Signs of Life: Market Ticks Higher Following Five-Day Losing Streak, Eyeing PPI Tomorrow

(Thursday Market Open) The market’s wavered the last few days as investors showed caution ahead of a troika of events—Friday’s Producer Price Index (PPI), Tuesday’s Consumer Price Index (CPI), and Wednesday’s Federal Reserve rate decision.

The benchmark S&P 500® index (SPX) has fallen five days in a row as many investors apparently decided to take some profits as they await the numbers. Don’t be surprised if trading lacks direction today with so much information waiting in the wings. The market is trading slightly higher today after major indexes slid in eight of the last nine sessions, a sign it might be oversold.

Mega-caps like Alphabet (NASDAQ: GOOGL), Tesla (NASDAQ: TSLA), and Apple (NASDAQ: AAPL) have been under pressure most of the week, weighing on SPX performance. Some of them showed a slight rebound in premarket trading, strength that could potentially spill over into the broader market if it continues.

Morning Rush

• The 10-year Treasury yield (TNX) is up slightly at 3.45%.
• The U.S. Dollar Index ($DXY) is basically unchanged at 105.12.
• Cboe Volatility Index (VIX) futures have leveled off at 22.76.
• WTI Crude Oil (/CL) is up 3% at $74.52 per barrel, rebounding from 2022 lows.

Just In

Initial weekly jobless claims of 230,000 came in pretty much in line with expectations, but continued claims of almost 1.7 million were a little more than anticipated and may give Fed watchers some optimism. Stock futures were already green when the data hit, and nothing in it looks like it will change the market’s tone.

The data calendar is quiet for the rest of the day, with PPI coming tomorrow.

Data Watch

This week’s critical report, the November PPI is due at 8:30 a.m. ET tomorrow and could help set the market’s tone heading into next week’s FOMC meeting.

• Analysts expect that PPI growth held steady at 0.2% in November, equal to the growth in October, according to a Briefing.com consensus. Core PPI, which strips out volatile gas and food prices, is also expected to rise 0.2%, up from being flat in October.
• The October PPI report showed prices rising 8% year over year, down from 8.4% in September. That year-over-year number will be important to track tomorrow for signs of further easing.
• Also, the sharpest drop for PPI categories in October was an 11.7% decline in unprocessed goods for intermediate demand. Think of stuff like fresh fruit that’s going to be canned, or raw cotton that will be turned into yarn—they’re goods that haven’t been fabricated and are used by businesses to produce something, according to the U.S. Bureau of Labor Services. We’ll watch to see if that sharp drop was a one-month blip or something more.
• While many investors focus on the CPI, which is due next Tuesday, the PPI report is arguably more important because it can lead to trends in consumer prices. Rising wholesale prices can show up in the CPI down the road if companies pass along costs to consumers by raising prices on the products they sell.
• The October PPI and CPI reports showed signs of easing, leading to a strong rally that picked up steam late last month. A hiccup in November’s CPI and PPI data could add to investor concerns about Fed hawkishness, though it’s likely that only an extreme increase might push the Fed toward a 75-basis-point rate hike next week.

Fed speakers, including Fed Chairman Jerome Powell, have been telegraphing that a 50-point move may be more likely, and they don’t like to surprise the markets. As of Wednesday, the CME FedWatch Tool showed a 75% chance of a 50-point hike.

Potential Market Movers

Earnings for Broadcom (AVGO), LuLulemon (LULU), and Costco (COST) are all expected after the close today. Yesterday’s column previewed things to look for.

Another thing to watch is the VIX, which has been creeping up the last few days as investors await next week’s Federal Open Market Committee (FOMC) meeting. Investors may have been lulled to sleep by the market’s relatively narrow range over the last few weeks, but if the VIX hits 25 or above, it would signal expectations of larger day-to-day price variations in stocks—swings that may unnerve investors and lead to selling. A higher VIX generally, but not always, is associated with pressure on stocks.

Thinking Cap

Volatility won’t go away in the new year, writes Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

In a report this week called Global Outlook: Recovery and Risk, Kleintop wrote, “Markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks’ decreasing rate hikes and China’s reopening.”

He added: “Inflation is still stubbornly high. Central banks stepping down the pace of rates hikes is more about responding to weak economies than making strong progress on lowering inflation. Even though third-quarter economic growth was better than expected for many major countries in North America, Europe, and Asia, a global recession likely began sometime during the third quarter.”

Reviewing the Market Minutes

It may be holiday season, but there’s little cheer on Wall Street. The S&P 500 index (SPX) fell Wednesday for the fifth-straight session yesterday, the first time that’s happened since a five-day stretch that ended October 12.

Unlike the sell-off back in October, this one isn’t linked to worries about yields and dollar strength. The benchmark 10-year Treasury yield (TNX), in fact, posted a nearly three-month low Wednesday, possibly reflecting recession worries. Those same concerns showed up Wednesday in crude prices, which leaked  to new 11-month lows. When yields and crude retreat day after day, that often reflects investor concerns about the economy.

Those concerns also show up in sector performance, with more “risk-on” sectors like info tech and communication services coming in at the bottom of Wednesday’s sector scorecard. Energy stocks are also losing their grip over the last week after leaving the rest of the sectors in the dust all year.

Here’s how the major indexes performed Wednesday:

• The Dow Jones Industrial Average® ($DJI) ticked up by 1.5 points to close at 33,597.
• The Nasdaq Composite®($COMP) fell 0.51% to 10,958.
• The Russell 2000®(RUT) fell 0.31% to 1,806.
• The SPX closed down 7.34 points, or 0.19%, at 3,933.

Talking Technicals: The SPX has been on a losing streak but technically hasn’t fallen completely out of bed. It continues to hold above its 100-day moving average (MA) of 3,930, and for now that looks like it may remain a support point. Below that is the November 17 low of 3,906.

CHART OF THE DAY: TOUGH CUSTOMER. Last summer and fall climbing 10-year yields (TNX—pink line) put the S&P 500 (SPX—candlesticks) under pressure. These days, falling yields and accompanying fears of recession, appear to be one factor pushing down the SPX. Data Sources: S&P Dow Jones Indices, Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Sentiment Check: Tomorrow brings the University of Michigan preliminary Consumer Sentiment report for December. Sentiment has been in the dumps for a while, and analysts don’t expect it to have improved so far this month. The headline consensus figure is 57.0, up from 56.8 in November. As always, the focus will be on consumers’ expectations for inflation, which is something the Fed often watches. Inflation expectations for the year ahead fell to 4.9% last month from 5.1%.

Inside a Hawk’s Mind: Ahead of next week’s FOMC meeting, it’s worth revisiting recent words from St. Louis Fed President James Bullard. Perhaps you remember how his recent hawkish tone spooked stocks a couple of times late last month. Bullard believes even at current levels between 3.75% to 4% (up from zero in March) rates remain economically “accommodative,” another way of saying they’re too low to cork inflation. In a recent article posted on the St. Louis Fed site, Bullard said based on personal consumption expenditure (PCE) price growth, a benchmark Fed rate of 4.9% might be needed to “exert downward pressure on inflation.”

He added, “Thus, even under generous assumptions, the policy rate has not reached a level that could be considered sufficiently restrictive,” according to his calculations. That doesn’t mean 4.9% is the exact level needed either. Exactly what that point might be and when it will occur “remain to be determined,” Bullard wrote. But next week’s expected 50-basis-point hike will take rates only to 4.25% to 4.5%, not even close to the 4.9% he spoke of.

Recession Magnets: If you’re in the camp that says a recession is here or near, something to remember is that not all stocks behave the same when hard times come knocking. Certainly, most stocks tend to fall when the economy backtracks, but larger, better-known stocks sometimes get the benefit of the doubt and can attract investors like a warm cave that offers shelter in a blizzard. Why? Investors think these companies can better navigate a recession based on market-leading product positions, quality of management, and track records of handling margin challenges. Last month’s TD Ameritrade Investor Movement Index® (IMX) revealed that this sort of migration toward better-known stocks may already be happening. The IMX, which tracks what TD Ameritrade investors are actually doing and how they’re positioned, showed familiar stocks like Tesla (TSLA), Apple (AAPL), Intel (INTC), Meta (META), Alphabet (GOOGL), Amazon (AMZN), and Walt Disney (DIS) among the names with net-buying activity in November.  

Notable Calendar Items

Dec. 9: November PPI and Preliminary December University of Michigan Consumer Sentiment Index

Dec. 12: November Treasury budget and expected earnings from Oracle (ORCL)

Dec. 13: November CPI, FOMC meeting begins, and expected earnings from ABM Industries (ABM)

Dec. 14: FOMC rate decision, quarterly projections and dot-plot, November Export and Import Prices, and expected earnings from Lennar (LEN)

Dec. 15: November Retail Sales, December Empire State Manufacturing, and November Industrial Production and Capacity Utilization

Dec. 16: Expected earnings from Accenture (ACN)

Dec. 19: No earnings or data of note

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

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