Equities Retreat As Yields And The Dollar Advance

(Monday Market Open) Equity index futures are pointing to a lower open as the Federal Reserve’s Jackson Hole kickoff on Friday is drawing even more attention after last week’s volatility.  

Potential Market Movers

The Fed’s annual Jackson Hole Economic Symposium should provide Federal Reserve Chairman Jerome Powell a chance to reset interest rate expectations that appear to have shifted several times in the past few weeks.  

On Friday, the 10-year Treasury yield (TNX) spiked 10 basis points and was nearing 3% once again. The rise in the 10-year caused the dollar to rally and it appears that the greenback looks to extend its rally this week as the U.S. Dollar Index ($DXY) rose 0.18% ahead of the opening bell. The dollar index has climbed more than 3% in the last two weeks and is nearing its July high.

Rising yields and the strong dollar may have investors rethinking their recent stock acquisitions as currency concerns for multinationals and valuation calculations are now under question again. The Cboe Market Volatility Index (VIX) spiked higher in premarket action reflecting these concerns, jumping 12.5% to move back above the 23 level.    

While Monday is a relatively light day for economic announcements, this week investors will want to pay attention not only to key reports on durable goods, pending home sales, and Michigan consumer sentiment numbers, but the Fed-favorite inflation barometer coming Friday, the PCE price index.  That data will arrive right around the same time that Fed Chair Jerome Powell takes the stage at Jackson Hole.

Moving away from the Fed, the Shanghai composite rose 0.61% despite an ongoing heat wave in China that has some investors concerned that the temperatures could stifle semiconductor and lithium battery manufacturing. The heat wave is putting pressure on China’s already tapped-out electric grid that could result in energy rations and rolling blackouts. China has been the main focal point in global supply chain issues due to its zero-COVID policy. Heat concerns will likely add to the supply chain troubles.  

Tesla (NASDAQ: TSLA) CEO Elon Musk said the company will be jacking up the price of its FSD driver assistance software by 25% in September. The package currently costs $12,000 with a $199 monthly subscription. TSLA was down 1.75% in premarket.

As meme stock mania continues its resurgence, AMC Entertainment AMC fell more than 30% in premarket action as the company’s special dividend of Class A common shares is expected to start trading today. The shares known as AMC Preferred Equity Units (APE) are expected to dilute the shares of the stock.

Signify Health SGFY rallied more than 33% ahead of the opening bell as the company’s board plans to meet and weigh takeover bids from Amazon.com (NASDAQ: AMZN), UnitedHealth Group UNH, and Option Care Health OPCH. CVS Health CVS has also been part of the mix in previous reports. 

Reviewing the Market Minutes

Fresh uncertainty about the Federal Reserve’s rate hike intentions put an end to stocks’ best weeklong rally going back to November. The discussion sent the U.S. dollar and Treasury yields upward.

Added turbulence from Friday’s expiration of some $2 trillion in options, gyrations in resurgent meme stocks, and new worries about hiring helped send all major equity indexes home for the weekend in the red.

The S&P 500® index (SPX) lost 1.29%; its biggest daily decline since June. The Dow Jones Industrial Average ($DJIA) retreated 0.86% while the Nasdaq ($COMP) slid 2.09%.

The U.S. Dollar Index ($DXY) finished at 108.08 on Friday, up 0.55%, to finish at its biggest weekly percentage increase since March 2020. The 10-year Treasury yield closed the week at 2.987%, up from 2.879% on Thursday.

After the somewhat dovish tone of the Federal Open Market Committee (FOMC) July minutes released last Wednesday, public comments Thursday (by FOMC voting members James Bullard and Esther George) supporting future hikes seemed to give investors pause. Later Friday, the Richmond Fed’s Thomas Barkin agreed he’d support further hikes even though it would risk recession. By then, the pause was over and selling dominated.

Health care and energy were the only two sectors to finish marginally in the green on Friday with consumer discretionary taking a 2.02% hit.

It seemed a nervous day overall in Friday’s trading, with the Cboe Market Volatility Index (VIX) gaining more than 5% on the day to finish at 20.60. For the highest anxiety on Friday, investors didn’t have to go much farther than Bed Bath & Beyond BBBY, which finished down more than 40% on Friday in the aftermath of Chewy.com (CHWY) founder Ryan Cohen selling his nearly 8 million shares in the housewares company.  Other meme stock favorites GameStop GME and AMC Entertainment AMC finished the week down 3.8% and 6.6% respectively.

General Motors GM shares gained 2.53% on Friday after announcing it will reinstate its quarterly dividend the company suspended in April 2020 and would raise its share buyback program from $3.3 billion to $5 billion. The dividend will be $0.09 per share, compared with $0.38 before the halt, and paid September 15 to shareholders of record as of August 31.

Foot Locker FL finished up 20.04% on Friday after beating earnings and news that former Ulta Beauty ULTA CEO Mary Dillon would become the shoe chain’s new CEO on September 1. Deere DE gained 0.34% by Friday’s close after cutting its full-year forecast and reporting below-estimate earnings for its latest quarter.

Buckle BKE finished the day up 1.75 after beating on earnings but not revenue. 

CHART OF THE DAY: FED UP. After a week of conflicting signals from the Federal Reserve on future rate hikes, investors hit pause on August’s broad recovery rally by the end of Friday’s session. Could fresh global inflation data this week capped by Fed Chairman Jerome Powell’s Friday keynote at the central bank’s annual policy meeting in Jackson Hole reset the trend for its September rate decision? The S&P 500® index (SPX—green) ended four weeks of gains on Friday, followed by similar retreats in the Nasdaq Composite ($COMP—pink), the Dow Jones Industrial Average ($DJI—orange), and the Russell 2000 (RUT—gray). 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

WATCH THOSE BUYBACKS: It’s a bit early to call it a trend, but General Motors’ GM move Friday to reintroduce its quarterly dividend and raise its share buyback program comes just days after last week’s signing of the Inflation Reduction Act. As I mentioned last Tuesday, the law instituted a 1% tax on stock buyback programs that will go into effect next year. Bloomberg reported last week that the new tax could encourage companies to increase their share repurchases in the coming months, possibly pushing their stock prices higher as a result. It certainly worked for GM’s stock on Friday.

FILL ’ER UP.  In its latest sift through of Q2 store earnings reports, Refinitiv reported Friday that the only thing better than a competitive discount store is a competitive discount store that sells gas. Pointing out that Walmart’s WMT Sam’s Club membership count is already up more than 25% this year after a record-high level in 2021, Refinitiv added that competitors Costco COST and BJ’s Wholesale Club BJ have also seen skyrocketing gas prices supporting same-store sales during the year.

MEDIA BLACKOUT: In the absence of any major economic reports during Friday’s session, a survey published Thursday by global consultant PwC seemed to dominate conversation on media new and old. It said that half of executives and corporate board members were either reducing headcount or thinking about it, while an additional 52% told the firm they were freezing hiring. Some 40% of the more than 700 U.S. executives and board members interviewed said they were rescinding job offers, and a similar amount were reducing or eliminating sign-on bonuses.

Notable Calendar Items

Aug 23: New home sales and earnings from Intuit (INTU), Medtronic (MDT), Advance Auto Parts (AAP), Dick’s Sporting Goods (DKS), and Toll Brothers (TOL)

Aug 24: Durable goods orders, Pending home sales, and earnings from Nvidia (NVDA), Salesforce.com (CRM), Snowflake (SNOW), and Autodesk (ADSK)

Aug 25: Gross domestic product (GDP) and earnings from Dollar General (DG), Workday (WDAY), Dollar Tree (DLTR), Ulta Beauty (ULTA), Burlington Stores (BURL), and Gap (GPS)

Aug 26: Fed Chairman Jerome Powell speaks at Jackson Hole, PCE price index, Michigan Consumer Sentiment, Personal Income, and earnings from Marvell Technology (MRVL) and Dell (DELL)

Aug. 29: Dallas Federal Reserve Manufacturing Index

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

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