Fizzling Out: Stocks Under Pressure As Dollar Powers To 10-Month Highs, Yields Remain Elevated

(Tuesday market open) The 10-year Treasury yield’s inexorable march to its highest levels since late 2007 has investors tapping the brakes on equities. The major U.S. indexes fell again early Tuesday after Monday’s tentative rally, putting them on pace for their first losing quarter in a year with four days left in Q3.

While U.S. stocks halted a four-day slide Monday, yields remained squarely in market focus early Tuesday despite the 10-year note yield slipping back under 4.5%. That was after reaching a 16-year high Monday of 4.54%. The U.S. dollar reached its strongest point since late November. These are just a couple of the dynamics dampening investor sentiment and forcing the market to give up a slice of the year’s gains this month.

“Stocks are attempting to stabilize following last week’s sizable declines, but the price action early this week looks tentative,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “With Treasury yields hitting fresh cycle highs, it’s going to be difficult to generate sustained buying.”

Yields will likely remain the focus until we get to the Q3 earnings season starting in mid-October, he adds. Rising Treasury yields are often bearish for equity prices, enticing investors to forgo riskier stocks and lock in historically high and virtually risk-free fixed income returns. Elevated yields also signal higher borrowing costs for businesses and consumers.

Yesterday’s rally might not have much muscle to power through into Tuesday’s session, in part because it lacked breadth. For instance, the Nasdaq Composite (COMP) rose 0.5% Monday but featured more decliners than advancers. If there’s going to be a serious rally attempt, it would be healthy to see multiple sectors add strength. Financials, for instance, are typically seen as an important component of any long-term upward move.

Morning rush

• The 10-year Treasury note yield (TNX) fell five basis points to 4.49%.
• The U.S. Dollar Index ($DXY) steadied at 105.89.
• Cboe Volatility Index® (VIX) futures climbed to 17.34.
• WTI Crude Oil (/CL) eased to $89.21 per barrel.

The U.S. Dollar Index (DXY) strengthened for the 10th consecutive week. Early Tuesday it touched its highest level since last November before retreating slightly, reflecting expectations interest rates will remain at historical highs.

A strong dollar can help slow inflation for Americans, but it cuts both ways. Large, U.S.-based multinational corporations may face an earnings squeeze when revenue from operations in weaker-currency regions of Europe, Asia, or South America is converted into dollars.

What to watch

Economic numbers ahead: Today’s Consumer Confidence reading from The Conference Board is expected to show slippage for a second consecutive month, perhaps in part because of the late-summer upswing in gasoline prices. The index is expected to fall to 105.0 for September, based on a Briefing.com consensus, after posting 106.1 in August. Inflation fatigue appears widespread, The Conference Board said in an August statement, noting consumers “were once again preoccupied with rising prices in general, and for groceries and gasoline in particular.”

Today the National Association of Home Builders is also expected to report August New Home Sales. Analysts expect new home sales to have fallen to an annual rate of 695,000 in August, based on a Briefing.com consensus, from 714,000 in July.

Other economic news this week includes August Durable Goods on Wednesday and the final estimate for Q2 Gross Domestic Product (GDP) Thursday. Previously, second-quarter GDP growth was lowered to 2.1% from 2.4%. Friday brings Personal Consumption Expenditure (PCE) prices, the inflation metric watched most closely by the Federal Reserve.

Government shutdown: Congressional leaders made little progress over the weekend or early this week toward a short-term funding measure that would keep the government open.

Michael Townsend, Schwab’s managing director of legislative and regulatory affairs, says an October 1 shutdown “looks increasingly likely.” Historically, government shutdowns have not caused a major reaction in financial markets, Michael says. “But shutdowns can increase market volatility, and an extended shutdown could have an impact on the overall economy,” he notes.

Stocks in spotlight

The Q3 earnings season won’t get rolling until mid-October, but this week will feature quarterly results from a few major names, such as semiconductor giant Micron MU on Wednesday afternoon and athletic apparel Nike NKE on Thursday afternoon. BlackBerry Limited BB and CarMax Inc. CMX are also expected to report results on Thursday.

Carnival Corp. CCL quarterly results, expected Friday morning, may offer insights into consumers’ appetite for spending on cruises and other discretionary travel and leisure during a time of ramped-up recession concern. Any comments from the CEO on the business or economic outlook could be telling. Carnival’s shares have been trending lower for nearly three months but are still up around 73% so far this year. 

Costco COST earnings are the main event after the close today. The big-box company reports at a tough time for the consumer staples sector, which is near 10-month lows. Analysts expect earnings of $4.80 per share on revenue of $77.96 billion, according to Earnings Whispers. One thing to watch is whether Costco announces an increase in membership fees.

Eye on the Fed

A couple of public speeches by Fed leaders this week are sure to draw interest as investors seek clues to the outlook for interest rates and the central bank’s next moves. Fed governor Michelle W. Bowman is scheduled to speak at a rental housing conference today at 1:30 p.m. ET (more details below in “Thinking Cap”)

Despite the Fed’s warning of another potential rate hike, investors retain high conviction that the central bank will be on hold for a few more months.

Early Tuesday, the probability that the Federal Open Market Committee (FOMC)will raise its benchmark funds rate from its current 5.25 to 5.50% target range following its October 31–November 1 meeting was pegged at 24%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 39%.

“Whether or not the Federal Reserve hikes rates again, the ‘higher-for-longer’ theme is more important,” Schwab Center for Financial Research analysts write in a report. “Expectations for the number of rate cuts next year has been revised significantly lower by both Fed officials and the market.”

Talking technicals: Despite Monday’s bounce, the market’s technical posture remains a bit soggy. Last week, the S&P 500® Index (SPX)closed below a key support level at around 4,330, which coincided with the lows of late June and mid-August, Schwab’s Nathan Peterson points out. A further downside price move could confirm a bearish “head-and-shoulders” chart pattern that may signal further downside, possibly as low as 4,060, which would represent the measured move of that chart pattern, he says.

While the SPX is down about 6% from a 16-month closing high of 4,588.56 posted July 31, it hasn’t dropped far enough to negate the bull market that began last October. The SPX is also still up 13% so far this year.

CHART OF THE DAY: GO-GO GREENBACK. The U.S. dollar index (DXY—candlesticks) since mid-July has been steadily marching higher, strengthening over 6% since then and this week reaching its highest point since late November. The dollar’s strength reflects the Fed’s extended rate-hiking campaign that’s boosted Treasury yields to multiyear highs, making such dollar-based debt increasingly alluring to foreign investors. A strong dollar can help slow inflation for Americans, but it cuts both ways. Large, U.S.-based multinational corporations may face an earnings squeeze when revenue from operations in weaker-currency regions of Europe, Asia or South America is converted into dollars. 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

Fed opens up: Fed speakers, following a pre-FOMC “quiet period,” are stepping back to the microphones. A couple of them made hawkish comments last Friday echoing Fed Chairman Jerome Powell’s latest remarks, and more speakers are on their way this week. This includes a speech Tuesday by Fed Governor Michelle Bowman addressing rental housing affordability. At this point, hearing hawkish comments from Fed policymakers is kind of a “dog bites person” story. The “man bites dog” article would be if any expressed dovish views. There was a hint of that recently from some Fed officials, among them Atlanta Fed President Raphael Bostic, who said on August 31 that Fed policy is “appropriately restrictive.” The public calendar doesn’t show him speaking again soon, but when he does it will be interesting to see if he still feels the same even as the market builds in firmer chances of a Q4 rate hike.

Sticker shock: U.S. automakers are investing billions of dollars on a rapid transition to electric vehicles that could see EVs account for one out of every two new cars sold by the end of the decade, FactSet reports. This shift is placing a heightened focus on affordability, as carmakers increasingly look beyond higher-end markets and early adopters to ramp up sales volumes in coming years. But affordability remains an obstacle to these ambitious plans. EVs cost substantially more to manufacture than gasoline-powered vehicles. High EV sticker prices rank neck-and-neck with access to chargers as the top concerns among prospective consumers, according to a AAA survey. Moreover, as automakers look to tap into the mass market for growth, they will contend with more price-conscious buyers. A majority of 2023 model year EVs are aimed at the higher-end and luxury markets, with prices in many cases above $60,000—well above the average light-duty vehicle price of about $42,000. The Chevrolet Bolt, among the cheapest EV offerings on the market today, carries a starting price of about $26,000.

Rain makes grain: Consumers who’ve gained some relief from grocery inflation this year can take further encouragement from one particularly important end of the food chain. U.S. farmers are poised to reap the second-biggest corn harvest on record. Earlier this month the U.S. Department of Agriculture estimated this year’s crop at a larger-than-expected 15.13 billion bushels of corn, up 10% from last year. While drought still grips some parts of the central U.S., farmers in much of the Midwest benefit from ample rainfall and other favorable growth conditions. Expectations for a big crop have sent corn futures tumbling about 24% from a June peak around $6.30 a bushel to near a two-year low around $4.80. Corn grown in the U.S. is used in many foods, as well as feed for cattle and ethanol production. What crude oil is to the energy complex, corn is to agriculture—the most actively traded farm commodity and arguably the most important. A big crop won’t slay food inflation by itself, but it will certainly help.

Calendar

Sept. 27: August Durable Goods Orders and expected earnings from Micron (MU).

Sept. 28: Third estimate of Q2 Gross Domestic Product (GDP), August Pending Home Sales, and expected earnings from CarMax (KMX) and Nike (NKE).

Sept. 29: September Chicago PMI, August Personal Income and Personal Spending, August Personal Consumption Expenditures (PCE) prices.

Oct. 2: September ISM Manufacturing Index and August Construction Spending.

Oct. 3: August Job Openings and Labor Turnover (JOLTS).

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

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