Target's Beat Sparks Stock Futures, But Watch U.S. Dollar and Yields Today

(Tuesday market open) S&P 500® index futures (/ES) briefly clawed back to 4,000 before the opening bell, though continued strength may require the blessing of Treasury yields and the dollar. Lately, those key barometers are calling the shots for the broader market and so far are mixed. Home price and consumer confidence data are also on the radar, both due out around the open.

Spillover from overseas market strength Tuesday could be helping U.S. stocks in premarket trading. European and Asian stocks were mostly higher despite soft industrial production data from Japan and two European Central Bank (ECB) policymakers making the case for 50-basis-point rate hikes at the March ECB meeting. Stay tuned for important manufacturing data from China due Thursday night, U.S. time. Hopes for more growth there appear to be lifting crude oil this morning.

Another interesting overseas development—rising inflation in Spain and France. Normally, this wouldn’t be too noteworthy, but it shows inflation remains an issue, and in Spain it’s rebounding after a slowdown. It illustrates that inflation can sometimes flip around and suddenly grow worse after recent improvement. Not a comforting thought for the world.

Just in

Today, Target TGT issued a relatively disappointing outlook and rose 2% in premarket. It just goes to show that markets can be unpredictable, and possibly that investor enthusiasm for embattled TGT on an earnings beat can happen despite falling margins suggesting a lack of pricing power. 

Whatever TGT does today, the takeaway for investors might be that three major retailers reporting in the past week seem hesitant about the consumer outlook. TGT didn’t directly address that issue in this morning’s announcement, but said it’s “planning its business cautiously” to be “agile” in the current environment. These sound like code words to investors to keep expectations under control. In an interview on CNBC this morning, TGT’s CEO said the company is closely watching consumers navigate the inflationary and high interest rate environment.

Morning rush

• The 10-year Treasury note yield (TNX) rose one basis point to 3.93%. It’s up 40 basis points in February.
• The U.S. Dollar Index ($DXY) slipped to 104.6.
• The Cboe Volatility Index® (VIX) futures traded at 20.8.
• WTI Crude Oil (/CL) jumped sharply to $77.4 per barrel.

Yields remain elevated, which could set us up for choppy trading today.

Eye on the Fed

Stop the presses. Did a Fed speaker just sound optimistic? That’s one way to read yesterday’s remarks from Fed Governor Philip Jefferson, who said core goods inflation has “come down substantially.” He believes housing services inflation will eventually slow, and there are signs of deceleration in labor compensation, a major driver of services inflation.

Treasury yields gave up some of their recent gains Monday, providing an on-ramp for the battered stock market. That said, a strong Pending Home Sales number tested the slight Treasury market rally. One question is just how high the Fed-sensitive 2-year Treasury note yield needs to go to fully build in market sentiment that the terminal, or peak, rate will be higher than the 5% to 5.25% projected by the Federal Open Market Committee (FOMC) in December.

Stocks in spotlight

Lowe’s (LOW) reports first thing tomorrow, following a tough quarter for rival Home Depot (HD). LOW shares dipped last week in sympathy after HD reported and recently traded near its 2023 lows, down nearly 10% from last month’s peak. Things looked brighter a month ago for the home improvement retail giant when rates were falling. Like HD, LOW is a rate-sensitive stock, because many consumers doing large projects on their homes tend to borrow the money. HD said in its call last week it expects 2023 to be “a year of moderation in demand for home improvement.” In its last earnings call, LOW was more chipper, saying it didn’t see negative impacts from inflation. That was back in November. Have things changed? Stay tuned.

Salesforce (CRM)is another major earnings report tomorrow, though it’s after the close. CRM shares had a meteoric January followed by a frustrating February, kind of like a lot of stocks out there. Unlike many other stocks, however, CRM’s February downturn came after several analyst downgrades, the departure of a co-CEO, a restructuring, and a layoff announcement. All this sets up a challenge for CRM to prove to investors it’s righting the ship, which would be easier if the macro environment doesn’t take too big a hit, something the jury’s still out on. After last month’s relatively weak earnings reports from the info tech sector, including competitor Microsoft (MSFT), investors are waiting to hear how business demand is shaping up for CRM’s cloud software products. One thing to watch: subscription renewal progress.

Union Pacific (UNP) stock went clickety-clack yesterday, climbing 9% after the railroad announced a CEO succession plan and got an upgrade from Bank of America (BAC). One headline yesterday summed it up, saying “Search for New CEO on Track.” Railroads and other transport stocks got a boost from the UNP rally, but the Dow Jones Transportation Average ($DJT), often seen as a barometer of the U.S. economy, remains more than 6% below its February 1 high.

What to watch

Quiet factories? The U.S. manufacturing economy has spent many months in the doldrums—three, to be exact. That’s how long the Institute for Supply Management (ISM) Manufacturing Index has been under 50 (anything below 50 signals contraction). The next update is tomorrow morning, and the report’s New Orders index (a barometer of future demand) is in focus after a very poor January reading of 42.5.

For the headline February ISM number, analysts anticipate a soft 47.8%, according to research firm Briefing.com. That’s up a touch from 47.4% in January. This is arguably the biggest report of the week, with Friday’s scheduled ISM Services report also worth tracking.Services has stayed in expansionary territory.

Chicago Purchasing Managers Index (PMI) is due just after the open today, providing another look at the manufacturing economy, though of the Chicago region specifically. Analysts expect a headline reading of 45.0 in February, up from 44.0 in January but still contractionary.

Market minutes

Here’s how the major indexes performed Monday:

• The Dow Jones Industrial Average® ($DJI) rose 72 points, or 0.22%, to 32,889.
• The Nasdaq Composite® ($COMP) climbed 0.63% to 11,466.
• The Russell 2000®(RUT) rose 0.31% to 1,896.
• The S&P 500® index (SPX) added 12 points, or 0.31%, to 3,982.

For a day at least, relentless pressure from the dollar and rising Treasury yields eased Monday. That gave the stock market a slight boost following its worst week of 2023, and the more rate-sensitive $COMP had the best day of any major index. Defensive sectors like utilities and health care delivered Monday’s worst performances.

Though stocks managed slight gains, the dollar index remained close to recent seven-week highs and the 2-year yield isn’t far from Monday morning’s 15-year peak. For the 10-year yield, 4% remains the level to watch. The Treasury market has steadily chipped away almost all hope investors had previously built in for a possible drop in rates later this year—a major reason major stock indexes continue to struggle.

Bear tracks: Few enjoy investing in a bear market, but bear markets are simply part of Wall Street’s cycle. What do you do as an investor when the bear roars, and how is a bear market defined—learn more about Market Volatility from Schwab experts.

Talking technicals: The SPX lost most of its early gains Monday but still managed to finish just above the 50-day moving average (MA) of 3,980. That put it just above that key support level after it closed below that level Friday for the first time in a month. Significant? Perhaps, but a close above 4,000 might give the bulls more fuel.

CHART OF THE DAY: SETTING THE STAGE? The last major dip in the Cboe Volatility Index (VIX—purple line) corresponded with strength in the S&P 500 index (SPX—candlesticks). Lately, despite rising concern about rates and the dollar, the VIX headed lower, and the SPX closed above technical support Monday. Does this set the SPX up for improvement? Data sources: S&P Dow Jones Indices, Cboe. 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

Lingering labor headaches: This time, it’s literal. A recent customer study by BAC finds health issues are just one big challenge likely extending wage and inflation worries. And it’s apparently keeping multiple generations out of the job market, including millennials and Generation X. Noting that labor force participation remains one percentage point below where it was in February 2020, BAC asked, “What is keeping prime age workers away? Deteriorating health (both related and unrelated to COVID), caregiving responsibilities, and migration to areas with lower cost of living.” All these problems are “unlikely to be resolved in the near term,” leading to “more persistent headwinds” in the labor supply. BAC based its study on its own customers who stopped receiving paychecks since the pandemic.

Which way is up? It’s a tricky time for retailers trying to read the consumer tea leaves. Last week’s Consumer Sentiment data was the best in a year, and unemployment remains near record lows, things that should fuel retailer optimism. There’s even been coverage in the national media recently about consumer-oriented firms being hesitant to lay off workers even if times get tough, simply because it was so hard to find employees after the pandemic and they don’t want to waste money they spent hiring and training them. But recent big-box guidance has been cautious, perhaps a sign that worries about inflation take precedence over budding improvement in consumer sentiment. All this week, be sure to pay close attention to what retail executives say about the pricing environment and if and whether they plan to pass rising costs along to consumers or take a margin hit.

Licking wounds: It’s that time of the quarter when old favorites from the COVID-19 pandemic step up to the earnings counter. That includes vaccine maker Moderna (MRNA), which saw its stock skid last week after giving soft guidance, and Beyond Meat (BYND), a stock that spiked in the 2019 – 2020 era before getting chewed up the last year or two. BYND had a good quarter and shares rose, though they’re less than 10% as valuable as at their peak. MRNA shares are at around 25% of their peak. This week’s pandemic old-timers’ earnings gathering includes Zoom Video (ZM) and AMC Entertainment (AMC), followed next week by DocuSign (DOCU). The volatility of all these stocks during the pandemic serves as a reminder to investors of the dangers of speculative buying during a historic event, something many veteran investors learned during the dot-com bust.

Calendar

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

March 7: January Wholesale Inventories and expected earnings from Dick’s Sporting Goods (DKS)

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

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