Investors Still Looking Cautious Ahead Of Wednesday's Big Inflation Report

(Tuesday Market Open) Equity index futures were slightly lower ahead of the opening bell and the Cboe Market Volatility Index (VIX) edged a little higher as investors hesitated ahead of tomorrow’s Consumer Price Index (CPI) report.

Potential Market Movers

Back in July, investors were feeling more confident about stocks after the FOMC committee’s previous rate hike because of the dovish tone the central bank took after the announcement. Things seem different now. Last week’s hotter-than-expected jobs report rattled investors while the CME FedWatch Tool went from a more than 60% chance of a 50-basis point hike to a more than 60% chance of a 75-basis point hike.

Before today’s market open, the tool had increased its probability of to a 75-point hike to 69.5%. Of course, tomorrow’s CPI release could cause this probability to shift once again.

The S&P 500® index (SPX) is still trading near its May highs. Many investors are concerned that the market may be overbought with the SPX moving up about 500 points since its June low. Additionally, there’s some concern that there’s less conviction driving the rally and that short covering could have been a bigger driver in that movement.

Asian markets appear to be holding up despite the saber-rattling between China and Taiwan. The Shanghai composite was 0.32% higher on Tuesday. China appears to be sending a message that Taiwan belongs to China as it conducts ongoing military drills in the Taiwan Strait. However, the Taiwan defense force is conducting live fire exercises of its own, likely rehearsing its actions if China decides to invade.  

Looking at individual stocks, the semiconductor group is likely to take another hit today after Micron (MU) issued an earnings warning causing the stock to fall 4.18% premarket. The announcement comes on the heels of fellow semiconductor company Nvidia (NVDA) issuing a warning yesterday.

Earnings season continues with another round of reports. Here are few of interest with all movements in the premarket session.   

• Emerson Electric EMR beat earnings despite lower-than-expected revenues but lowered its full-year net sales growth outlook which caused the stock to fall 1.29%.
• Take-Two Interactive TTWO reported lower-than-expected earnings and confirming a slowdown in the gaming industry. TTWO fell 3.91%.
• Sysco SYY topped earnings and revenue estimates as the company was able to reach its market share growth goal of 1.3 times for the year.  However, the stock fell 2.54%.  
• Hyatt H reported better-than-expected earnings and touted strong bookings despite concerns over the short-term future of travel. The news prompted a 2% rally.

After the market close, Roblox RBLX and Coinbase COIN are expected to report earnings. 

Reviewing the Market Minutes

Stocks rallied in the Monday morning session on a boost for green stocks that could benefit from taxpayer subsidies in the Inflation Reduction Act of 2022, nicknamed the climate and tax bill. Passed over the weekend after Vice President Kamala Harris cast the tiebreaking vote, the slimmed-down version of the former $2 trillion Build Back Better Act contains, among other provisions, $370 billion in earmarks and incentives for green initiatives that proponents say will help reduce future inflation. During Monday’s trading, the NASDAQ Clean Edge Green Energy Index (CELS) jumped nearly 3.5% during the day but struggled to hang on to its gains and closed just 0.32% higher. Likewise, Tesla TSLA spiked nearly 5.7% but closed just 0.78% higher.

Investors appeared to be focused on a potentially bigger piece of inflation news, Wednesday’s Consumer Price Index (CPI) for July, and concerns that the market may be overbought after its recent rally. The S&P 500® index (SPX) and the Nasdaq ($COMP) respectively closed 0.12% and 0.10%. However, the Dow Jones Industrial Average ($DJI) rose 0.09%. Despite the major indexes closing basically flat on the day, the NYSE advancers outpaced decliners 2-to-1.

The Nasdaq was also hurt by semiconductor stocks slumping after Nvidia lowered its Q2 guidance due to declining gaming products sales. NVDA is scheduled to report earnings August 24. After a volatile day of trading, the PHLX Semiconductor Index (SOX) fell 1.6% on the news.

Back on Fed watch, Federal Reserve Governor Michelle Bowman said that she sees another 75-basis-point hike on the table for the September FOMC meeting. However, the bond market may have already adjusted for this possibility as the 2-year Treasury yield fell three basis points to 3.2% and the 10-year Treasury yield (TNX) fell eight basis points to 2.77%. The yield moves further widened the 2s10s spread.

CHART OF THE DAY: CHEAT CODE. The S&P 500 Interactive Home Entertainment Index ($SP500#50202020—candlesticks) has slightly outperformed the S&P 500 (SPX—blue) over previous 12 months. The sideways movement on the relative strength line (green) suggests that group is moving closely in line with the SPX. 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 GAMES: The earnings warning from Nvidia draws attention to the struggle the gaming industry has had this year. According to the NPD Group, spending on video games has declined 10% in the first half of 2022 compared to 2021. Sensor Tower reported that spending on mobile games was down 10.7% in June compared to the previous year. Additionally, in Q2, for the first time, spending on non-game apps was higher than game apps in Apple’s AAPL U.S. app store.

Some gaming stocks are reflecting an earnings slowdown. After Monday’s close, Take-Two Interactive TTWO reported lower-than-expected earnings. Activision Blizzard ATVI reported a miss last week too for the third quarter in a row. Meanwhile, Electronic Arts EA reported better-than-expected earnings last week after two down quarters.

Other major video gaming stocks Sea SE and Bilibili BILI respectively report earnings August 16 and August 29.

OKAY TO MISS: Failing to meet earnings estimates hasn’t necessarily been a bad thing in Q2, according to FactSet. While it’s true that positive earnings surprises and the margin of such surprises have been lower than their five-year averages during the latest quarter, many investors have been willing look past the news and buy up shares.

When measuring a company’s performance two days prior to earnings reports and two days after earnings reports, the average return of S&P 500 companies is 0.0% for the second quarter. That’s right, 0.0%. If this trend continues, it would be the first time the index has not seen an average negative price reaction to negative earnings surprises.

Investors are also rewarding positive surprises. Companies that have beat earnings estimates have increased 2.1% over the same time period. This is actually a much larger gain than the five-year average of 0.8%. So, if this trend continues, Q2 will contain the largest average of positive earnings surprise increases in share price since Q3 of 2019, which was 2.2%.

HOT MEMES: Some surprises can look great at first, but turn out to be dangerous. According to S&P Global Market Intelligence, the large price moves in Bed Bath & Beyond (BBBY) last week and again on Monday may be related to a “short squeeze” causing short sellers to cover and drive prices even higher. The reason the report pointed to a possibility of a short squeeze is because prospects for the company haven’t changed. BBBY was also part of the 2021 meme stock brouhaha.

On Monday, the company’s stock skyrocketed as much as 63% during the day but closed just 39.38% higher on more than 10 times its average volume, per Briefing.com.

Barron’s reported that fellow meme stock AMC Entertainment AMC was up more than 8% on Monday extending its six-day win streak that’s taken the stock approximately 68% higher.

Meme stocks are extremely volatile and can result in large losses.

Notable Calendar Items

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

Aug 15: Earnings from James Hardie Industries (JHX) and ZipRecruiter (ZIP)

Aug 16: Building permits, Housing Starts and earnings from Walmart (WMT), Home Depot (HD), and TJX Companies (TJX) 

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

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