On The Rate Watch: Yields Still Driving Action As Inflation Data Roll In

Today starts with the S&P 500 (SPX) on a four-day losing streak and one possible culprit — yields on 10-year Treasury yields—moving higher. 

Once again, the bias in stocks appears to be lower, as SPX futures remain under pressure amid interest rate fears. The 10-year Treasury note yield could be stealing some of the stock market’s thunder, topping 3.23 percent in the early going. Yesterday it peaked at above 3.26 percent, the highest in more than a decade. 

Some data checked in early Wednesday, with the headline and core producer price index for September both rising 0.2 percent. That was in line with Wall Street analysts’ expectations, but up from a negative 0.1 percent a month earlier. The closely watched consumer price index is due tomorrow morning, and now that the PPI is showing a rebound, the CPI could attract more interest. These inflation data might play into 10-year yield action over the coming days, especially if CPI comes in higher than the 0.2 percent Wall Street expectation. 

Fed speakers are on the prowl today, so consider keeping an eye out for possible headlines. The calendar includes remarks from Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic. Overseas, Asian markets were mixed after showing a lot of weakness earlier this week. Back home, crude seems to be having trouble getting through the $75 a barrel level.

Yesterday, U.S. stocks traded on both sides of the prior day’s close but limped around without much direction before a mixed settlement. The Nasdaq (COMP), which has been under a lot of scrutiny recently amid pressure on the tech sector, was up more than 0.7 percent at one point Tuesday, but finished barely higher. The market might continue to tread water today and tomorrow ahead of highly anticipated big bank earnings Friday morning.

Nasdaq Holding Its Own Despite Gloom and Doom Talk

There’s been a lot of talk on the financial networks about how the COMP has been down on its luck lately. Frankly, some of that is simply talk. Although COMP hasn’t been climbing, it hasn’t been exactly a firestorm of selling either. It helps to take a broader view.

Suppose someone told you back in late July that by early October, shares of Facebook, Inc. FB would be down 30 percent from their level then and shares of Alphabet Inc. GOOG GOOGL would be down 9 percent? It would have sounded pretty rough for the COMP. That actually is the case, but the COMP is only down 2 percent since July 25, the day FB shares got taken out to the woodshed after disappointing earnings. 

One reason COMP has managed to hold its own is that the widest-held stock, Apple Inc. AAPL, is up 18 percent since that July 25 day of reckoning, while the other two FAANG components—Amazon.com, Inc. AMZN and Netflix Inc. NFLX—have managed to stay flat to just a little lower. So when you hear talk about the FAANG fading, keep it in perspective. One FAANG stock is fading, another is having trouble, but another is looking pretty good. Overall, COMP isn’t getting killed, and the market as a whole has held up pretty well, with a lot of resiliency. That doesn’t mean investors shouldn’t be cautious—that should go without saying at all times. Only that some of the gloom and doom might be overstated. 

Shifting Sector Sands

What’s positive about the market right now is different segments coming up healthy each day. While housing stocks have struggled despite some better data recently, some of the so-called “defensive” sectors like utilities and health care continue to perform strongly. If that seems odd in the middle of a Treasury yield rally, consider what we discussed here Tuesday about some investors apparently thinking yields might not be able to climb much higher and trying to get in front of that. The 10-year yield actually fell a smidgen Tuesday but stayed up around 3.2 percent, still near seven-year highs.

Financials lost ground Tuesday, but remain up over the last week. Rates are higher, but it still seems like a lot of people just aren’t believers in the segment. Friday’s launch of big bank earnings season could shed more light on how the sector is doing, and remember to listen to conference calls. Arguably, they’re more important now than ever, mainly because of all the events swirling around the world with trade, energy, and emerging markets, not to mention the recent bond market weakness.

Info tech rose Tuesday, helped by strength in AAPL and Microsoft Corporation MSFT. Energy, led along by crude, was Tuesday’s best sector performer.

Volatility Elevation Might Not Be Over

Volatility remains a factor, with VIX up near 16. That’s way above the late-summer lows down around 11, but still below the rally to 18 in mid-July. Looking at the performance of VIX over the last few weeks, it seems to indicate the market’s had some roughness, and also might hint that with the bond weakness there’s been a shift in the sands. 

Some investors seem to be confused right now about where to put their money, so VIX could remain elevated for a while. Friday’s bank earnings might help give a peek as to where some of that money might end up.

Oil Keeps on Rolling

A number of factors look like they’re helping pump up the oil market this week, including a storm in the Gulf of Mexico, looming U.S. sanctions against countries that buy oil from Iran, and last week’s drop in the U.S. oil rig count. Today’s weekly stockpiles report from the U.S. government might give another price signal for crude, and remember to listen to CEOs next week for any indications on whether high energy costs are starting to press profits.

While oil costs are an indirect threat to profits, one direct threat to nearly every industry is higher cost of the materials needed to manufacture products. Already, several companies reporting in the last month have mentioned this, and over the last month, materials has been one of the poorest performers in the S&P 500. 

Things got tougher Tuesday when specialty chemicals company PPG Industries (PPG) fell 10 percent amid what Briefing.com called “disappointing guidance” based on currency pressures, cost inflation, softer demand in China, and a lower end-user demand in Europe and the U.S. Several sector components finished trading at their 52-week lows. 

In other corporate news, Starbucks (SBUX) shares seemed to get a caffeine injection yesterday, rising more than 2 percent on news that a well-known activist investor was buying shares. Also, the venerable Sears Holdings (SHLD) has hired an advisory firm to help it prepare for a bankruptcy filing that could come as soon as this week, The Wall Street Journal reported. That stock has gone from above $60 to below $1 a share in less than a decade, arguably a victim of online rivals.

FIGURE 1: Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The UN and Oil

Did anyone else notice how crude reversed early losses Tuesday after news of U.N. Ambassador Nikki Haley’s resignation? It might not have been totally a coincidence, though as noted earlier, there are plenty of fundamentals supporting oil right now. According to some foreign policy analysts, Haley is seen as more of a moderate voice in the administration’s policy, and her departure at the end of the year could potentially mean a more powerful role for the Iran hawks in the State Department. Arguably, a hawkish policy on Iran is one reason oil prices are already up more than 28 percent year to date. U.S. sanctions on buyers of Iranian oil are scheduled to take effect Nov. 4, but some recent media reports say the U.S. might consider waivers for some countries that purchase Iranian oil if they cut back their imports from the country. 

Dollar Peeks Above 96

The dollar index tested the thin air near seven-week highs above 96 early Tuesday but then retreated to the mid-95 range. For weeks now, the index has run into resistance above 95.50, but some technical analysts argue that a close above 96 might indicate strength ahead. Like oil, the dollar seems to have plenty of fundamental support at the moment. Sharp words from both the International Monetary Fund (IMF) and the European Union aimed at Italy’s government Tuesday reinforced concerns about budget issues there. The IMF and Brussels have both warned Italy’s government not to increase borrowing in its next budget. The euro fell to more than one-month lows vs. the dollar. Another thing possibly pressuring the euro is what appears to be lack of progress in Brexit talks. 

Following the Auctioneer’s Gavel

Seasoned traders remember a time when Treasury auctions were a stop-trading-and-watch thing. In recent years, however, these periodic sales of new securities by the Treasury Department seemed to have moved to second-tier status among market-moving data points. Given the recent spike in yields, this week's auction action—which includes $36 billion in 10-year notes today and $15 billion in 30-year bonds Thursday—might be worth a look. Might the recent upward move in long yields attract a steady pool of bidders, thus keeping a lid on the yield? Or might participants be a little gun-shy given the recent rise? Remember, the Congressional Budget Office recently projected $1 trillion-plus deficits between now and 2020. Will the buyers continue to show up, and at what price? Stay tuned.

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