of next week’s meeting, so Fed speakers are off the calendar for now.

This morning’s rise in the 10-year yield didn’t seem to spook the market the way last month’s yield gains did, at least not early on. The difference could be that August’s yield rally was dramatic and quick, but this one has been more muted. Also, if you look at the SPX at each of the last eight short-term highs on the 10-year yield, it was either already in a decline or flat, and then it turned higher when the rate peaked. This could imply that the rate followed the equity market, not vice-versa, Schwab’s Frederick notes.

Talking technicals: Last week the SPX dropped below its 50-day simple moving average, which now stands at 4,478. The next significant level of support for the SPX is 4,350 (the August low), with the next key resistance level around 4,600, according to Nathan Peterson, director of derivatives analysis at Schwab.

Ready to yield? Where do Treasury yields go from here after recently reaching new 15-year highs? Likely lower as inflation continues to cool, says Kathy Jones, Schwab’s chief fixed income strategist, in her latest posting. Treasury yields typically peak before the final rate hike of the cycle, she notes.

CHART OF THE DAY: CREATED EQUAL. For most of the year, the S&P 500 Equal Weight Index (SPXEW—purple line) has trailed the S&P 500 Index (SPX—candlesticks). That’s held true recently, as well, but the struggles of mega-caps might change the equation somewhat if they continue. The SPXEW measures the 500 members of the S&P 500 without accounting for market weighting. 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

Tag, you’re “it”: As the tit-for-tat trade war sizzles between China and the United States, investors should be aware of companies that might get targeted by Beijing. Apple was in China’s sights last week just a few months after Beijing banned sales of Micron MU chips to key domestic industries. In August, lack of Chinese regulatory action essentially killed Intel’s INTC acquisition of Tower Semiconductor TSEM, noted PCMag, a trade publication. China’s moves came as the Biden administration tightened restrictions on China’s ability to import key chip technology. Eight of the 10 S&P 500 companies with the most revenue from mainland China are chip makers or related to the chip industry, Barron’s notes. Qualcomm QCOM tops the list, with 63% of its revenue from China. Texas Instruments TXN, Broadcom AVGO and Western Digital WDC also do a hefty amount of business there. Non-tech firms—for example, luxury goods or automobile companies—could also see an impact if China’s economy keeps sputtering or if Beijing gets more punitive.

Climb and punishment: It’s possible that OPEC’s recent production cut isn’t intended to “punish” U.S. consumers with higher prices, but instead reflects worries about the global economy. One thing the Saudis try to avoid is a glut of oil. It’s possible Saudi Arabia sees the faltering Chinese economy and rising interest rates around the globe as signs that demand might ease. The irony is that by allowing prices to rise this way, OPEC could raise worries about a recession in the United States and Europe. Higher energy prices often precede recessions as consumers must dig deeper to fill their tanks and stop spending as much on other products. OPEC next meets in early October, and if smaller members of the cartel push back on output restrictions, that could help put the brake on crude prices—at least temporarily.

Reality check: September is living up to its reputation as the worst month of the year on Wall Street, but keep things in perspective. Markets aren’t far off their late-July highs, and there’s no rule that stocks must go straight up. We’re in a sideways pattern without many positive catalysts, and that could continue until seasonal factors improve in Q4. In addition, the market remains somewhat high priced, historically, and investors still fret about inflation and a relatively hot U.S. labor market. This week’s inflation data are the next chapter in the story.

Calendar

Sep. 12: No major earnings or economic data.

Sept. 13: August Consumer Price Index (CPI).

Sept. 14: August Producer Price Index (PPI), August Retail Sales, and expected earnings from Adobe (ADBE) and Lennar (LEN).

Sept. 15: August Import and Export Prices, September Empire State Manufacturing, August Industrial Production, and Preliminary September University of Michigan Consumer Sentiment.

Sept. 18: No major earnings or economic data.

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

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