Getting Back Up: Stock Futures Edge Higher as Investors Gauge the Fed, Data and Yields This Week

(Monday market open) With major indexes down three weeks in a row as investors plug in expectations for higher interest rates and watch the dollar climb, will this week break the streak?

It may depend on a heavy load of company reports and data as we hit the tail end of a disappointing Q4 earnings season. Earnings per share (EPS) are expected to fall between 3% and 5%, according to major research firms.

We’ll hear from a fair number of Fed speakers this week and see key economic data on the health of the U.S. manufacturing sector, which has been under the weather lately. The U.S. dollar $DXY) recently hit seven-week highs, a critical part of the pressure on stocks. If the dollar shows any signs of weakening, that might be supportive for equities.

Just in

• The probability of a 50-basis point rate hike next month sank to around 26% early Monday, according to the CME FedWatch Tool. It had risen well above 30% at times late last week. Nevertheless, Treasury yields remain elevated, with the 2-year Treasury yield recently hitting new peaks.
• According to the Wall Street Journal, Pfizer (PFE) is in talks to acquire cancer drug maker Seagen (SGEN) in a deal that could be valued in the billions of dollars. A Merck (MRK) deal to buy SGEN fell through last year.
• Durable goods fell 4.5% in January, worse than the 3.9% drop expected by analysts. However, excluding transportation, they rose 0.7%, above expectations.
• Over the weekend, conglomerate Berkshire Hathaway (BRK) reported results and drove headlines as CEO Warren Buffett defended BRK’s share buybacks. This came after President Biden signed a bill last year instituting a 1% tax on buybacks. Also, BRK posted an annual decline in book value for just the fourth time.

Morning rush

• The 10-year Treasury note yield (TNX) ticked up to 3.95%.
• The U.S. Dollar Index ($DXY) eased slightly to 105.1.
• Cboe Volatility Index® (VIX) futures fell to 21.5.
• WTI Crude Oil (/CL) fell slightly to $76.17 per barrel.

Despite the sharp drop in stocks on Friday after another batch of bearish inflation data, volatility stayed relatively tame Monday. Checking ahead, volatility also doesn’t look too bumpy. The forward futures contracts for the VIX are under 25, topping out just above 24 by October. That’s subject to sharp change at any given time, naturally, because futures markets tend to be volatile. Even futures markets for volatility.

Eye on the Fed

The Treasury market sent an obvious signal Friday that investors are fleeing shorter-term notes as inflation concerns rattle Wall Street. Yields—which move inversely to the price of the note—rose across the complex, but around midday, the 2-year Treasury note was up 13 basis points while the 10-year note only rose 8 basis points.

That’s a pretty clear sign investors expect an aggressive Fed because shorter-term notes are more exposed to near-term Fed policy. It also means the yield curve inversion—where the 2-year yield maintains a premium to the 10-year yield—grew more extended. It’s now around 87 basis points, about as high as it’s been for this particular inversion that began last year.

Yield curve inversions are often considered a sign of possible recession ahead. But not every one of them has led to a recession, and the strong labor market continues to cause head scratching. For that matter, the Atlanta Fed’s GDPNow meter got an upward revision to 2.7% for Q1 Gross Domestic Product (GDP) growth Friday based on recent strong economic data.

Stocks in spotlight

Retail redux: You’re excused for feeling like retail earnings season has been in the headlights for a while. This week, it arrives in a big way—that’s a promise—following last Tuesday’s disappointing kick-off from Walmart (WMT) and Home Depot (HD). Tomorrow afternoon sees embattled Target (TGT) take center stage, followed by Kohl’s (KSS) and Dollar Tree (DLTR) the next morning. Best Buy (BBY), Nordstrom (JWN), Costco (COST), and Lowe’s (LOW) also are on this week’s calendar. Other key earnings reports to watch this week include Salesforce (CRM) and Broadcom (AVGO).

Target: Things weren’t pretty in TGT’s aisle last time the big retailer reported earnings in November. Shares fell as the company guided for slower holiday sales due to inflation’s pressure on customers. The stock recovered nicely in January as inflation appeared to ease, only to get shoved back down lately with the rest of the sputtering consumer discretionary sector. Last week showed that retail companies delivering soft guidance get punished. 

Restaurant row: After Domino’s (DPZ) delivered a negative surprise last week, restaurant earnings this week from Wendy’s (WEN) and Cracker Barrel (CBRL) could provide further insight into fast food and casual dining demand. Domino’s results indicated fewer people were staying home for pizza, which goes along with the whole post-pandemic “get out and have fun” mentality. Does that mean folks flocked to sit-down restaurants like CBRL, or did they opt for the drive-through at WEN on their way to a show?

What to watch

Data break: There’s plenty of data on this week’s calendar, but almost none tend to be market movers. The exception is Wednesday’s February Institute for Supply Management Manufacturing Index. We’ll preview analysts’ expectations for the data tomorrow, but as a reminder, the previous three reports showed contraction in the U.S. manufacturing economy. This backs up the Fed’s contention that services demand remains hot while goods demand has started to flag. There’s no Nonfarm Payrolls report this Friday, by the way. That’s going to happen March 10.

Spending habits: Last Friday’s Personal Income and Personal Spending data for January provided more evidence that consumers remained active last month and also have money saved, keeping inflation expectations elevated. Some economists believe the high level of savings, some of which may reflect COVID-19-related government stimulus, is one reason the economy hasn’t fully responded to Fed tightening, Barron’s noted over the weekend. Listen to what retail executives say this week to get the latest update on consumer demand and for insight on how retailers are responding to wholesale market inflation.

Market minutes

Here’s how the major indexes performed Friday:

• The Dow Jones Industrial Average® ($DJI) fell 337 points, or 1.02%, to 32,816. It’s given back its gains for the year.
• The Nasdaq Composite® ($COMP) dropped 1.69% to 11,394.
• The Russell 2000® (RUT) fell 0.92% to 1,890.
• The S&P 500® index (SPX) dropped 42 points, or 1.05%, to 3,970.

It wasn’t surprising to see the $COMP get its knuckles rapped Friday after inflation data came in hotter than expected, raising the risk of higher rates. As we noted Friday, info tech and other growth stocks more dependent on lower borrowing costs to fuel future growth tend to wilt as rates rise.

Which types of stocks sometimes hold up a bit better in a higher-rate environment? There’s no guarantee, but they can include banks and financial companies, as well as “value” stocks that are defined as being priced below their intrinsic value.

Financial companies—including banks and insurers—were among the better performers Friday, though none really broke the bank, so to speak. Also, energy-related stocks generally held the fort, perhaps because the sector has one of the lowest price-earnings (P/E) ratios on Wall Street.

Getting political: Don’t discount geopolitics when you look over the recent wreckage of the early 2023 rally. Russia, China, and the United States continue to butt heads, raising particular concerns around industries like computer chips, agricultural commodities, industrial metals, and other products with heavy exposure to trade. For more on the current face-off between China and the United States, including the possible impact of a possible visit to Taiwan by House Speaker Kevin McCarthy, check out this analysis from Jeff Kleintop, Schwab’s chief global investment strategist.

Talking technicals: There’s nothing magical about moving averages (MA) as investors found to their chagrin during the pandemic sell-off of 2020. Nevertheless, sometimes they’re a useful road sign, and that appeared to be the case Friday as the SPX bottomed right above its 200-day MA of 3,940. That being said, the SPX fell below its 50-day MA last week (it’s near 3,977. If the 50-day MA falls below the 200-day MA, it’d likely be considered a bearish alarm bell.

CHART OF THE DAY: SECTOR SHIFT. The S&P Energy Select Sector Index (IXE—candlesticks) was one of the best performers last year, but not so much lately. It’s a commodities and weather story, with the sector hurt by warm temperatures this winter that clipped natural gas demand. Meanwhile, the S&P Financial Select Sector Index (IXM—purple line), while easily outperformed by energy over the last year, has outpaced energy so far this year. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Euro slump: Just a few weeks ago, the euro’s climb against the dollar hinted at prospects for improved overseas economies. Not so fast. Recent hawkish Fed comments, the continued overhang of war in Ukraine, and three-month highs in U.S. Treasury yields all seemed to work against the euro, recently sending it to seven-week lows near $1.054. The low for the year was in early January at just below $1.053. The two last traded at parity in mid-November. A drop back toward autumn lows, if it occurs, could hurt the continent’s buying power, putting more pressure on U.S. companies selling products there. On the other hand, it could make European products, such as cars and agricultural commodities, cheaper for major importers like China—which also could be bad news for U.S. manufacturers. Heads I win; tails you lose.

EV’s bumpy week: After all the excitement a few weeks ago about Tesla’s (TSLA) results and the electric vehicle (EV) industry’s prospects in general, this week’s EV news seemed to be flickering a bit. Take Ford’s (F) hot F-150 Lightning truck business, now suspended for another week due to a battery fire, and reports that luxury EV maker Lucid (LCID) has seen recent orders slip. Meanwhile, Rivian (RIVN) shares fell sharply late last week just a few days before the EV company’s scheduled earnings report expected tomorrow afternoon. It’s another pickup truck delivery problem, according to trade publication InsideEVs. While innovation can take time and hit some speed bumps, some auto buyers might be asking themselves, “Is this thing on?”

Good news at ground level? On a positive note, one-year inflation expectations remained muffled in the final February University of Michigan Consumer Sentiment report on Friday. They’re still elevated at 4.1%, but consumer prices are up about 6% year over year and services prices (not including shelter) are up 7%. The ease in expectations suggests inflation might actually be leveling off in parts of the economy, because when it comes to expectations, they’re usually shaped by perceptions on the ground. By the way, sentiment hit a 12-month high, so there’s still optimism out there. 

Calendar

Feb. 28: February Chicago PMI, February Consumer Confidence, and expected earnings from Target (TGT), Ross Stores (ROST), Rivian (RIVN), AutoZone (AZO), and HP (HPQ)

March 1: February ISM Manufacturing Index, January Construction Spending, and expected earnings from Kohl’s (KSS), Salesforce (CRM), and Lowe’s (LOW).

March 2: Preliminary Q4 Productivity and expected earnings from Anheuser-Busch (BUD), Best Buy (BBY), Kroger (KR), and Macy’s (M)

March 3: February ISM Non-Manufacturing Index

March 6: January Factory Orders

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

Image sourced from Shutterstock

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