Signal Watch: In Thin Data Week, Markets Move Lower Ahead of Next Week's Fed Meeting

(Monday Market Open) Stocks sagged early Monday to kick off a week where fresh catalysts might be tough to find.

We haven’t said that in a while, but unless you count today’s November ISM Services data and this Friday’s Producer Price Index (PPI) for November, scheduled influential data is a bit thin in coming days.

Keeping things relatively quiet, the Fed will soon be in a lockdown period where its speakers go quiet ahead of next week’s Federal Open Market Committee (FOMC) meeting December 13-14.

The 200-day moving average (MA) of 4,046 may be a support point for the S&P 500 Index® (SPX). Like a mountain climber setting up a tentative camp near the mountain top, the SPX has spent the last three sessions just inches above that 200-day MA. It’s the first decent stretch above that level since April. The question is whether it can hold or if the index needs to descend for more oxygen.

Morning Rush

• The 10-year Treasury yield (TNX) rose 2 basis points to 3.53% but remains near recent lows.
• The U.S. Dollar Index ($DXY) keeps sliding, falling 0.36% to 104.17.
• Cboe Volatility Index® (VIX) futures hover just above 20.
• WTI Crude Oil (/CL) rose nearly 3% to $82.20 per barrel.

The earnings calendar is thin until Thursday when several large companies are expected to report, including Broadcom (AVGO), Costco (COST), and Chewy (CHWY).

Stay tuned later today for a speech by Christine Lagarde, president of the European Central Bank (ECB). Her view on the path of rates there could be informative. Back home, the futures market pencils in about a 75% chance of the U.S. Federal Reserve raising rates 50 basis points next week and a terminal (or peak) rate near 5% next summer, according to the CME FedWatch Tool.

Just In

The big news over the weekend was the decision by OPEC and its allies to keep crude production unchanged despite Europe’s new $60 per barrel cap on Russian crude prices. The cap takes effect today, but crude rallied this morning.

The rise in crude might sound surprising as OPEC stood pat. However, worries might be forming around Russia’s pledge not to sell crude to countries with a cap, which might limit supplies by 1 million to 1.5 million barrels a day, according to analysts quoted in The Wall Street Journal.

The next OPEC-and-friends meeting isn’t scheduled until spring, but that doesn’t really mean much. They can get together anytime if they sense the need for new cuts, or they could do what they did last week when prices fell to 11-month lows—jawbone through the media to get prices to climb.

More soft data came in from China overnight with the country’s services PMI number remaining in contraction. Still, stocks soared in Hong Kong amid talk that China will loosen COVID-19 restrictions.

Staying in China for a moment, shares of Tesla (TSLA) slammed the brakes early Monday after news reports that the company plans to cut production at a plant there.

Jobs Report Redux

Stocks erased most of their early losses Friday, and volatility remained low. How come the bottom didn’t fall out after that inflation-flashing jobs report?

• After weighing the jobs and wages data with lower recent inflation numbers and Federal Reserve Chairman Jerome Powell’s words about slower rate hikes, investors decided that despite Friday’s hiccup in the “cooling”/“peak” inflation narrative, there’s still good reason to believe the pace of rate hikes could slow as soon as this month.
• Also, if given the choice between a collapsing jobs market or a hot jobs market, most investors would still choose a strong jobs market. That’s why Friday’s trading may have been a “cooler heads prevail” situation, but one that acknowledges the inflation story isn’t over and the risks are still very real.
• Another thing to keep in mind is that over the last eight months, the “establishment” survey has shown 2.7 million jobs created, while the separate household survey shows just 120,000, Charles Schwab Chief Market Strategist Liz Ann Sonders pointed out. “The reality is probably somewhere in the middle,” she added.
• What did the household survey show in November? A drop of 138,000 in the number of people employed, following a 328,000 decline in October. Which may help explain the market’s snap back after the initial reaction to the establishment data.
• Still, the report did spark some worry about the Fed’s future course, especially with the strong wages number.

Reviewing the Market Minutes

Friday’s recovery from early data-driven lows demonstrated a return of the “buy the dip” mentality that was so prevalent over roughly 18 months from the bottom of the pandemic bear market until the peaks early this year. It’s kind of a “what, me worry?” market that’s led to days like Friday when the VIX briefly fell below 19 for the first time since April despite handwringing over possible wage-driven inflation.

Five S&P 500 sectors actually rose Friday, led by materials and industrials. You don’t often see rallies in those sectors when recession threatens.

Here’s how the major indexes performed Friday:

• The Dow Jones Industrial Average® ($DJI) rose 34.87, or 0.1%, to 34,429.
• The Nasdaq Composite® ($COMP) fell 0.18% to 11,461.
• The Russell 2000® (RUT) rose 0.59% to 1,892.
• The SPX fell 0.12% to 4,071 but finished higher for the week and climbed in five of the last seven weeks.

Talking Technicals: The U.S. Dollar Index ($DXY) snapped back quickly Friday after briefly falling below a long-term technical support level at 105, which was also near its 200-day moving average (MA). But after a brief move above the 200-day MA Friday morning, it fell back into negative territory late in the day.

The $DXY is still up nearly 9% over the last year but down 5.6% over the last month to lows not seen since July. If it can’t rally on a jobs report like this, it might indicate that the path of least resistance remains lower. While that may sound bullish for a stock market that’s struggled for months with dollar strength, a falling dollar also could be a sign that investors fear a U.S. recession.

CHART OF THE DAY: HOLIDAY CHEER. The S&P 500 (SPX—candlesticks) is testing its downward channel’s resistance line. This could be a pivotal point for the market as the bulls and bears battle. According to the Stock Trader’s Almanac, December is usually a good time for the bulls, particularly after Christmas break when the Santa Claus rally often pushes stocks higher. Market breadth appears to be strengthening as the NYSE advance/decline line has risen since October. However, it’s also nearing its moving average, which acted as resistance in August. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

More Price Pain? Inflation fears flared Friday after the Labor Department’s surprisingly hot November jobs report, but wage growth is just one factor driving prices. You also should heed /CL, up sharply last week and back above $80 per barrel after recently posting an 11-month low. There’s a lot of focus on OPEC and its allies, as well as European price caps on Russian crude. But some of the price gains have domestic origins. U.S. oil refineries operated at 95.2% of their operable capacity, according to the Energy Information Administration’s (EIA) weekly petroleum status report. This has increased from around 90% at the beginning of November but has been consistent with recent months as refinery capacity has remained a bottleneck for U.S. production capacity of petroleum-related products, according to Charles Schwab analysts.

Mortgage Relief: Some homebuilder stocks got a shot in the arm late last week from a third consecutive week of falling mortgage rates. The closely watched 30-year mortgage dropped to 6.49% from 6.58% the prior week and to the lowest level since September 22, said Bloomberg citing Freddie Mac data. If you’d rather rent, there’s good news too. Apartment rents dropped 1% in November, according to Apartment List, the biggest monthly drop in at least five years. Shelter prices play a big role in shaping the Consumer Price Index (CPI), which will be released December 13 just ahead of the Fed’s next rate decision.

Want to Make a Bet? Casino and gambling stocks have had a nice run over the last few months despite COVID-19 lockdowns in China that continue to hurt the global industry and Macau in particular. Not all gambling takes place at casinos as anyone following sports betting knows. Technology has played a crucial role in building new gambling fans across the world, making it easier and more accessible for the sports bettor to wager from the comfort of their own homes. The question is which of several large sports betting stocks will ultimately become champion? Similar to casino giants, loyalty will likely determine the winners in the sports betting industry, so investors may want to ask questions before putting their money down. For instance, how does one competitor build brand loyalty over others in its territory? Does the average player sign up for more than one app, and how “sticky” is their money once they do? Over time, many players may want to establish a relationship with a single brand—so investors may want to keep a close eye on who’s ahead. 

Notable Calendar Items

Dec. 6: October Trade Balance and expected earnings from AutoZone (AZO) and Casey’s General Stores (CASY)

Dec. 7: October Consumer Credit and expected earnings from Campbell Soup (CPB)

Dec. 8: Expected earnings from Broadcom (AVGO) and Costco (COST)

Dec. 9: November PPI and Preliminary December University of Michigan Consumer Sentiment Index

Dec. 12: November Treasury budget

Dec. 13: November CPI, FOMC meeting begins, and expected earnings from ABM Industries (ABM)

Dec. 14: FOMC rate decision, quarterly projections and dot-plot, November Export and Import Prices, and expected earnings from Lennar (LEN)

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

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