Down Under: Smaller Than Expected Australia Hike Drives U.S. Rates Lower

(Tuesday Market Open) It’s been three weeks since the S&P 500® (SPX) enjoyed a two-day win streak. Today we’ll see if Wall Street can match that feat after yesterday’s impressive gains.

So far, so good. Stocks are in the green and Treasury yields fell for the second-straight day after the Reserve Bank of Australia delivered a smaller than expected rate hike of 25 basis points. Analysts had predicted 50. The so-called “Fed pivot crowd” that hopes for the Fed to pause its rate hikes sooner rather than later feels vindicated this morning. That’s driving lower rate expectations, which could provide temporary relief. Stock also rose in Europe and Japan overnight.

The U.S. 10-year Treasury yield fell to 3.59% after topping 4% last week. It hasn’t closed below 3.6% since Sept. 21. The U.S. dollar also weakened further from last week’s highs. A lot of dials are starting to point more in the right direction, at least for the moment.Still, there’s skepticism about how much staying power any upward move might have, considering that investor necks might still be suffering whiplash after the summer rally completely fizzled in September. And we haven’t gotten much in the way of indication from Fed speakers so far this week that the Fed is going to move toward a lower rate hike.

With the Cboe Volatility Index® (VIX) still just below 30 this morning, it’s no time for investors to put caution aside. At the end of the day, growth will be the ultimate driver. Right now, the lower rates are helping, but VIX is still in the upper-20s, which tells you the victory flag isn’t flying yet.

The lower rates could also potentially be setting us up to be blindsided by some of the employment data this week.

Potential Market Movers

Monday’s weak construction and manufacturing data fed into falling Treasury yields, and inflation fears softened slightly. Those fears could come back if labor data today, Thursday, and Friday doesn’t also show signs of easing.

Bulls would like to see the headline number of this morning’s JOLTS job openings report fall below 11 million. Thursday’s weekly jobless claims also loom large after a five-month low of 193,000 posted last week. For the report to be considered bullish, that number would have to rise.

The September payrolls report on Friday is expected to show 250,000 new jobs created that month, according to Wall Street consensus. Remember that any bad data news would likely be viewed positively by the market as investors hope for the downward rate pressure seen early this week to continue.

Factory orders are also ahead today after Monday’s weak ISM manufacturing data. Analysts expect a 0.4% August rise, according to Briefing.com.

Fed speakers are out on the hustings all week, with the potential to add to the hawkish forecasts that hurt last week’s market. The CME FedWatch Tool projects a 62% chance a 75-basis-point November rate hike. This week, the United Nations called on central banks to halt rate hikes, warning they could cause a global downturn.

It’s a slow earnings week, but Conagra CAG and McCormick MKC report Thursday, so pass the pumpkin spice.

Reviewing the Market Minutes

Retreating yields took pressure off the dollar on Monday, which in turn lifted pressure on the stock market. The SPX rose nearly 2.6% to 3,678, the Dow Jones Industrial Average® ($DJI) increased 2.66% to 29,490, and the Nasdaq® climbed almost 2.3% to 10,815.

Every SPX sector made up ground Monday, but energy outpaced all of them with gains of more than 5.7%. WTI crude surged nearly 5% yesterday ahead of what analysts expect will be a production cut announced at this week’s OPEC+ meeting. The worrisome thing is that lower gas prices appeared to drive consumer inflationary expectations lower over the last few months. If that starts to change, it could give the Fed another reason to stay hawkish.

Other leading sectors yesterday included materials, utilities, and communication services. The worst sector was consumer discretionary. Airlines, cruise lines, and restaurants were among companies in the red Monday, perhaps a sign that recession fears remain elevated. Tesla (NASDAQ: TSLA) suffered sharp losses of nearly 9% after its quarterly deliveries disappointed investors. If demand for expensive electric cars declines, it could be a sign that even wealthy consumers are starting to feel the economy pinch.

Semiconductors, a beaten-down subsector, had a pretty nice day Monday. Intel (INTC) led the way, and the PHLX Semiconductor Index (SOX) rose a solid 3.76%.

The market’s big leap Monday came despite more signs of Q3 earnings woe. The Q3 S&P 500 earnings growth outlook sank to 2.9% in research firm FactSet’s latest report, down from the previous projection of 3.2% 

Analysts spent the last quarter making their largest cuts to S&P 500 earnings-per-share estimates in more than two years, FactSet noted. The sectors getting chopped the most were materials, communication services, consumer discretionary, information technology, and health care. Unfortunately, we’re probably far from finished seeing downside revisions to earnings.

Three Things to Watch

Foul Is Fair: One reason for Monday’s bullish tone might’ve been the recent run of soft economic data. This goes back to the “bad is good” thesis that posits weak economic performance could get the Fed to loosen its icy grip on the market sooner rather than later. Three poor data readings in a row Friday and Monday hinted that maybe the Fed’s hawkish policy is finally starting to have an impact. Friday’s Chicago Purchasing Managers Index (PMI) fell way under expectations for September, and Monday’s ISM Manufacturing Index for September also disappointed. Construction spending for August fell 0.7% compared with a consensus projection of 0.2% and July’s 0.6% drop.

The ISM reading of 50.9% showed the U.S. manufacturing sector is just barely in expansion mode (a reading of 50% or higher) and was down from 52.8% the previous month. It also came in below analysts’ expectations, according to Briefing.com. The important thing here is the month-to-month softening of the manufacturing sector.

Waiting for a JOLT: Those soft data readings didn’t come from the labor market, though, and the current robust jobs picture is really making the Fed’s job hard. That’s why today’s JOLTS August job openings report looms large. The last one showed job openings above 11.2 million in July. If that falls below 11 million, it might be one sign that a slowing economy is finally squeezing job growth and demand. This wouldn’t be surprising considering all the recent layoff and hiring freeze notices from corporations. Naturally, no one wants to see people losing jobs. But it’s hard to imagine the Fed getting any less hawkish as long as unemployment remains near historic lows and job openings stay near record highs.

Coal Steams Ahead: Coal is not losing power, despite rumors to the contrary. Spot prices for U.S. coal topped $200 a ton recently for the first time, according to the U.S. Energy Information Administration (EIA). This may be helping coal company shares like Peabody Energy Corp. (BTU) and Arch Resources (ARCH). The global supply chain recovery from pandemic shutdowns, record summer heat, and the war in Ukraine have contributed to coal’s rising popularity. The old adage is that “high prices cure high prices,” but that might not describe all of what’s going on with coal right now. European demand could remain strong as the crisis in Ukraine prevents most Russian natural gas from flowing toward that continent while supply chains for coal remain sluggish. Meanwhile, U.S. coal production is going full steam ahead (pun intended), and producers may not be able to raise it much higher, Bloomberg reported.

Notable Calendar Items

Oct. 5: September ADP Nonfarm Employment, September ISM Non-Manufacturing Index, and Trade Balance

Oct. 6: Earnings from Conagra (CAG) and McCormick (MKC)

Oct. 7: Nonfarm Payrolls, Wholesale Inventories, and earnings from Tilray (TLRY)

Oct. 11: Earnings from PepsiCo (PEP)

Oct. 12: September Producer Price Index (PPI)

Oct. 13: September Consumer Price Index (CPI), earnings from Delta (DAL), Domino’s (DPZ), and Walgreen’s Boots Alliance (WBA)

Oct. 14: September Retail Sales, October Preliminary University of Michigan Sentiment, and earnings from J.P. Morgan Chase (JPM), Citigroup (C) Wells Fargo (WFC), and Morgan Stanley (MS)

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

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