London Bridge: BoE Again Intervenes in Bond Market, Raising Stability Concerns

(Tuesday Market Open) After separate warnings Monday of possible recession and “fragile liquidity” from two influential global financial leaders, investors woke Tuesday to fresh troubling news from the Bank of England (BOE). The U.K. central bank is expanding bond purchases to prevent what it called “fire sale dynamics” that could threaten economic stability.

Stock indexes, which had their fourth-straight decline yesterday, came under pressure ahead of the open and flirted with new two-year lows.

Still, moves in any direction could be limited today considering all the data directly ahead. Especially the inflation reports tomorrow and Thursday. In addition, tomorrow brings minutes from September’s Federal Open Market Committee (FOMC) meeting.

Treasuries, which were closed for the holiday yesterday, began their new week with yields near 3.9% for the 10-year Treasury note, up about 40 basis points from last week’s lows. Overnight, the yield initially jumped to 4% before taking a breather, but the slide in yields from their highs didn’t seem to help stocks.

One thing that might ultimately weigh on yields and appears to be hurting commodity prices is news of more COVID-19 cases in China. The country added to its pandemic-fighting measures today, and new lockdowns could mean more pressure on that huge economy.

Potential Market Movers

Major bank earnings and analysts’ calls loom later this week, but JPMorgan Chase JPM CEO Jamie Dimon got a head start on Q3 commentary Monday in a CNBC appearance that appeared to darken the market’s sense of gloom. He thinks the United States and global economies are likely to fall into recession sometime in the next six to nine months.

During the morning broadcast yesterday, Dimon said the benchmark S&P 500® (SPX) could fall by “another easy 20%” from current levels, adding that “the next 20% would be much more painful than the first.”

Dimon did say, however, that balance sheets are in pretty good order. There’s a lot of attention now on credit markets, but there aren’t a lot of defaults or expectations for defaults getting priced in.

Later Monday, Fed Vice Chair Lael Brainard became the latest Fed speaker to deliver a hawkish economic diagnosis, saying that monetary policy “will be restrictive for some time” to ensure inflation returns to the Fed’s 2% target. She said the moderation in demand due to monetary-policy tightening is only “partially realized.” She also warned of “fragile liquidity in core financial markets.”

Brainard implied that the Fed would proceed in a “data-dependent” manner. This appeared to help the markets around midday Monday, because it implied the Fed might be willing to consider moderating rate hikes if data start losing ground. That’s not a prediction, but it seemed to be the market’s interpretation of her words.

The Nasdaq-100® (NDX) dipped to a new two-year low following Dimon’s words, and the Cboe Volatility Index®(VIX) popped up above 33 intraday yesterday for the first time since late last month, and it could remain elevated as investors await inflation data tomorrow and Thursday (see more below). VIX was again above 33 this morning.

Tomorrow and Thursday, respectively, bring much-awaited Producer Price Index (PPI) and Consumer Price Index (CPI) reports, respectively. Analyst consensus from Briefing.com suggests we’ll see a 0.2% rise in both headline PPI and CPI, with core PPI rising 0.3% and core CPI up 0.4% from a month earlier. Any positive monthly numbers at this point could be read as bearish, because it means prices are still rising despite the Fed’s inflation-fighting efforts.

There’s also some important inflation data later today when the Federal Reserve Bank of New York releases consumer inflation expectations for September. Previously, one-year expectations fell to 5.7% in August from 6.2% in July. The Fed has said it’s very focused on inflation expectations, so this report could be a big-ticket item.

This week also marks the official start of Q3 earnings season. While many consider Friday the official start due to bank earnings that day, PepsiCo (PEP) kicks things off early tomorrow. The food and beverage giant’s results will follow pretty strong showings recently from some smaller food and beverage competitors.

Thursday marks the first mega-earnings day, featuring Walgreens Boots Alliance WBA, Taiwan Semiconductor TSM, Domino’s Pizza DPZ, BlackRock BLK, and Delta DAL.

Then some of the big banks step up to the plate Friday morning. Their narrative is likely to set the tone for the rest of the Q3 earnings season.

Reviewing the Market Minutes

Monday was the fourth-straight lower session after last week began with a big rally.

 The SPX fell 0.75% to 3,612.4, staying just above the nearly two-year low below 3,600 posted late last month.

The Dow Jones Industrial Average® ($DJI) finished the day down 0.32% to close at 29,202.81, while the Nasdaq-100®- (NDX) lost 1% to close at 10,926.97. The Russell 2000® (RUT) fell 0.34%, but unlike the SPX and NDX isn’t near recent lows.

Energy stocks caused most of the pressure on the SPX yesterday as WTI Crude (/CL) prices sank amid recession fears. Energy has been the one sector holding up well lately. In the consumer world, WBA shares got a nice bounce ahead of earnings later this week. Merck MRK also popped nicely, another sign that some investors may be turning toward healthcare stocks as they seek what may be perceived as “safer” parts of the market, though no investment is truly “safe.”

The U.S. Dollar Index (DXY) remained firm, rising above 113. It hovered near that level this morning.

Three Things to Watch

Holding On (For Dear Life): Since the end of March, when stocks weren’t far from their all-time highs, investors have withdrawn about $80 billion from stock mutual funds and exchange-traded funds, The Wall Street Journal reported, citing data from the Investment Company Institute. That sounds pretty massive until you consider that U.S. and international stock funds held $19.3 trillion at the end of March. So, even though inflation can’t seem to drop and stocks can’t seem to rise, investors have taken only 0.4% of their money out of stock funds, the newspaper noted. What does this tell us? There’s a lot of money that remains in the market despite the prolonged descent, which might back up the words Dimon of JPM had yesterday about there being more room for stocks to decline.

Watching the Investors: The Investor Movement Index® (IMXSM) fell to 4.47 in September, from 4.82 in August. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.

After bucking the trend and increasing exposure to the markets for the first time all year in August, TD Ameritrade clients once again lowered exposure in September. From the Fed’s commitment to a hawkish approach to fighting inflation, to historic swings in currency values, to mixed jobs data and crude oil taking a nosedive, retail traders took a risk-off approach in September, leaning into fixed income and investing in names built on solid fundamentals.

What’s Being Bought Or Sold? Interestingly, it looked like investors tracked by the IMX did increase their exposure to some of the info tech companies that have been falling, including Intel INTC, Nvidia NVDA, Advanced Micro Devices AMD, and Apple AAPL during September.

Having said that, tech stocks, including semiconductor companies, were among the worst performers again Monday after a dismal end to last week. The Philadelphia Semiconductor Index SOX fell another 3% Monday, still stinging in part from last week’s AMD warning of a Q3 revenue shortfall.

Some of the major names sold in September by investors the IMX tracks included Netflix NFLX, Exxon Mobil XOM, and BP PLC BP.

Notable Calendar Items

Oct. 12: September Producer Price Index (PPI) and September FOMC meeting minutes release

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

Oct. 14: September Retail Sales, October Michigan Consumer Sentiment (early), August Business Inventories, and earnings from Citigroup (C), JPMorgan Chase (JPM), Wells Fargo &Co. (WFC), Morgan Stanley (MS), PNC Financial (PNC), U.S. Bancorp (USB), and UnitedHealth (UNH)

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC)

Oct. 18: September Industrial Production, September Capacity Utilization, and earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), and Netflix (NFLX)

Oct. 19: September Housing Starts and Building Permits, and earnings from Abbott Labs (ABT), Procter & Gamble (PG), Biogen (BIIB), Travelers (TRV), Tesla (TSLA), and Las Vegas Sands (LVS).

Oct. 20: September Existing Home Sales, Philadelphia Fed Index, and earnings from Alaska Air (ALK), American Airlines (AAL), AT&T (T), Dow (DOW), Whirlpool (WHR), and CSX (CSX).

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

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