Sentiment Check: Market Under Pressure as Positive Feelings Dip Following Hawkish Remarks from Fed Official

(Tuesday market open) ) Five Federal Reserve officials are speaking today, but words from another Fed policymaker yesterday helped lead to early losses on Wall Street. Stocks fell in premarket trading on ideas that the battle against inflation may not be won and rate hikes may not be over.

That was the message from Minneapolis Fed President Neel Kashkari, who once was seen as a Fed “dove” but has become decidedly more hawkish in recent years. In separate interviews with news media yesterday, he warned of the dangers of “undertightening” and said more data are needed to determine whether the inflation genie is back in the bottle.

Major indexes extended their rally to six days Monday but likely didn’t remind anyone of the sparkling gains enjoyed last week. Instead, the S&P 500® Index (SPX) had a rare “inside day,” meaning it didn’t fall below Friday’s low or surpass Friday’s high, finishing up just 0.2%. It was the first inside day in over a month and might imply lack of conviction on Wall Street after the sharp rally.

The broader market’s gains were also a bit of a smokescreen considering the direction of most stocks. Declining shares led advancing ones most of Monday’s session, but the strength in so-called “mega-caps” helped the SPX and the Nasdaq (COMP) gain ground. The small-cap Russell 2000 (RUT), fell more than 1%, lacking aid from behemoths like Apple (AAPL) and Alphabet (GOOGL) that lifted the SPX and Nasdaq yesterday.

Whether Monday’s wobbling performance carries over into today may depend in part on Treasury yields, which bounced back early this week from recent one-month lows and appeared to limit upward direction in stocks. The selling in Treasuries, which move the opposite direction of yields, could reflect consolidation following the sharp change in direction last week, Briefing.com notes. Yields came under pressure last week after Fed Chairman Jerome Powell took a more dovish tone following the Fed’s decision to keep rates on pause, and amid softer economic data that eased inflation fears.

Morning rush

• The 10-year Treasury note yield (TNX) gave back two basis points to 4.63% but remains up from last week’s lows.
• The U.S. Dollar Index ($DXY) steadied at 105.62.
• Cboe Volatility Index® (VIX) futures inched up to 15.03 but remains near seven-week lows.
• WTI Crude Oil (/CL) fell 1.6% to $79.53 per barrel and traded below $79 at one point.

This morning crude oil fell back below $80 per barrel to its cheapest levels since late August after China’s October trade data showed a more dramatic-than-expected 6.4% year-over-year drop in exports. Some economists call China the “factory of the world,” so the soft export number could speak to weak demand in other major countries that buy from China. That’s possibly sign that demand for crude could drop.

Still, OPEC said Tuesday that the cartel remains positive on overall crude demand ahead of its next meeting later this month. At that point, investors could learn whether Russia and Saudi Arabia extend production cuts into 2024, Bloomberg reported.

What to watch
A slew of Fed speakers is ahead, including Fed Chairman Jerome Powell delivering opening remarks at a conference tomorrow morning. Today, Fed Gov. Christopher Waller takes the mic to discuss using data to understand the economy. Waller is one of five Fed speakers Tuesday as they emerge from their self-imposed hibernation accompanying last week’s meeting.

“We expect that most will reiterate the Fed can be patient in determining the path for interest rates,” says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “The bar for an additional rate hike this cycle is high, but we believe it’s too early to begin projecting rate cuts.”

One factor that could influence the Fed’s decisions on rates is the pace of economic growth. The Atlanta Fed’s GDP Now tool is now tracking Q4 Gross Domestic Product as data filters in, and it started off in a tailspin at an annual rate of 1.2%. The tracker’s final Q3 estimate was an annual rate of 5.4%, and the first government estimate was just below that at 4.9%. The next GDPNow update comes today.

Another rate-related feature this week is Treasury auctions, with three scheduled in the coming days. If demand is perceived to be poor at the auctions, it could hurt the Treasury market, potentially driving yields higher.

Lending update: Meanwhile, the Fed’s Senior Loan Officer Opinion Survey (SLOOS) released late Monday reported that bank lending standards generally remain tight but somewhat improved from Q2. “While there was improvement across the board, demand for credit remains weak and banks continue to charge higher spreads on their loans,” says Collin Martin a director of fixed income strategy at the Schwab Center for Financial Research. A weak credit market could imply softening U.S. business conditions.

This old car: Used car prices helped drive inflation last year, and today features October price data after a 1% month-over-month gain in September that was the biggest in six months. Economic strength in Q3 kept inflation from slowing as much as it had earlier this year, and today’s used car prices data could help investors understand if that strength spilled into early Q4.

Stocks in spotlight
Walt Disney (DIS) dominates this week’s earnings, reporting late Wednesday. Cost-cutting is likely to be in focus, along with streaming subscribership. Also listen for any possible updates on theme park and resort demand heading into holiday season. Disney’s outlook might have a ripple effect around the travel industry, including airline and travel website stocks.

Uber (UBER) shares shifted into reverse ahead of the open after the ride and delivery services firm came up short of Wall Street’s quarterly revenue expectations. Earnings beat estimates and the company issued fiscal 2024 guidance that was ahead of analysts’ forecasts. Bookings, platform users, and trips showed firm quarterly growth. However, the freight business appeared to remain a speed bump.

MGM Resorts (MGM), Wynn Resorts (WYNN), and Occidental Petroleum (OXY) are among other companies expected to report this week, as Occidental comes up to bat this afternoon and MGM tomorrow. With Disney, Uber, and resorts on tap, consumer demand for entertainment is squarely in the spotlight even as some companies that reported earlier this quarter, including airlines, voiced caution about the coming months. This week may provide a sense of whether those same dynamics are playing out among casinos and hotels.

Eye on the Fed
Early today, futures trading pegged chances at 90% of the FOMC holding its benchmark funds rate at the current 5.25% to 5.50% target range following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 80%.

FAQ time: Have questions about stocks, interest rates, or earnings? Check the latest answers to frequently asked questions from Schwab’s Chief Investment Strategist Liz Ann Sonders and Chief Fixed Income Strategist Kathy Jones in the latest episode of their new podcast, On Investing.

Breadth is back … sort of: At Monday’s close, nearly half of S&P 500 stocks traded above their respective 50-day simple moving averages, a sizzling performance considering the percentage had fallen to 10% as recently as October 30. Even at nearly 50%, it remains low historically for a bull market, however, implying that stock market gains aren’t very evenly spread across Wall Street. The SPX is up 13% year-to-date, but the S&P 500 Equal Weight (SPXEW) index is a shade lower for 2023. The SPXEW weighs all 500 stocks in the index equally, removing much of the influence from the “magnificent seven” with their $1 trillion market capitalizations and sharp gains this year. So, if most of the stocks in your portfolio continue to tread water and you wonder how the market can be up 13%, that might be why.

Talking technicals: The SPX is back above its 50-day simple moving average (SMA) and it appears that the index has broken above the downward sloping resistance line from the prior downtrend which began in August. “However, we are hovering around an area where sellers stepped in back in mid-October, that’s roughly the 4,400 area for the SPX and 15,250 area for the Nasdaq 100 (NDX), so we’ll see how the rest of the week plays out,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Salary bump: Now that U.S. autoworkers have negotiated significant salary hikes from the major automakers, one question is whether higher pay could spill into additional companies and sectors. The auto industry is far from alone in suffering recent strikes over pay. While workers deserve fair salaries, a broad rise in wages could hurt margins for automakers and other industries, putting pressure on stocks and possibly leading to future layoffs. The issue may be more of an auto industry problem than one for the wider economy, however, because union membership rates are so low relative to history. Still, “reshoring” efforts in the semiconductor chip industry also put employee costs under the microscope. Companies like Intel (INTC) and Taiwan Semiconductor (TSM) are focusing more of their efforts on U.S. production, and U.S. employees often come with higher costs.

Calendar

• Nov. 8: September Wholesale Inventories and expected earnings from Biogen (BIIB), MGM Resorts (MGM), and Walt Disney (DIS).
• Nov. 9: Expected earnings from Illumina (ILMN), Wynn Resorts, (WYNN), and Becton Dickinson (BDX).
• Nov. 10: University of Michigan Preliminary November Consumer Sentiment.
• Nov. 13: Expected earnings from Tyson (TSN).
• Nov. 14: October Consumer Price Index (CPI) and expected earnings from Home Depot (HD).

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