Before The Flood: Fresh Catalysts Lacking Today, But Inflation, Fed Minutes Loom Tomorrow

(Tuesday market open) Once again, market participants find themselves in countdown mode, waiting for data and earnings to kick off later this week and perhaps give Wall Street a nudge one way or another.

The March Consumer Price Index (CPI) report gets things started tomorrow, followed by wholesale prices Thursday and retail sales Friday. Fed minutes from the last Federal Open Market Committee (FOMC) meeting tomorrow afternoon is another possible highlight. The big banks get earnings season started on Friday.

In the meantime, catalysts are a bit thin. U.S. stocks were mixed Monday, as investors confronted the possibility that a still-strong labor market could trigger more Federal Reserve interest rate increases.

The S&P 500® index (SPX) continues to pivot around the 4,100 level. The last five sessions saw relatively small moves, and there didn’t appear to be much motivation among traders to push toward last week’s highs.

Morning rush

• The 10-year Treasury note yield (TNX) is unchanged at 3.41%.
• The U.S. Dollar Index ($DXY) fell marginally to 102.2.
• The Cboe Volatility Index® (VIX) futures inched up to 19.2.
• WTI Crude Oil (/CL) slid to $79.46.

Treasury yields bounced back to start the week, getting a lift from continued strong jobs creation in the March Nonfarm Payrolls report released last Friday. The 10-year Treasury yield had pivoted around 3.5% late last month before losing its grip, and that might be an area to watch for possible resistance on any moves higher.

Just In

CarMax (KMX) beat analysts’ average earnings per share (EPS) estimate but came up short on revenue. No problem, investors said, sending shares up 7% in premarket trading. Same-store sales were down by less than what Wall Street had expected, and the used car dealer reaffirmed its long-term targets. Used car prices are starting to inch up again after many months of decline. KMX said vehicle affordability remains a headwind.

Eye on the Fed

Friday’s jobs report appears to make a May rate hike more likely, according to my colleague Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. Job growth decreased in March but remained solid, potentially keeping the Fed tilted toward at least one more rate increase. The probability of a 25-basis-point hike next month was 70% this morning, according to the CME FedWatch Tool. About steady with 24 hours ago.

Don’t miss the minutes from the last FOMC meeting when they’re released Wednesday at 2 p.m ET. They’ve been known to move the market, though there’s no guarantee that will happen tomorrow. Minutes from the January’s FOMC meeting showed the Fed pretty much united around fighting inflation and focused on the “very tight” labor market that was contributing to rising wages and prices. Fed officials also wanted more evidence of a downward trajectory for inflation.

Stocks in Spotlight

Bank on it: Friday includes earnings reports from several big banks including JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC). Banking giants like these saw their stocks tumble last month and not recover much since. They’ll all be in the spotlight Friday not just for the usual information on earnings, revenue, trading volume, and loan demand; their credit quality and loan books likely will be monitored more closely when they unveil Q1 results and discuss their outlook for the rest of the year.

Take to the sky: Before the banks report, Delta (DAL) is scheduled to open its books Thursday. Passenger air travel numbers are generally back to where they were in 2019 before the pandemic, according to the Transportation Security Administration (TSA). Airline shares got a lift earlier this year amid improved passenger demand, continuing to outpace the broader market. The NYSE Arca Airline Index (XAL) is up 9% this year. However, DAL and other major airline stocks remain well below their 2023 highs, and it’ll be interesting to hear whether DAL executives still see as “robust” travel demand as they did late last year. Labor costs are also number one on the runway for DAL and the entire industry after DAL pilots got a big raise earlier this year. Rising oil costs are another concern. United (UAL) and American Airlines (AAL) follow DAL next week.

What to Watch

As a reminder, this week brings three potentially market-moving reports:

Consumer Price Index (CPI): This critical look at consumer inflation is due at 8:30 a.m. ET Wednesday and follows a lower-than-expected 0.3% rise in Personal Consumption Expenditures (PCE) prices last month.

Wall Street expects a 0.3% increase in headline CPI and a 0.4% increase in core CPI that strips out energy and food, according to Briefing.com.

February CPI growth was 0.4% and 0.5%, respectively, so we’re looking at what analysts think will be a slight move in the right direction, from an interest rate standpoint. Meaning the Federal Reserve might be more likely to pause rate hikes if inflation growth shows signs of easing.

Producer Price Index (PPI): On Thursday morning, again at 8:30 a.m. ET, we’ll see how wholesale inflation looked in March. Analysts expect PPI to rise 0.1% month-over-month, and core PPI to rise 0.2%, Briefing.com says. PPI fell 0.1% in February and core PPI was flat, so estimates now are for a slight uptick but nothing too scary.

Retail Sales: This important indicator of consumer demand fell 0.4% in February, and much of recent data suggest the economy has gotten more sluggish since then. Will this show up in the retail sales figures? If so, it could be another warning sign for companies that depend on consumers showing up to drive revenue and earnings. Analysts expect that February’s retail slowdown extended into March with a drop in sales of 0.9%, according to consensus from Trading Economics.

Each data point could have ripple effects, not the least of which is the potential impact on Fed policy and Treasury yields. Recent numbers stirred new recession fears, evidenced by the fact that futures trading now indicates strong chances of two cuts by the end of the year. If more market participants become convinced the economy is slowing, it could accelerate a move toward defensive sectors like staples and utilities, or to so-called “safe haven” areas like gold and Treasuries, though no investment is actually “safe.”

Pay up: Those rising pilot salaries discussed earlier highlight something beneath the surface of last Friday’s jobs report. Though hourly wage growth of 4.2% year-over-year was the lowest gain since the pandemic began, it’s still historically strong and a potential source of inflation. For pay to really start leveling off, jobs growth would have to slow, economists say. Yet last month’s 236,000 remained high from a historic basis. If the economy keeps churning out 200,000 or more new jobs each month (it’s created just over 1 million in the first three months of 2023), those new hires will be out there spending money and potentially kindling inflation. While the Fed may not want interest rates to go up much more, it can’t necessarily cut rates, either, if inflation remains a threat.

Thinking cap

Ideas to mull as you trade or invest

Lower charges: Tesla (TSLA) has cut prices across its entire U.S. model lineup, with the largest being $5,000 per vehicle for its most expensive models, the S and the X. The company shaved $2,000 off the price of the Model Y and introduced a lower-cost dual-motor version priced at $49,990. The Model 3 saw a $1,000 price reduction. While the price cuts raised concerns about demand and margins, one analyst says TSLA has significant chances to cut costs ahead. Also TSLA’s automotive gross margin last year was 28.5%, placing well above Ford (F) and Toyota Motor Corporation (TM), as Barron’s pointed out earlier this year.  Does that give it some room on the books to lure customers by offering “bargain” wheels? Investors aren’t necessarily buying that. Shares of TSLA dropped sharply early Monday amid margin worries before the stock recouped most of its losses.

Dollar tailwind strengthens: There’s concern Q1 earnings may lay an egg, bringing the second-straight quarter of year-over-year losses and putting corporate America into an “earnings recession.” Analysts expect a drop of around 6% for Q1 S&P 500 earnings per share (EPS), according to FactSet. One positive catalyst, however, could be the weaker dollar. This goes especially for many of the largest corporations with heavy overseas sales. The lower dollar—which makes these companies’ products more competitive overseas—is likely to help on a sequential basis, as the dollar index spent much of Q4 2022 above 108 but most of Q1 between 101 and 104. The falling greenback may help their year-over-year earnings later this year if the dollar stays below 2022’s peak levels of 110 and higher. That seems likely now with so much data pointing toward a U.S. economic slowdown, which normally would weigh on the dollar.

Credit check: Last month’s banking crisis inflamed fears of a credit crisis to follow. The thinking was that banks would pull back lending, making it harder for companies to raise money to fund expansion or for new companies to launch. While those fears haven’t gone away, the corporate bond market is holding together so far. Last week saw the first new issuance of high-yield corporate bonds after three weeks of little to no activity. Also, the yield spread (or the premium of corporate bond yields to U.S. Treasury yields) has stabilized, albeit at higher levels than before the crisis. If that spread had continued climbing, it might have indicated trouble for companies trying to borrow. We’re not out of the woods by any means, and a credit crunch leading to slower economic growth isn’t out of the question despite these new green shoots, especially with the futures market indicating higher probability of a rate increase at next month’s Fed meeting.

Calendar

April 12: March CPI and core CPI.

April 13: March PPI and core PPI. Expected earnings from Delta (DAL) and Progressive (PGR).

April 14: Expected earnings from BlackRock (BLK), PNC Financial Services (PNC), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and UnitedHealth (UNH). March Retail Sales and April University of Michigan Preliminary Consumer Sentiment.

April 17: April Empire State Manufacturing, and expected earnings from State Street Corp. (STT).

 

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

 

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