Clawing Back? Positive Energy Seems To Return After Drop, But Trade Fears Persist

Wall Street appeared to enjoy some positive vibes early Wednesday after Tuesday’s late sell-off. Though tariff and geopolitical worries played a role in the plunge, the main factor might have been simple fatigue after a seven-day rally in the Nasdaq. Today’s theme seems to be whether the market can recover.

Fresh data hit early Wednesday as the producer price index rose 0.2% in February, in line with Wall Street analysts’ expectations and not a number likely to raise any fears about inflation. Retail sales fell 0.1% in February, but were weighed down by a weak automobile market. With auto sales stripped out, retail sales rose 0.2%, still below expectations.

While the market isn’t likely to spend much time focused on these numbers, the takeaway might be some inflation relief. The PPI and retail sales numbers certainly don’t seem to indicate any kind of overheating in the economy, and bond prices rose a bit on the data.

Stocks bounced in pre-market trading, and the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) came back a little in pre-market trading after Tuesday’s weakness. The real focus today is on whether stocks can make up what they lost yesterday. Keep in mind, too, that quadruple witching (expiration of stock index futures, stock index options, stock options and single stock futures) is coming up Friday. There aren’t a lot of numbers to watch on the data side of the equation, but because it’s quadruple witching we may see some back and forth trade. A lot of people might want to close their positions before the end of the day tomorrow.

The market remains on edge about tariffs, inflation, and geopolitics as Wednesday gets underway. Overseas, Asian stocks took it on the chin as worries swirled about possible U.S. tariffs and the replacement of former U.S. Secretary of State Rex Tillerson, news media reported. The White House might be looking at imposing up to $60 billion in tariffs on Chinese goods, according to Reuters.

The Asian slump came despite better than expected data from China, where industrial output jumped more than 7% in the first two months of the year. Oil climbed slightly after that news hit.

Arguably, most of this year’s sell-offs have centered around chances of a possible fourth rate hike in 2018. That didn’t seem to really be the concern as U.S. stocks slumped on Tuesday, however. Actually, a couple of items seemed to work against rate fears. The February consumer price index (CPI) was pretty mellow, coming in as expected at 0.2% and not raising many eyebrows. Also, 10-year yields pulled back during the day, falling to around 2.85% by the close to near the middle of their recent range as inflation fears eased a bit.

Tech took a blow Tuesday, in part from news that the Trump administration had blocked Broadcom Ltd AVGO bid for QUALCOMM, Inc. QCOM. Shares of QCOM fell sharply. The scuttling of that deal might have cast a shadow over semiconductor stocks specifically and the tech sector as a whole. Nasdaq (COMP), which is loaded with tech shares, recorded a losing day after seven higher sessions in a row.

With tech the leading sector so far this year, it’s not too surprising to see some money coming off the table. Perhaps the deal news gave some investors an excuse to take profit. To be fair, it was hard to find any sector that looked too good Tuesday. Only a few of the more “defensive” ones finished in the green. Energy, financials, and consumer discretionary were among the other big losers.

From a technical perspective, Tuesday looked a bit disappointing for the S&P 500 (SPX). Earlier in the day, the SPX climbed just above psychological resistance at 2800 for the first time since late January, but couldn’t hold those gains and ended up posting moderate losses. Sometimes a move like that can indicate general market weakness, so we’ll see if any leftover bearish  feeling seeps into Wednesday’s action.

Companies in the news early Wednesday included Walmart Inc WMT, which media reported plans to expand its grocery home delivery service to 100 cities by the end of the year; and Alphabet Inc. GOOG GOOGL, which is banning crytpocurrency-related advertising.

Gold found some buyers Tuesday, rising amid concerns about President Trump’s firing of Secretary of State Tillerson and the possible impact on diplomacy. Despite Tuesday’s gains, gold really hasn’t done much year-to date. It jumped in early February when stocks had their correction, but now finds itself trading not far above where it started the year. The dollar index is back below 90, but weakness in the dollar didn’t seem to help crude oil Tuesday, as it sometimes does. A weaker dollar, if it persists, might lead to inflation fears sticking around, however.

So far, the week is going pretty much the way some analysts were concerned it might. There’s not much earnings news and the Fed meeting isn’t until next week. At times like these, outside events can sometimes send prices veering quickly up and down. Tuesday’s action, when the Dow Jones Industrial Average ($DJI) briefly climbed 100 points only to fall triple digits by the end of the session, indicates volatility still being a factor. VIX moved a little higher Tuesday, back to above 16. It’s now near about average levels, but it wouldn’t be surprising to see VIX spend much of the year between 16 and 20, compared with 10 or below for a good deal of last year. To sum things up, caution appears to be warranted the rest of the week.

FIGURE 1: YIELD FLATTENING? After moving steadily higher the first part of this year, yields on the benchmark 10-year Treasury note (candlestick) have flattened over the last few weeks, this six-month chart shows. Meanwhile, the dollar index (purple line), seems to be carving a range of its own, not veering much above or below the 88-90 area recently. Chart source: CME Group. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Inflation - Beyond the Headline

Investors seemed to breathe a collective sigh of relief that yesterday’s February consumer price index rose just 0.2%, in line with expectations. However, a look at the report as a whole revealed some signs that inflation isn’t necessarily out of the economy’s hair. For instance, while core inflation — which strips out food and energy prices — also rose 0.2% in February and was up just 1.8% for the year, the core rate has been rising at a faster pace over recent months. In addition, prices for some items, especially apparel, have been moving up at a rapid clip lately.

Looking beyond the CPI, the monthly NFIB Small Business Economic Trends Survey released Tuesday showed the highest percentage of small business owners raising prices since mid-2014. In addition, 24% of those surveyed plan price hikes, the highest level since 2008. Keep an eye on the University of Michigan preliminary sentiment data for March due Friday to see if the survey captures any sense of consumers feeling a bite from higher prices.

Carving A Range

After rising quickly in January and February, the benchmark 10-year yield seems to have grown pretty comfortable in its current range. Since late February, it’s moved back and forth in a relatively narrow window roughly between 2.8% and 2.9%, without much sign of trying to test highs above 2.9% posted in February. The last time things were this quiet was back in November and early December, before yields started  taking off at the start of the year. It could be argued that this relative smoothness might be one factor behind market volatility settling down a little over the last week.

It’s also worth noting that yields haven’t ended a session above 2.9% since Feb. 27, the day before Fed Chair Jerome Powell’s first testimony to Congress. He spoke again two days after that and appeared to try and calm things down after initially alarming some people with a hawkish tone. Maybe he succeeded, considering the yield trend since then. Powell speaks again next Wednesday in a press conference after the Fed meeting, so it could be interesting to see how yields react.

Crude Supplies Coming Up

Crude inventories are due a little later this morning following last week’s report showing a higher-than-expected stockpile build of 2.4 million barrels. This is often a time of year when stockpiles start to swell a bit as seasonal maintenance takes place in the refining industry, and supplies remain above the five-year average. However, stockpiles are down from a year ago, and with the economy on a roll and potentially sparking more demand, there may not be much room for prices to fall below current levels at just above $60 a barrel. Crude futures hit a low of $59.12 for the front-month contract about a month ago, and that could represent a technical support level. The relative weakness in oil over the last month seems to be weighing on energy stocks, which trail the S&P 500 (SPX) over that time period and are among the worst-performing sectors since mid-February along with utilities, telecom, and consumer staples.

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