Bulls Look To Bounce Back After Bear Barrage

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(Friday Market Open) Yesterday’s 75-year-low nonfarm productivity report leveled stocks, and today, all eyes are on how the nonfarm payrolls numbers within today’s April job numbers will affect trading. The S&P 500 futures were pointing lower overnight but rallied back to even before the announcement. 

Potential Market Movers

The bright news in the Employment Situation Report was nonfarm payrolls adding 428,000 new jobs last month, well above the forecasted 385,000, but lower than the March’s 424,000. However, most of the jobs were added in lower-paying positions in the services sector. Additionally, the participation rate fell from 64.4% to 62.2% as more people left the workforce. The April unemployment rate rose from 3.5% to 3.6%, and equity index futures turned slightly lower after the release.

Oil futures were 1.34% higher before the opening bell and working a three-day rally, but natural gas futures have been the main event in the commodities market because they’ve risen 36% in the last two weeks. However, natural gas appears to be running into some resistance that stretches back nearly two decades, causing natural gas futures to drop 1.74% before the opening bell.

Today, Chinese companies Alibaba BABA and Baidu BIDU are expected to report earnings. Given recent reports on China’s economic struggles linked to COVID-19 shutdowns and other factors, these results could reflect the fallout.

One U.S. company of note, Cigna CI, reported better-than-expected earnings and revenue prompting a rise of 2.35% in premarket trading. Earnings for CI rose 17.15% for the quarter, smashing through estimates.

The Cboe Market Volatility Index (VIX) is higher this morning, trading back above the 33 level. However, despite the huffing and puffing from yesterday’s sell-off, the S&P 500 (SPX) appears to be staying above congestion levels around 4,150. This continues to be a key level for the bulls.

Reviewing the Market Minutes

Yesterday, stocks staged a stunning reversal of Wednesday’s Fed rate announcement rally, as investors considered the steepest drop in U.S. productivity in 75 years and 10-year Treasury yields (TNX) edging above 3% for the first time since 2018.

The S&P 500 (SPX) lost more than 3% while the tech-heavy Nasdaq Composite ($COMP) finished down 5% at the close. With the Dow Jones Industrial Average ($DJI) falling more than 3.1% during the session, the major indexes gave back most of Wednesday’s gains.

Thursday’s nonfarm productivity numbers slid at a 7.5% annualized rate last quarter, the deepest since the third quarter of 1947. Fourth-quarter numbers were revised to show productivity growing at a 6.3% rate, below the previously reported 6.6% pace. Nonfarm productivity measures hourly output per worker.

The rise in the 10-year Treasury yield pressured valuations of all stocks throughout the session and particular technology and consumer discretionary stocks in particular. Investors had to revalue their holdings once again on a discounted future cash flow model to account for the higher yields. At the same time, the U.S. Dollar Index ($DXY) moved higher during the session, , exceeding 2020 highs and testing 2017 highs. As I’ve mentioned before, the strong dollar is trouble for U.S. multinationals operating overseas because it makes their products and services more expensive to foreign customers.

News from overseas wasn’t helping much. April’s China’s Caixin purchasing managers’ index came in at 36.2 for April, down from 42 in March, as the nation continues its zero-COVID policy. Results under 50 for that index indicate a slowing economy. Meanwhile, Bank of England raised its key interest rate to the highest level since 2009, adding that inflation may peak at more than 10% as the ongoing Russia-Ukraine war continues to drive energy and other consumer and business costs throughout Europe.

One standout gainer was electric heavy truck maker Nikola (NKLA), which rose 6.39% after reporting its first shipments to customers in April and letters of intent for 500 of its battery-electric Tre models. 

CHART OF THE DAY: 10-YEAR TRIPS TECH. The 10-year Treasury yield (TNX—candlesticks) topped 3% and is approaching resistance around 3.25%. If the TNX breaks resistance, the yield’s next stop could 4%. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Playing Both Sides? So much of yesterday’s action appeared to be driven by the bond markets because rising yields drove concerns over stock valuations and currency risks for multinational mega-cap companies. While the Fed attempted to try and remain even-keeled, apparently the bond market felt the central bank was too dovish, and that inflation would continue to be a problem under the Fed’s current plan.

The issue may lie with what Chair Jerome Powell called a “softish landing.” A soft landing is where the Fed slows inflation without hurting the economy too much. Few analysts believe the Fed can do this because the Fed doesn’t have a good track record of soft landings. It’s a very difficult dismount for sure.

Some critics say that the Fed is overly concerned with the “wealth effect” keeping consumption relatively strong while the Fed tightens. The wealth effect is the economic theory that people spend more money when they feel rich. If the Fed can help keep the stock market from falling, then people may continue to feel rich enough to not cut spending too much. Judging by today’s reaction, bond investors have serious doubts the Fed can walk this line.  

Platform Problems: Yesterday, real estate investing platforms Zillow ZG and Opendoor OPEN split on their earnings outlooks after both firms reported better-than-expected earnings and revenue. ZG lowered its guidance causing the stock to fall 14.9% while OPEN increased its guidance, prompting it to rally 14%.

Last year, Zillow’s housing speculation arm got into trouble as housing prices retreated somewhat.  Opendoor said they didn’t have those problems in their real estate speculation division. However, higher mortgage rates and rising housing inventories make one wonder if Opendoor can continue to outperform Zillow. Perhaps Zillow has more realistic view of the housing market, or maybe Opendoor is just better at what they do. Time will tell. 

Little Guy Troubles: The Russell 2000 (RUT) broke below its 2022 lows two weeks ago and despite several attempts, it hasn’t been able to break back above them. As investors focus on safe harbors and defensive sectors, small-caps aren’t likely to get much attention. If the RUT resumes its slide, it could be testing 2018 highs next.  

Notable Calendar Items

May 9: Earnings from Duke Energy DUK, Simon Property SPG, BioNTech BNTX, and Tyson Foods TSN

May 10: Earnings from Occidental OXY, Suncor Energy SU, and Sysco SYY

May 11: Consumer Price Index (CPI) and earnings from Toyota TM, Walt Disney DIS, and JD.com JD

May 12: Producer Price Index (PPI) and earnings from Brookfield BAM

May 13: Michigan Consumer Sentiment and earnings from Honda HMC

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

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.