Shutdown Averted, But Old Concerns Linger As Treasury Yields Dollar Pop And Powell Remarks Awaited

(Monday market open) Washington is open this morning and Wall Street is ready for business.

Worries that the release of crucial economic data would be interrupted by a government shutdown vanished Saturday night when Congress passed legislation at the last minute to fund government operations until November 17. This allows investors to sharpen their focus this week on labor market numbers and what they say about the economy and the potential path of interest rates.

That’s not to say Wall Street can ignore Washington, D.C. The next six weeks ahead of the new deadline “will be just as tricky to navigate,” says Michael Townsend, managing director of legislative and regulatory affairs at Schwab. Chances of a longer-term solution remain murky as the House and Senate work to pass appropriations bills amid competing priorities, he says, putting a November government shutdown “squarely on the table.”

Any shutdown at that time would again threaten to delay data that investors, businesses, and the Federal Reserve need. This includes readings on inflation, as well as the jobs market.

“The agreement to keep the government open for six weeks ensures that Fed officials will have that critical data in advance of its next monetary policy meeting on October 31 and November 1, but a mid-November shutdown could impact the Fed’s final meeting of the year, scheduled for December 12-13,” Townsend notes.

Returning to the present, the best thing about September is that it’s over, though it ended Friday on a sour note. A promising rally lost steam, turning most major indexes red by the close. The tech-heavy Nasdaq (COMP) managed to end higher, but only by the skin of its teeth after early gains of more than 1%.

The S&P 500® Index (SPX) finished September down nearly 5% and Q3 down 3.7%. The Nasdaq fell 5.8% in September and 4.1% in Q3. Of the 11 S&P 500 sectors, only energy and communication services gained in Q3. Financials almost broke even. Info tech fell 4% after leading the rally earlier this year.

Major indexes initially surged early in the overnight session heading into Monday as investors cheered news of the shutdown being averted. In more recent hours, the market lost those gains and was trading near steady ahead of the opening bell. Rising Treasury yields could be taking a bite out of the earlier rally.

Later this morning, Fed Chairman Jerome Powell is scheduled to participate in a roundtable discussion with workers, small business owners, and others to discuss reviving local economies, Bloomberg reports.

Morning rush

The 10-year Treasury note yield (TNX) climbed 5 basis points to 4.63%, just below last week’s peak.
The U.S. Dollar Index ($DXY) is also back near last week’s high at 106.54.
Cboe Volatility Index® (VIX) futures jumped to 18.2 after falling below 17 on Friday.
WTI Crude Oil (/CL) rose a bit to $91.21 per barrel.

Treasury yields might heavily influence the path of stocks, at least until earnings steal some thunder. The 10-year Treasury note yield went from 3.82% at the end of Q2 to 4.57% at the end of Q3, finishing near highs last seen in 2007. This is partly driven by the idea that interest rates could remain higher for longer.

What to watch

Week ahead: We’re entering a big stretch for economic data, beginning with tomorrow’s Job Openings and Labor Turnover Survey (JOLTS) report.

Analysts surveyed by Trading Economics expect job openings to stay roughly steady near 8.8 million in August, down from double-digits during the initial pandemic recovery. A narrowing gap between available jobs and available workers is what the Fed wants to see, because it could keep inflationary wage increases from accelerating. Generally, employers raise wages more when labor is scarce.

Keep an eye on the “quit” rate, too. It’s been falling—another positive sign for rates because people tend to quit less if they don’t see chances of getting a higher-paying position. Quits in July were 3.549 million.

Friday’s September Nonfarm Payrolls report is expected to show jobs growth of 158,000, down from 187,000 in August, Trading Economics says.

This morning’s September Institute for Supply Management (ISM) Manufacturing Index, due soon after the open, could provide clues about the industrial economy. It rose to 47.6% in August but has spent about a year below the 50% level that would signal expansion. Consensus on Wall Street is for a slight rise to 47.8%, Trading Economics says.

Speaking of industrial data, China released some better-than-expected numbers over the weekend. The official NBS Manufacturing PMI rose to 50.2 in September from 49.7 in August. Analysts had expected 50.0, according to Trading Economics. It was the first growth in factory activity since March, amid recent stimulus from Beijing to bolster economic recovery.

OPEC weighs in: After a long break, the crude cartel and its allies meet this week and could decide Wednesday on production plans. There’s been some shakiness in crude lately, with futures stepping back from highs amid concerns that elevated prices above $90 per barrel might make Saudi Arabia more prone to end its production cutbacks early, according to Oilprice.com.

Stocks in spotlight

McCormick MKC and ConAgra CAG open their books tomorrow and Thursday, respectively. Both are in the food business, which has benefited from inflation raising prices over the last few years. They could offer investors a hint of whether companies in their sub-sector are losing traction with inflation slowing.

Analysts expect overall Q3 S&P 500 earnings to decline 0.1% from a year ago, according to FactSet. That would be an improvement from a worse-than 4% drop in Q2, and analysts typically err on the side of caution. Eight of 11 S&P 500 sectors are expected to report Q3 earnings growth and nine are expected to report revenue growth. Of the 116 S&P 500 companies issuing guidance to date, 74 were negative and 42 were positive. The negative percentage is equal to the 10-year average, FactSet notes.

Eye on the Fed

Early today, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 28%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 46%.

Fed speakers circulate this week, including Vice Chair for Supervision Michael S. Barr speaking at 1 p.m. ET today on “Monetary Policy and Financial Stability.” Governor Michelle Bowman takes the podium Wednesday morning.

Talking technicals: The SPX dropped below support around 4,330 last week, and on Friday appeared to register a bearish “pullback” to that level, which means it dropped below that level and re-tested it from the underside. “Is it possible we move above this level this week?” asks Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “Absolutely, but for now it looks like a bearish confirmation.”

CHART OF THE DAY: VIX CAPS WILD QUARTER. Stock market volatility was all over the map in Q3, as this three-month chart of the Cboe Volatility Index (VIX—candlesticks) demonstrates. The market’s “fear index” traveled from three-year lows to four-month highs in September alone. The S&P 500 (SPX—purple line) shows how elevated volatility tends to accompany poor performance for stocks, though VIX never got really out of hand the entire quarter. Data sources: S&P Dow Jones Indices, Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Fall break: While late summer is traditionally tough for stocks, seasonality often improves starting in October, though naturally there’ve been exceptions. The 2022 SPX low occurred in mid-October. The start of earnings season could potentially shift focus from that same tired trifecta of higher yields, dollar strength and oil prices. But earnings won’t be much help unless executives sound positive about the future.

Credit check: With bank earnings approaching next week, investors might get updates on the health of the lending industry. Concerns about higher interest rates tightening credit helped lead to last spring’s banking sector turmoil, but despite the aggressive pace of rate hikes, financial conditions eased this summer. “That’s reversed lately, likely driven by the decline in equities,” says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “We expect conditions to continue to tighten as the “higher for longer” Fed policy weighs on the economy and slows down lending.” High-yield spreads, which measure the difference between spreads on more risky corporate bond yields and Treasury yields, have grown more quickly than the spread on investment grade corporate debt, rising another five basis points by Friday from mid-week.

It’s academic: One lesson from past inflationary periods is that the first part of the battle against higher prices is the easiest. This means the Fed’s work might get tougher even though last Friday’s Personal Consumption Expenditures (PCE) prices data showed progress. Notably, core PCE services excluding housing—a closely watched data point for the Fed—rose just 0.1% in August, the lowest gain in more than a year and evidence that the fast-growing services sector might be slowing. Annual core PCE (stripping food and energy) rose 3.9%, down from an upwardly revised 4.3% in July. The Fed’s goal is 2%. Inflation growth has been roughly cut in half since peaking in mid-2022. “But as long as disinflation continues, the Fed will have to be more surgical with policy, given real rates will continue to inch higher (as long as nominal rates stay elevated),” says Kevin Gordon, senior investment strategist at Schwab.