Fed's Bullard Says Rate Hikes Have Had 'Only Limited Effects' on Prices to Date

(Thursday Market Open) The market’s euphoria over recent milder inflation data seems to have dried up as investors react to another mixed batch of retail earnings amid fresh comments from a Federal Reserve hawk.

St. Louis Fed President Jim Bullard kicked more sand at the recent Wall Street rally, saying that Fed rate hikes to date haven’t been big enough to cut inflation, implying that stronger medicine is needed. The U.S. dollar and Treasury yields rose on his words and stock futures extended earlier losses, though it’s really no surprise to hear this kind of tone from the Fed.

Overseas, economic news also looked troubling as the U.K. Finance Minister said Britain is in recession.

On the plus side, housing data came in slightly better than expected, and there actually were some bright spots in this morning’s retail results. People might have been bracing for worse after what they heard from Target (TGT) yesterday.

Even so, stock index futures saw selling advance as the opening bell drew near, with the S&P 500® Index (SPX) scraping near recent lows. Keep an eye on 3,900, which represents strong technical support near the 100-day moving average (MA).

Checking the Weather

• The 10-year Treasury yield (TNX) leveled out of its recent free fall this morning, rising a steep 10 basis points to 3.76% as investors contemplated Bullard’s speech. It had dropped 10 basis points Wednesday to 3.69%, the lowest level since October 4 and below its 50-day moving average (MA). It’s now down 15% from the October 21 intraday high of 4.33%.
• The U.S. Dollar Index ($DXY) also had been on a rapid path lower, but ticked up to 107 this morning. That’s still well below last month’s highs near 114.
• The Cboe Volatility Index® (VIX) flirted with 25 as stocks slid and investors contemplated Bullard’s speech.

Despite all the uncertainty this morning, investors seem pretty convinced about what will happen at the December 13-14 Federal Open Market Committee (FOMC) meeting. Odds rose over the last day to around 85% of a 50-basis-point Fed rate hike, according to the CME FedWatch tool.

Just In: Housing Starts and Building Permits, Jobless Claims

Housing Data: Today’s October Housing Starts and Building Permits data pointed toward continued retraction in the housing industry.

• Both numbers beat Wall Street’s consensus estimates but were below September levels, extending the recent slide. Seasonally adjusted starts of 1.425 million compared with analysts’ average estimate of 1.42 million.
• Seasonally adjusted October Building Permits of 1.526 million compared with analysts’ estimate of 1.518 million. The comparable numbers in September were 1.488 million and 1.564 million, respectively.

More housing data comes our way Friday when investors get a look at October Existing Home Sales just after the market opens. Consensus, according to Briefing.com, is a seasonally adjusted 4.38 million, down from 4.71 million in September. This number has steadily fallen since last spring as high mortgage rates took a bite out of loan demand.

But keep an eye on inventory. Unsold housing inventory in September was a 3.2-month supply at the current sales pace, down from the historic average of 6.0 months. Lack of available homes tends to keep prices high despite the difficult mortgage situation. Median existing home prices increased 8.4% in September even as sales fell 1.5%

Weekly Initial Jobless claims stayed light at 220,000, near the consensus estimate. Still, there’s been a lot of corporate layoff news recently, which makes this report interesting to follow for possible upticks in coming weeks. No one wants to see people lose their jobs, but to the Fed it would be a sign that tighter policy might be having an impact.

Potential Market Movers

Nvidia (NVDA) shares climbed slightly in premarket trading despite the technology company missing Wall Street’s earnings per share projections and forecasting lighter than expected revenue forecasts for the January quarter. Shares climbed about 0.4% in premarket trading.

• Perhaps the share gains were in response to better-than-expected revenue for the quarter just ended. NVDA beat analysts’ revenue estimates by about $15 million.
• However, the company’s gaming division saw a huge chop in revenue. The data center business looked relatively solid.

Shares of NVDA have fallen 46% already this year, and we may be seeing the law of large numbers start to play a role. Shares of many companies are down so much there may be investors who feel they’ve declined enough and would use any positive sign—like the slight beat on revenue—as a reason to jump in.

Remember, if you’re tempted to try and pick a bottom for a stock or the market, it’s impossible. It’s usually better to be late and right rather than be early and risk being wrong when it comes to buying shares of a company that just reported earnings, especially in after-hours trading when volatility tends to be higher.

Semiconductors in general, along with the tech sector overall, got clipped Wednesday after Micron (MU) warned about a weaker market outlook due to demand concerns. This might have also played into lower Treasury yields, which tend to fall when investors worry about economic growth. Chips are a vital part of many products consumers use, including phones and cars. A bad outlook for chip demand tends to also be a poor outlook for consumer demand in general.

Macy’s and Kohl’s Earnings: Good luck finding a clear trend in this week’s retail earnings numbers.  While Walmart’s (WMT) quarter and projections impressed, competitor Target (TGT) hit the dirt. There’s more division today as investors sort through earnings from Kohl’s (KSS), Macy’s (M), and Alibaba (BABA). 

Earnings from KSS looked decent, but the company’s shares got slammed, falling 7% in premarket trading after the company pulled its guidance for the holiday quarter. Kohl’s attributed its reset outlook to volatility in business trends, leadership change, and economic headwinds. That last reason sounded like what came from TGT yesterday, raising more concern about consumer demand.

Macy’s results went in a better direction. M’s stock was up 6% before the bell as it actually raised its holiday quarter earnings forecast. The department store leader’s latest numbers suggest that those worrisome headwinds aren’t hitting luxury items just yet.

Reviewing the Market Minutes

The market was a sea of red Wednesday, and the Nasdaq Composite® ($COMP) again suffered the steepest losses amid the chip weakness mentioned above. Retailers were another drag on the indexes after Target’s (TGT) disappointing earnings and holiday sales projections. Shares of most big retailers lost ground, including Gap (GPS), Nike (NKE), Foot Locker (FL), Kohl’s (KSS), and Macy’s (M). FL is expected to report earnings Friday morning before the opening bell.

Walmart (WMT) bucked the trend after its strong earnings Tuesday. So did the home renovation big-box stores Home Depot (HD) and Lowe’s (LOW), each of which impressed with its earnings this week. As retail earnings keep rolling in, there’s a dichotomy between the higher-priced and lower-priced stores. WMT did very well partly because of strong grocery sales. Not so much at TGT, where discretionary items swing more weight. It could be interesting to watch other discount retailers like Dollar Tree (DLTR) and Dollar General (DG) when they report after the holiday to see they benefited from the “WMT effect” as well.

Here’s how the major indexes performed Wednesday:

• The Dow Jones Industrial Average® ($DJI) fell 39.09, or 0.12%, to 33,553.83.
• The Nasdaq Composite ($COMP) dropped 174.75, or 1.54%, to 11,183.66.
• The Russell 2000® (RUT) fell 1.91% to 1,853.17.
• The SPX fell 0.83% to 3,958.79.

Talking Technicals: The 10-year Treasury yield (TNX) is trading below its 50-day MA for the first time since mid-August. The 50-day MA is at 3.84%, above the Wednesday’s close of 3.69%. 

Three Things to Watch

Tech Essentials: When you think of the tech sector, cybersecurity might not be the first thing that comes to mind. However, tech investors have flocked to that subsector in part because of recent high-profile corporate security breakdowns. It’s also an area that could prove popular among investors if we do hit a recession, because cybersecurity is to companies what tissue and cereal are to consumers—something essential during good and bad times. Tech investors often wear themselves out looking for the next hot product, but in tougher times, tech winners may be those providing hardware, software, and services that businesses and consumers can’t afford to pass on.

Third Time the Charm? Before the current market upswing, 2022 featured two double-digit rallies in the SPX, both of which got dashed and were eventually written off as “bear market” rallies. Is there any reason the current one won’t end up the same way? Some believe it’s unavoidable, and the market could remain in bear territory (down 20% from highs). Here’s the bearish take:

• The Fed hasn’t gotten less hawkish, and interest rates are far higher now than they were when previous rallies failed.
• Investor sentiment remains deep in the mud, and much of the recent economic data for the United States and the world seems to point lower.
• Some of the recent rally action might be driven by heavy corporate buybacks as some companies are trying to get them done ahead of a new buyback tax coming in January.
• There’s also debate over the “quality” of last week’s gains. While gains were evenly spread across most market sectors, some stocks that rose don’t have enviable balance sheets.

Watch the Speculators: All of this could imply that the rally was mostly speculative and temporary in nature and that many recent buyers might scurry away at hints of trouble. That happened last month when the market staged a small comeback based on hopes of a “Fed pivot.” The “pivot” crowd got out of Dodge fast when they realized the Fed wasn’t about to holster its weapons.

As for the most recent rally, hopes were pinned on inflation starting to slow, which theoretically could disarm the Fed. Treasury yields have fallen over the last week and trading now indicates a 50-basis-point Fed rate hike next month, not a potential fifth 75-point increase. Yet nothing Fed officials have said so far this week implies dovishness, and two Fed governors are expected to speak today. However, Fed Chairman Jerome Powell has no speeches on his calendar the rest of the month, which might keep volatility in check. As we’ve said, we might see a two-steps-forward/one-step-back scenario on Wall Street for a while.

Notable Calendar Items

Nov. 18: October Existing Home Sales and expected earnings from Foot Locker (FL) and JD.com (JD)

Nov. 21: Expected earnings from Dell (DELL) and Zoom Video (ZM)

Nov. 22: Expected earnings from Best Buy (BBY), Autodesk (ADSK), Dick’s Sporting Goods (DKS), Dollar Tree (DLTR), Medtronic (MDT), and Baidu (BIDU)

Nov. 23: November Final University of Michigan Sentiment, October Durable Orders, October New Home Sales, and expected earnings from Deere (DE)

Nov. 24: Markets closed for Thanksgiving, reopening November 25. Have a great holiday!

Nov. 25: No important earnings or data scheduled

Nov.28: No important earnings or data scheduled

Nov. 29: November CB Consumer Confidence and expected earnings from Hewlett Packard Enterprise (HPE)

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.