Study In Contrasts: Robust Economic Data, Including GDP, Can't Stop Slide On Wall Street

(Thursday market open) Economic vigor contrasts early Thursday with a retreating stock market. The first government estimate for third-quarter Gross Domestic Product (GDP) outpaced most estimates and orders for durable goods remained robust, but Wall Street lost more ground in premarket trading as major indexes approach five-month lows.

GDP grew at an annual pace of 4.9% in Q3, the government said in its first estimate—well above the consensus estimate of 4%. GDP rose from 2.1% in Q2, driven by strong consumer spending. One question is whether that can continue in the current quarter with so many headwinds blowing against consumers, including the highest borrowing costs in 16 years and a firm crude oil market.

An October that began with so much promise approaches its conclusion much like August and September, with major indexes pointing downward. Barring a massive rally, Wall Street is on its way toward three consecutive losing months for the first time since Q1 of 2020, and the S&P 500® Index (SPX) closed below 4,200 yesterday for the first time since May 31.

Treasury yields remain stubbornly near 16-year highs as perceived weak demand and excess supply of Treasuries continue to dog fixed income. This drives a “risk-off” mood in stocks, especially growth companies and small-caps that might rely more on borrowing to build their businesses. So-called “mega-cap” stocks, which carry high valuations and have an outsize impact on SPX performance due to their trillion-dollar market capitalizations, also feel the heat from rising yields.

Communication services and technology were among the market’s weakest sectors Wednesday, with the Philadelphia Semiconductor Index (SOX) suffering its worst day of the year with a 4% decline. Chip weakness stemmed partly from Texas Instruments (TXN), which said in its earnings report that it’s seeing weaker industrial demand. That sent a shiver through the entire chip sector.

Morning rush

• The 10-year Treasury note yield (TNX) fell 1 basis point to 4.93% soon after the GDP data.
• The U.S. Dollar Index ($DXY) rose to 106.71, the highest in over a week.
• Cboe Volatility Index® (VIX) futures climbed to 21.06.
• WTI Crude Oil (/CL) is giving back yesterday’s gains, down recently to $83.06 per barrel.

Investors continue watching Treasury auctions more closely than in the past due to heavy supplies and the potential impact on yields. A seven-year note auction is scheduled for 1 p.m. ET today.

Just in

Q3 Gross Domestic Product (GDP) was above expectations but didn’t immediately appear to have an impact on Treasuries or on futures market expectations for interest rates. The GDP deflator, which measures the difference between nominal and real GDP and helps capture changes in prices related to production and income developments, rose a stronger-than-expected 3.5%. That was up from 1.7% in Q2.

Initial weekly jobless claims of 210,000 were right in line with analysts’ consensus estimates from Briefing.com but remained near recent nine-month lows. However, September Durable Orders rose a stronger-than-expected 4.7%—another sign the economy remained robust toward the end of Q3.

In other news, the European Central Bank (ECB) held rates steady for the first time in 15 months. The decision to pause was in line with the market’s expectations. Measures of underlying inflation “have continued to ease,” the ECB said in its statement, though inflation remains “too high.”

Stocks in spotlight

Meta Platforms’ META earnings offered some cheer for struggling mega-caps. The company posted record profits, lowered its expense guidance, reported a 31% rise in ad impressions, and delivered earnings per share (EPS) and revenue that topped analysts’ average expectations. Shares initially rebounded in premarket trading from Wednesday’s losses but then backtracked as the opening bell approached.

Amazon AMZN reports this afternoon, putting the focus back on cloud computing after Microsoft MSFT and Alphabet GOOGL revealed divergent trends (see more below). Amazon’s retail business is still out there, and it could tell investors whether consumers opened their wallets for name-brand goods or trended toward bargain-hunting. Then there’s Prime Video, Amazon’s streaming service, which will soon introduce advertising.

As mega-cap earnings dominate, guidance becomes particularly important. Investors are in “Missouri” mode—that is, “show me.” They’re punishing shares of companies that delivered strong results but seemed cautious about the future, much to the chagrin of Tesla TSLA, Texas Instruments TXN, and General Motors GM.

In earnings news this morning, Southwest Airlines LUV posted results that met Wall Street’s expectations, but shares fell 4% in premarket trading on what appeared to be a cautious outlook in the press release. “Leisure trends appear to be returning to historical seasonal norms,” Southwest said. It’s slowing its available seat miles (ASM) growth rate, despite what it called “healthy trends” for the holiday quarter. Labor costs are a headwind.

What to watch

Inflation takes the stage tomorrow with the September Personal Consumption Expenditures (PCE) prices report, along with Personal Spending and Personal Income data. These bow just before the open and could have an impact on early trading, though the market bakes in virtually no chance of a Fed rate hike next week. That’s unlikely to change at this late stage no matter how the data look.

Instead, PCE prices and today’s GDP report might have more impact on rate-increase probabilities for December. There’s still about a one-third chance of a quarter-point hike then, and Fed Chairman Jerome Powell last week said he wouldn’t rule out another rate increase if economic data are hot.

Analysts anticipate annual PCE price growth to moderate from August for both headline and core readings. (Core strips out food and energy.) However, monthly core growth is expected to rise from August, a sign that inflation may remain “sticky.” Below are consensus expectations for September PCE prices, according to Trading Economics:

• Monthly PCE prices: +0.3%, versus +0.4% in August.
• Monthly core PCE prices (excluding food and energy): +0.3%, versus +0.1% in August.
• Annual PCE prices: +3.4%, versus +3.5% in August.
• Annual core PCE prices: +3.7%, versus +3.9% in August.

Eye on the Fed

Early today, futures trading pegged chances at 99.7% that the Federal Open Market Committee (FOMC) will hold its benchmark funds rate at the current 5.25% to 5.50% target range following its October 31–November 1 meeting, according to the CME FedWatch Tool. The market isn’t quite as confident on the expected results following the FOMC’s December 12 meeting, with chances of a pause currently at 75%.

CHART OF THE DAY: RUT TESTS SUPPORT. The Russell 2000 (RUT-candlesticks) is testing a significant support level that, if broken, could signal bad news for the rest of the market. It speaks to market breadth. Or as some technical analysts say, the soldiers (RUT) aren’t following the generals (S&P 500) which is a bad sign for any battle. Data sources: FTSE Russell, S&P Dow Jones Indices. 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

Deadline looms: The House of Representatives finally has a speaker, ending 22 days of paralysis. But new Speaker Mike Johnson (R-LA) won’t have time to ease into the job. If Congress can’t pass a budget or agree on a new continuing resolution by November 17, the lights could go off in Washington, D.C. They may start blinking on Wall Street even before that. A shutdown could directly reduce economic growth by 0.15% a week, Goldman Sachs (GS) says, and might pose a special challenge for certain companies like defense contractors that rely on Washington for a portion of their business. For instance, in its recent earnings call, Lockheed Martin (LMT) said a shutdown could cause it to “relook” at its share repurchasing program. A shutdown could also slam the door on important economic data, though most of October’s key numbers will be out before November 17. Wall Street got rattled ahead of the possible shutdown in September, and a repeat won’t be surprising if Washington again goes down to the wire. Fears of a shutdown last month helped send the Cboe VIX index from under 13 to above 19 in a matter of days. The higher VIX goes, the better likelihood of larger daily moves in the SPX.

Spare a dime? Another important date is October 30, when the Treasury Department will announce its anticipated borrowing needs for the coming three months. The benchmark 10-year Treasury note yield continues to flirt with 16-year highs near 5%, up almost 100 basis points from late July, when the Treasury Department made its last borrowing announcement. Back then, it expected an increase of $852 billion in privately held marketable debt for Q1 of fiscal year 2024 (corresponding to Q4 of calendar year 2023). That would be down from an estimated $1 trillion of net borrowing in fiscal Q4 of 2023. One question is whether the government can stick to that forecast. Anticipated borrowing needs for the last quarter rose by $274 billion, in part due to projections of lower receipts and higher outlays, the Treasury said. “With this update, we’ll see how the supply situation will look for next few months,” says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “If the Treasury announces a larger number than the markets are expecting, yields could move a bit higher since there would need to be even more buyers to absorb the increased supply.”

Amazon and the cloud: This week’s divergent cloud results from Microsoft and Alphabet have investors wondering what that might mean for Amazon, the biggest cloud computing provider. One school of thought suggests growth in Microsoft’s Azure cloud product speaks more to what’s happening around the industry than Alphabet’s shortfall. Cloud growth is driven in part by companies incorporating artificial intelligence (AI), and Microsoft appeared better able to ride the wave than Alphabet. If industry growth is expanding, Amazon could benefit since it’s the leader, though Microsoft possibly took share.

Calendar

Oct. 27: September Personal Income and Personal Spending, September Personal Consumption Expenditures (PCE) prices, Final October University of Michigan Consumer Sentiment, and expected earnings from AbbVie (ABBV), Exxon Mobil (XOM), and Chevron (CVX).

Oct. 30: Expected earnings from McDonald’s (MCD).

Oct. 31: S&P Case-Shiller home price index and October Consumer Confidence. Expected earnings from Cadence Design (CDNS) and Nucor (NUE).

Nov. 1: October ISM Manufacturing, September Job Openings and Labor Turnover Survey (JOLTS), September Construction Spending, Fed rate decision, and expected earnings from DuPont (DD), Humana (HUM), Kraft Heinz (KHC), American International (AIG), McKesson (MCK), PayPal (PYPL), Qualcomm (QCOM), and Roku (ROKU).

Nov. 2: September Factory Orders and expected earnings from ConocoPhillips (COP), and Apple (AAPL).

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