Risk-Off Returns: With Rates Rising and Major Data from China Due, Investors Retreat

(Friday Market Open) Another week that began with promise is fizzling out as the weekend approaches and Treasury yields march to new 14-year highs. 

The 10-year Treasury yield (TNX) kept climbing early Friday and reached 4.3%. That’s the highest since June 2008, and up 70 basis points from this month’s lows. This suggests the Federal Reserve’s rate projections are too conservative.

There’s now a higher than 60% probability that the Fed’s benchmark rate will be 5% or higher by next June, according to the CME FedWatch Tool. That compares to the Fed’s projected “terminal,” or peak, rate of 4.6%, suggesting the Fed has a lot more work to do.

As a reminder, the last two Fridays featured heavy selling on Wall Street, perhaps because traders felt uncomfortable going into the weekend with long positions. That’s why anyone trading today should be on their toes, especially in the final hour of the session when things recently tend to get bumpy.

It could be especially bumpy this afternoon because the weekend brings a slew of data from China, including Q3 Gross Domestic Product (GDP), September Industrial Production, and Unemployment. 

The market is waiting to see the latest economic tidings from that global powerhouse as it announced a week ago—at the start of its national party congress—that it would delay reports “indefinitely.” Keep an eye on futures trading Sunday night as traders react to the data, because it may influence trading on Monday.

With major indexes on defense amid a “risk-off” environment this morning, technical support for the S&P 500® index (SPX) may rest near 3,620 and below that at 3,600.

Potential Market Movers

In earnings news, Snap SNAP shares got crushed in trading ahead of the opening bell. The social media stock lost 25% of its value after missing analysts’ Q3 revenue projections and the company pointing to a difficult online advertising environment. SNAP’s pain is hurting the social media space in general this morning. It’s also a reminder that companies not meeting this earning season’s low expectations may end up with a harsh punishment.

Other earnings results were mixed early today and didn’t provide much sense of direction. Verizon VZ, CSX CSX, and American Express AXP beat Wall Street’s earnings projections, but Whirlpool WHR came up short and cut its revenue outlook, citing what it called “short-term macro headwinds” including demand weakness in Europe and Latin America. Shares fell 5% ahead of the opening bell.

VZ also fell as subscriber growth appeared to disappoint Wall Street. AXP shares also fell after the company added more “loan loss reserves” than expected to prepare for possible loans going south. This suggests that consumers might be struggling.

So far this earnings season, 75% of reporting companies have beat earnings projections. But as Barron’s noted yesterday, earnings typically beat expectations. Since 1994, the historical beat rate is 66%, according to Refinitiv. Over the last four quarters, an average 78% of companies have beat estimates.

In other corporate news, Intel INTC said it’s going to be cutting some jobs. That’s not a good sign in an industry that’s already suffering from investor pessimism about the outlook. It’s one thing to hear about slowing growth, but cutting labor force is an actionable, verifiable action they’re taking.

Fed speakers this week didn’t retreat from their hawkish tone. Philadelphia Fed President Patrick Harper said Thursday that the Fed is going to be raising rates “for a while.” The CME FedWatch Tool showed a 99.9% chance of the Fed raising rates 75 basis points in November. The Fed will likely follow that with an additional 75-basis-point hike in December and then add another 50 basis points in Q1, research firm CFRA said in a note Thursday.

Data continued to be mixed. Bad news on September Existing Home Sales and the Conference Board’s Leading Economic Indicators (LEIs) Thursday might be “good” news for the Fed. The LEI fell for the sixth month in a row, and existing home sales are down eight months in a row.

However, Thursday’s light weekly initial jobless claims data didn’t show cooling in the red-hot jobs market. This particular report covered the period of the month that the Department of Labor surveys for its October Nonfarm Payrolls Report, according to research firm Briefing.com. That means it could drive expectations for robust monthly jobs growth that would increase pressure on the Fed.

Reviewing the Market Minutes

The SPX slid 0.80% on Thursday to 3,665.78. The Dow Jones Industrial Average® ($DJI) fell 90.22 points, or 0.30%, to 30,333.59. The Nasdaq-100® (NDX) backtracked 0.51% to 11,046. Volume was lighter than normal but selling looked broad-based.

The SPX continues to pivot near the June low of around 3,670. It’s had a relatively tight range between 3,600 and 3,800 this month, without much attempt to re-test the short-lived mid-October lows down around 3,500. However, there also hasn’t been much buying interest evident on rallies above 3,700 as investors discovered Thursday when an early rally above that got snuffed out.

It felt like “old settlers’ week” Thursday as two very familiar names got positive earnings jolts. IBM (IBM) and AT&T (T) were among market leaders. Some other veteran companies like Philip Morris (PM), Union Pacific (UNP), and Dow (DOW) declined after reporting Thursday.

Only three sectors—communication services, energy, and information technology—gained on Thursday. Industrials and utilities brought up the rear. Consumer discretionary got clipped by weakness in Tesla (TSLA) after its earnings report sent shares much lower.

CHART OF THE DAY: VIX DIPS. The Cboe Volatility Index® (candlestick—VIX) fell below 30 late Thursday for the first time in nearly two weeks. Still, anywhere near 30 is historically high and suggests continued choppy trading is likely in the stock market. Also, the VIX remains well above its 50-day and 200-day moving averages (blue and red lines). Data Source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Earnings Rethink: One question is whether positive earnings surprises from many major companies could make analysts more optimistic about their earnings growth and price targets. A couple things play into the relatively strong results so far, including resilient consumer demand and easing supply chain issues (for some, not all, firms). We’re only about 12% through earnings season, and next week and the week after are the two busiest earnings weeks.

Where is earnings strength most likely to come from? Consumer discretionary, energy, and industrials could lead the way, research firm CFRA commented Thursday. Communication services, financials, and real estate are likely to bring up the rear. The firm expects full-year 2022 earnings growth of 5.7%, followed by 6.1% in 2023. That’s down from 6.3% and 7%, respectively, in the firm’s September 30 forecast. CFRA sees 1.8% earnings growth in Q3, not far from the most recent FactSet projection of 1.6%.

Could Heating Bills Cool? Most investors don’t think too much about Natural Gas (/NG) unless it’s freezing and they’re paying through the nose to heat their homes. That’s not the case right now. Front-month /NG futures fell again Thursday and are down around 15% since the end of last week to a nearly three-month low near $5.30 per million British Thermal Units (MMBtu). Typically, /NG rises as cold winter weather looms, and one might expect that to be even more so this year with Europe weaning itself off Russian natural gas. That dynamic lifted /NG to 14-year highs above $9/MMBtu last summer. Prices are down more than one-third since then. What gives? This week’s softness, at least, appears to be a function of weak demand, according to Natural Gas Intelligence, a newsletter covering the industry. U.S. supplies are also above year-ago levels despite the European turmoil and showed another rise this week.

Cheaper Natural Gas Impact: Is there a stock market impact if /NG keeps falling? Perhaps. First, the U.S. government forecasted that Americans could pay more for natural gas this winter. If the government is right and heating bills soar, that could take a bite out of consumer spending. But if heating prices fall, it could mean more money in peoples’ pockets for other things—like holiday spending, which might have a boomerang effect on sectors like retail and info tech, both of which typically see demand rise around the holidays.

Also, lower gas prices, if they continue, might come as a relief to companies like chemicals giant Dow (DOW), which said Thursday that soaring energy costs hurt Q3 profit. Industries with the highest exposure to natural gas prices include pulp and paper, metals, chemicals, petroleum refining, and food processing, according to NaturalGas.org. Many of those are in the materials sector of the S&P. It’s way too early to say lower gas prices are a certainty, but it’s something to watch that could perhaps boost margins for companies in those industries after many months of pressure from high input costs. On the other hand, recent drops in /NG might hint at a less market-friendly possibility: recession.

Notable Calendar Items

Oct. 24: Earnings from Royal Philips (PHG) and Northwest Bancshares (NWBI)

Oct. 25: October consumer confidence and earnings from Archer-Daniels (ADM), Biogen (BIIB), General Electric (GE), General Motors (GM), Microsoft (MSFT), Alphabet (GOOGL), Texas Instruments (TXN), and Visa (V)

Oct. 26: September New Home Sales and earnings from Boeing (BA), Boston Scientific (BSX), Kraft Heinz (KHC), and Waste Management (WM)

Oct. 27: Q3 gross domestic product, September Durable Goods, and earnings from Apple (AAPL), McDonald’s (MCD), Caterpillar (CAT), MasterCard (MA), Southwest (LUV), Merck (MRK), and Altria (MO)

Oct. 28: September Personal Income, Personal Spending, Personal Consumption Expenditure (PCE) prices, October Consumer Sentiment, and earnings from AbbVie (ABBV), Aon (AON), Chevron (CVX), and ExxonMobil (XOM)

Oct. 31: Happy Halloween! October Chicago PMI and earnings from CNA Financial (CNA), Goodyear Tire (GT), and Stryker (SYK)

Nov. 1: Start of the FOMC meeting, September Construction Spending, the October ISM Manufacturing Index, and earnings from Abiomed (ABMD), DuPont (DD), Eli Lilly (LLY), Pfizer (PFE), Uber (UBER), Advanced Micro Devices (AMD), and Under Armour (UAA)

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

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