Treading Water: Oh, Canada: Despite Ottawa's Surprise Rate Hike, Market Still Expecting U.S. Rate Pause

(Thursday market open) Smoke isn’t the only thing blowing in from Canada this week. A rate hike north of the border raised concerns on Wall Street, but by and large the market still seems confident of a Federal Reserve rate pause next Wednesday.

The small-cap focused Russell 2000® (RUT) rose to a three-month high yesterday even as previously sizzling sectors like info tech and communication services lost ground. The Bank of Canada’s quarter-point rate hike Wednesday likely played into tech weakness, raising concerns the Fed might follow suit. Higher bond yields both at home and abroad also might reflect Canada’s move.

Even before the Canada news, there had been pullback lately in some of the mega-cap stocks that propelled this year’s rally. Apple AAPL and Microsoft MSFT recently hit 52-week highs, as did semiconductor firm Nvidia NVDA. All three are well below water so far this week and suffered sharp losses Wednesday. It’s possible some profit-taking occurred after their performance far outpaced the rest of the market year-to-date. Apple and Microsoft both lost more ground overnight, but major indexes were mixed in premarket trading.

These mega-caps often set the entire market’s direction, so watch them closely the next few days to see if buyers come in at the lower prices or if selling continues. Also keep an eye on market volume, which was higher than normal yesterday. Heavier volume can sometimes indicate a stronger sense of conviction among market participants. Volume was generally light last month as major indexes rose to nine-month highs, but it was notably heavy Wednesday as tech stocks lost ground.

On the “cup is half full” side, however, advancers outpaced decliners yesterday on the New York Stock Exchange (NYSE) and new 52-week highs outpaced new 52-week lows, Briefing.com says.

Morning rush

The 10-year Treasury note yield (TNX) climbed 2 basis points to the high end of its recent range at 3.81%.
The U.S. Dollar Index ($DXY) continued easing from recent highs to 103.8.
The Cboe Volatility Index® (VIX) futures rose slightly to 14.09 but remain near three-year lows.
WTI Crude Oil (/CL) has been climbing this week and recently traded at $73.22 per barrel.

Just in

This week has been a “news vacuum,” according to one Wall Street analyst. However, today brings tidings in the form of initial weekly jobless claims. They spiked to 261,000, well above analysts’ expectations for 237,000 and close to the highest level this year. Higher claims tend to indicate a slowing labor market, but it would likely take several weeks or even months to be a trend. Generally, the market associates recessions with claims of 300,000 or more. Still, Treasury yields eased immediately after the data.

In other news, Eurozone Q1 Gross Domestic Product (GDP) was revised to -0.1% compared to the earlier estimate of 0.1% growth. Q4 growth also got checked, with the new estimate at -0.1%. That puts Europe technically into a small recession, Trading Economics observes.

Eye on the Fed

Chances of an interest rate pause at the June meeting stand at 71% this morning, according to the CME FedWatch tool, which also prices in a nearly 70% chance that rates will rise by July. These numbers haven’t moved much the last few days, reinforcing ideas that a pause is likely next week.

The Federal Open Market Committee (FOMC) meeting starts next Tuesday—the very day of the critical May Consumer Price Index (CPI) report. The Fed will announce its decision next Wednesday afternoon.

Northern lights: Western central banks often, though not always, raise and lower rates in unison. This month might be one of those times when they don’t. The Bank of Canada’s quarter-point rate hike Wednesday after a long pause surprised U.S. market participants and probably was partially responsible for the info tech sector’s poor performance yesterday, as that sector is often more sensitive to rate worries.

Concern showed up more in the equities market than in fed funds futures, which still indicate strong chances for a Fed pause next week, only slightly lower than they did before the news from up north.

While Canada’s economy often moves in parallel with its southern neighbor, Canada’s consumer price index (CPI) rose 0.7% in April. That inflation reading far exceeded economists’ expectations and compared with 0.4% in the United States. Canada wasn’t the only former British territory to jack up rates this week. Australia’s central bank raised its benchmark rate to an 11-year high.

What to Watch

No drum roll: Friday is another day with no major data release on the calendar, and Monday doesn’t look much more exciting. That means anyone who loves watching numbers will have to be patient and wait for the deluge of data later next week.

Sick day: Remember that a quiet market sometimes can be more prone to moving on outside influences like geopolitics or even the weather. One development drawing attention this week is an outbreak of COVID-19 in China. That might not have attracted much notice if things were busier on Wall Street. China’s recent economic data has been mixed as the country reopens from its pandemic lockdown. Any signs of the illness returning raises concerns about the possible impact on China’s growth, as well as its import demand. Cases are expected to peak at only 25% of the last wave, and so far there’s been only a slight moderation in activity based on anecdotal reports and high-frequency mobility measures such as subway traffic, according to the Schwab Center for Financial Research.

Stocks in the Spotlight

Soup and crackers: It’s said hot soup can refresh on a summer day, but Campbell CPB shares cooled yesterday after the company delivered earnings that some analysts labeled as disappointing.

On the surface things looked about right as Campbell beat Wall Street’s earnings per share estimates, reported in-line revenue, and reaffirmed previous guidance. But the earnings beat was only half of what the company delivered earlier this year, Briefing.com notes. And the company’s Meals and Beverages segment saw revenue fall 2%—a somewhat puzzling result considering there is a durable eat-at-home trend, according to retail sector analysts.

The snacks category, which includes those ubiquitous Goldfish crackers, was strong in the quarter, rising 12%. Salty snacks remained popular, it seems, even if the soup spoons stayed in the drawer.

Unwinding: Over the last year, the S&P Real Estate Select Sector Index ($IXRE) is down more than 15% while the S&P Info Tech Select Sector Index (IXT) is up more than 19%, forming the top and bottom sectors on the one-year scorecard. This week there’s been a slight unwinding of that huge gap, with real estate hustling higher and tech giving up some gains.

CHART OF THE DAY: ROLE REVERSAL. Over the last year, the S&P 500’s real estate sector ($IXRE—candlesticks) has been the worst sector performer and info tech (IXT—purple line) has been the best. This week, real estate is gaining and tech is losing ground. 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

Unrefreshing pause? As “pause” ideas build ahead of next week’s FOMC meeting, prepare for possible hawkish language as a side dish. Assuming the Fed does pause, it’s possible either the Fed’s statement or Fed Chairman Jerome Powell’s post-meeting press conference could include wording designed to stamp out expectations that a pause may lead to a cut. The fear of a rate-driven recession hasn’t vanished, even with recent talk on the financial networks about chances for a “soft landing.” While cyclical sectors like financials, materials, and industrials showed signs of emerging from slumber this week, possibly due to pause hopes, the same sectors could face a headwind if “Fedspeak” associated with the meeting takes a negative tone. We’ve seen many times when a Fed decision and statement initially send markets up before selling emerges during the Powell press conference.

Summer breeze: So-called market “internals” improved recently, according to Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. That’s essentially the opposite of what we’ve seen most of the year in terms of metrics like stocks making 52-week highs and stocks trading at or above their respective 200-day moving averages. The more evidence of positive developments on this type of measure, the “healthier” the market will look. That could conceivably aid investor sentiment and provide a tailwind for sectors outside the info tech/communications services heavyweights driving most of this year’s rally. For this to happen, he says, would require less stress in the banking environment, a delayed start of the recession, and further clarity on the path of monetary policy.

Sticker shock: One major inflation “driver” over the last two years is the automobile market. Potential car buyers received good news yesterday but it might not have much impact on Fed policy. The Manheim Used Vehicle Value Index declined 2.7% month-over-month in May, following a 3% fall in April. Year-on-year, prices for used cars fell 7.6%—the biggest annual drop in four months, Trading Economics says. While this might play into next week’s inflation data, it’s likely not enough evidence of receding inflation to satisfy the Fed. Keep in mind that Fed is less concerned about goods inflation and more focused on a price measure known as Personal Consumption Expenditures (PCE) core services ex-housing, which strips out anything related to commodities, housing, and goods. Cars, obviously, are goods, not services—unless you decide to Uber.