China Responds To Pelosi Visit With Sanctions And A Show Of Military Force

(Friday Market Open) The long-awaited Employment Situation report was released before the market open and showed the economy added a lot more jobs than expected.

Potential Market Movers

Analysts had forecasted nonfarm payrolls to increase by 250,000 jobs—instead they were up 528,000. The unemployment rate fell to 3.5%, significantly lower than the forecasted 3.6%. Notably, the participation rate fell, which helped to increase the unemployment rate. Average hourly earnings rose 0.5% in July and 5.2% year-over-year, which were both above their respective forecasts of 0.3% and 4.9%.  

An increase in jobs while GDP has been falling could suggest that productivity is in decline. Productivity is an important economic indicator because it often correlates to wealth increases. Lower productivity will also make it harder for prices to come down as labor costs are likely to increase.   

The 10-year Treasury yield (TNX) shot up past 2.78% as investors fear the hot jobs market will prompt the Federal Reserve to be more aggressive in raising rates. The bond market is already increasing the odds for a 75-basis-point hike in September.

Equity index futures also fell on fears of potentially more aggressive and sustained Fed rate hikes as the Dow futures and Nasdaq futures were both down about 200 points each before the open.   

Adding to the rate fears, China is finally reacting to Speaker Nancy Pelosi’s visit to Taiwan with sanctions. Beijing is also cutting off some of its communications with the U.S. government. China also launched military exercises around Taiwan and launched missiles over the island, some of which went over Japan and landed in Japanese waters. However, the Shanghai composite and the Japanese Nikkei were both higher on the day.

In response to China’s reactions, CNBC reported that Apple AAPL has told its factories to reexamine packaging to make sure that there’s nothing that indicates that Taiwan isn’t part of China even though Taiwan considers itself a fully sovereign state. AAPL was down 1.36% in premarket action.

Investors have slogged through a slew of earnings reports this week and there’s plenty more to go. Here are a few making movements during the premarket session.  

• EOG Resources EOG rose 1.28% despite missing earnings estimates. EOG declared a special dividend and reaffirmed its fiscal year earnings outlook.  
• DraftKings DKNG jumped more than 9% after beating on top- and bottom-line numbers and lifting its earnings forecast for the year.
• Goodyear Tire GT beat earnings and revenue estimates and popped 4.38% higher.
• Suncor Energy SU topped earnings estimates, but investors may be seeing the results as a good time to take profits because the stock fell 0.75%.
• Block SQ beat estimates for earnings and revenues but fell 7.39% as the company took a $36 million loss related to bitcoin.
• Yelp YELP smashed its earnings estimates, reporting $0.11 cents per share instead of the fraction of a penny forecasted.
• Lyft LYFT reported a profit of $0.13 cents a share instead of a forecasted loss, the stock 5% higher.
• Zillow Z beat earnings estimates but plummeted more than 7% after the company predicted a significant contraction in home sales.

Tesla TSLA kicked off their shareholder meeting yesterday. They voted to split the stock 3-for-1. CEO Elon Musk told investors the U.S. is past peak inflation and said that components costs were shrinking. He also predicted a small recession.

Amazon AMZN announced plans to buy iRobot IRBT with an offer that is a 22% premium to Thursday’s close. The deal could signal an increase in mergers and acquisitions (M&A) as cash-rich companies like Amazon could find a lot of value in stocks that have sold off over the last seven months.

An increase in M&A activity could also boost investment banks like JPMorgan JPM, Morgan Stanley MS, and Goldman Sachs GS whose capital businesses have struggled through 2022.

Reviewing the Market Minutes

The S&P 500® index (SPX) was basically flat on Thursday closing just 0.01% higher. Investors were likely feeling cautious ahead of today’s jobs report. The Nasdaq ($COMP) increased 0.41% but the Dow Jones Industrial Average ($DJI) decreased 0.16%.

The U.S. Dollar Index ($DXY) fell 0.70% in response to the relatively aggressive rate hikes of 50 basis points by the Bank of England (BoE) and the Central Bank of Brazil. The BoE hike was its largest in 27 years as Britain’s central bank tries to rein in inflation amid recession fears. Brazil’s monetary policy committee known as Copom, raised its key lending rate to 13.75% as the country faces a 12.13% annual inflation rate recorded in April, a 19-year high.

Oil prices continued to fall on Thursday with WTI crude futures settling 2.7% lower to $88.49 per barrel. Natural gas futures fell 2.1% and unleaded gasoline futures tumbled 4.8%. With performance like this, it’s not surprising that energy was the worst performer among the S&P 500’s 11 sectors. The Energy Select Sector Index fell 3.67%.

Investors continued to favor the technology and consumer discretionary sectors Thursday as yields continued to slide, allowing them to revalue growth stocks even higher. The 2-year Treasury fell six basis points to 3.04% and the 10-year Treasury yield (TNX) fell seven basis points to 2.68%.

CHART OF THE DAY: HELP NOT WANTED? The Job Openings: Total Nonfarm FRED survey, known as JOLTS, is still near its 10-year high. However, if the widely watched job openings, hiring and separations survey continues to follow the same path as the stock performance of the only industrial staffing company in the S&P 500, Robert Half International (RHI—blue), JOLTS could slide dramatically in the next few months. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. 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 

BLOW THEIR SOX OFF: The PHLX Semiconductor Index SOX rose another 0.92% in response to positive earnings from Advanced Micro Devices AMD, which shot up 5.93%. The industry group continues to see mixed results and varying outlooks from semiconductor company earnings reports. However, the SOX keeps moving higher and is now nearly 45% above its July low and is less than 5% from its June high.

OWE YOU ONE: The Federal Reserve Bank of New York’s Center for Microeconomic Data issued its “Quarterly Report on Household Debt and Credit” on Tuesday, revealing that in Q2 total household debt grew $312 billion or 2% to $16.15 trillion. While all loan balances increased, credit card balances grew 13%, the largest surge in more than 20 years. Additionally, delinquencies increased for all debt types. The report also showed a large increase in foreclosures, but the increase comes as the pandemic moratoria and the mortgage forbearance programs come to an end, which likely reflects a normalization of these numbers.

The big banks set aside quite a bit of money for provisional loan losses during their recent earnings reports. A study from FactSet showed that higher provisional reserves often correlate with lower bank earnings. If issues around delinquencies and foreclosures move past “normal,” the banks could struggle.

CEO OH NO: According to the CEO Business Confidence Survey, CEO confidence has fallen at a greater rate than actual economic activity is currently reflecting. Extremes in CEO pessimism may be used as a contrarian signal because economic activity often improves after pessimism peaks. However, it’s difficult to know if pessimism has peaked, so this survey may be worth watching.    

Notable Calendar Items 

Aug 8: Earnings from Dominion Energy D, AIG AIG, BioNTech BNTX, Tyson Foods TSN, and Principal Financial PFG

Aug 9: Earnings from Emerson EMR, Sysco SYY, Roblox RBLX, Coinbase COIN, and Hyatt H

Aug 10: Consumer Price Index (CPI) and earnings from Walt Disney DIS, and Honda Motors HMC

Aug 11: Producer Price Index (PPI) and earnings from Brookfield BAM, Illumina ILMN, Rivian RIVN, and Cardinal Health CAH

Aug 12: Michigan Consumer Sentiment 

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

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