Can Bulls Overcome Powell's Hawkish Comments?

(Tuesday Market Open) U.S. stock futures took a step forward and Treasury yields moved a step back as investors tried to shake off Friday’s Federal Reserve-driven sell-off.

Potential Market Movers

Though markets were pointing higher before the open, it might be a bit early to shrug off Friday’s hawkish Fed signals and steep market losses. Important global economic data and U.S. numbers on the employment situation are set to roll in before the long three-day weekend.

Major Equity Index Futures were up fractionally before Tuesday’s opening bell, with the Cboe Market Volatility Index (VIX) settling around 25. Yields on the 2-year and 10-year Treasury yield (TNX) were ticking lower, thought the 2-year Treasury yield is close to its high for the year. The U.S. Dollar Index ($DXY) was down 0.22% in premarket action.

Investors are awaiting key June data today: housing numbers from the S&P Case-Shiller U.S. home price index and the government’s JOLTs Job Openings and Quits report for signs of slowing in hiring.

It’s tough to pick a bottom in a market like this, so investors might want to tread cautiously. This morning, Germany announced that its annual inflation rate rose to 7.9% in August, returning to its highest levels in nearly half a century as the entire eurozone battles high prices fueled by rising costs for food and energy.

In slightly better news on the U.S. retail earnings front, Best Buy BBY gained 0.41% before the open after announcing a quarterly beat on earnings and revenues, adding that its comparable-store sales fell less than expected. Discounter Big Lots BIG rose 1.62% premarket after releasing smaller-than-expected quarterly loss figures and a beat on revenue.

In premarket trade, Hewlett Packard HPQ gained 0.86%, CrowdStrike CRWD advanced 1.64% and Chewy CHWY gained 0.64% in advance of their respective earnings releases after today’s close.

Meanwhile, in the continuing breakup story between Elon Musk and Twitter (NYSE: TWTR), Musk filed another notice this morning to terminate his purchase of the social media giant, citing last week’s news that Twitter’s former head of security alleged deficiencies in Twitter’s security and content moderation practices. TWTR’s shares were down 0.60% premarket while Tesla (TSLA), the company Musk runs, gained 1.12% before the open.

Reviewing the Market Minutes

Stocks were set to have another bad day on Monday after Friday’s sell-off that was sparked by hawkish comments from Fed Chairman Jerome Powell.

The Cboe Market Volatility Indicator (VIX) had spiked above 27 as investors were faced with additional hawkish comments from the European Central Bank (ECB). Over the weekend the ECB issued a statement suggesting they would raise their key interest rate 50 basis points on September 9.With so many hawks circling, investors seemed to be feeling like prey. However, stocks bounced back throughout the day and briefly traded in positive territory. The S&P 500® index (SPX), Nasdaq ($COMP), and the Dow Jones Industrial Average ($DJI) respectively closed 0.33%, 0.71%, and 0.30% lower. The VIX retreated below 26 but is clearly reflecting elevated levels of angst.

Small-cap stocks were hit a bit harder than the major indexes as the Russell 2000 (RUT) fell 0.89%. The S&P 400 mid-cap index decreased 0.69%, while the CRSP U.S. Mega Cap Index tumbled 0.70%.

Energy and utilities were the only sectors to end the day in positive territory. Technology, real estate, and financials were the worst performers.

Technology found major selling pressure from the semiconductor group. The PHLX Semiconductor Index (SOX) plunged 1.93%.

Energy was helped by rising oil prices as WTI crude oil futures rallied 4.1% higher to settle at $96.91 per barrel. Oil rallied as talks with Iran over the use of nuclear technology were extended a few weeks due to ongoing disagreements on key issues. The surge in oil prices broke the $94.25 level that was recently acting as resistance but has been support through much of 2022. Many technical analysts would likely view this move as a bullish signal for oil.

Of course, rising oil prices would only add to inflationary pressures.

Treasury yields extended their Friday rally into Monday as the 2-year Treasury yield rose two basis points to 3.42% and the 10-year Treasury yield (TNX) shot eight basis points higher to 3.11%. 

CHART OF THE DAY: PAY CHECK. U.S. Gross Domestic Income (A261RL1Q225SBEA:FRED—green) crossed below its zero line (green horizontal) more often than U.S. Gross Domestic Product (A191RP1Q027SBEA:FRED—pink) crossed below its zero line (pink horizontal). If GDI was used as a substitute for GDP, there would have been more recessions over this time period. 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. 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

MEASURING INCOME: U.S gross domestic product (GDP) has already seen two consecutive negative quarters which may or may not be considered a recession depending on whom you speak with. Those looking for a better alternative may choose to follow gross domestic income (GDI) according to Joel Prakken, chief U.S. economist at S&P Global Market Intelligence. GDI measures the incomes earned and costs incurred in the production of GDP. Prakken said that the research shows most of the time, GDP and GDI move together. But when they diverge, GDP is usually adjusted in the direction of GDI during later updates.

TOP LINE FIGURES: Another measure of the economy that’s actually broader than GDP is gross output (GO). GO measures total economic activity by tracking all production of new goods and services. It measures all stages of the economy including resources, production, distribution, and final output (known as GDP). Economist Mark Skousen PhD said that GO is like the top-line number of an income statement whereas GDP is the bottom-line number.

Mr. Skousen argues that a weakness of GDP is that it leads people to believe that business investment is a much smaller portion of the economy compared to consumption because GDP only deals in final goods. However, GO accounts for harvesting, transporting, and manufacturing raw materials as well as the distribution of goods.

GO is released with the third revision of GDP which is expected September 29.

FULDA GAP: One part of GDP is net imports and exports. The recent trade balance report for the U.S. saw large gains in exports that should help to boost the GDP in Q3. However, Germany reported its first trade deficit in 30 years as the weak euro has resulted in surging import prices. As fall and winter approach and Germany is faced with an energy crisis due to sanctions against Russia, it’s likely that Germany will experience a bigger trade gap. The gap is likely to be a drag on its GDP as German looks for energy supplies elsewhere and are likely to find higher prices or cheaper quality.

Notable Calendar Items

Aug. 31: Earnings from Polestar Automotive PSNY, Trip.com TCOM, Cooper COO, and Five Below FIVE

Sep 1: ADP Nonfarm Employment, ISM Manufacturing PMI, and earnings from Broadcom AVGO, Lululemon LULU, Hormel Foods HRL, Campbell Soup CPB, and Toro TTC

Sep 2: Employment Situation Report and earnings from DocuSign DOCU

Sep 5: Markets closed for Labor Day Holiday

Sep 6: ISM Non-Manufacturing PMI, and earnings from Guidewire GWRE, HealthEquity HQY, and Coupa Software COUP\

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

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