Market Wavers Ahead Of Fed's Virtual Jackson Hole Symposium, But Durable Goods Impress

Maybe as a kid, you waited all week to hear the top-40 broadcast. Well, today the countdown begins, but Casey won’t be the deejay. It’s all about counting the hours until Friday morning when we’ll hear from Fed Chairman Powell. 

Sometimes the market is telling you to be extra careful, and today may be one of those days. There was pretty much no movement in major indices overnight and there aren’t any major numbers that could get us going today, other than durable goods, which came in a bit better than expected. Thin volume lately means moves could be exacerbated if they do happen, so if you’re trading, consider taking caution. 

One question going into the rest of the week—other than the obvious one about what Powell and company might say—is whether this strong reopening trend we’ve seen the last few days can continue. Another is whether China’s market rebound is for real. The market there rose again overnight after some of the country’s big tech stocks popped earlier this week. A government crackdown got an adverse reaction from the market earlier in August. 

Closer to home, the U.S. House passed a budget yesterday. However, that’s not a one-day story and we’ll see how it plays out over the coming weeks. The devil’s in the details. 

Earnings From Salesforce, Dick’s Sporting Goods Break Up Monotony

The next few weeks are kind of an earnings desert, but every now and then there’s an oasis. 

Today, earnings from Salesforce CRM are expected after the close, breaking up the monotony ahead of the Fed’s virtual Jackson Hole meeting. This Dow Jones Industrial Average ($DJI) component has a long history of beating analysts’ earnings estimates and is one of the last big tech companies to report before earnings season goes on hiatus. One thing people might be listening for is any update on how CRM is incorporating Slack into its business after buying it for $28 billion late last year.

Dick’s Sporting Goods DKS is another company on today’s thin earnings calendar, and its shares climbed double-digits in pre-market trading after a solid beat of analysts’ consensus. We continue to see really nice earnings out of the retail sector. DKS looks like another “green shoot” that’s maybe a sign of people’s giant appetite to get back out. 

Otherwise, the news is a little thin as the market looks for catalysts ahead of Jackson Hole. In a normal year, we’d be able to talk about how Fed officials were winging their way to Wyoming as we speak, but the virtual nature of the event this year kind of takes some of the drama away, if you will. Instead, the talk on the Street centers on how this move by the Fed to go virtual demonstrates how seriously central bankers take the Delta variant, and may even play into how they approach policy. 

For now, there’s not a huge amount of direction on Wall Street after several days of rallying. Stocks look about as flat as a day-old soft drink this morning. We may not see a lot of conviction one way or another as people prepare to hear from the Fed. Still, it’s worth noting that the 10-year yield pushed above 1.3% today for the first time in more than a week, so maybe that’s a sign of economic optimism. 

Jackson Hole Approaches, Fraying Nerves

There’s a lot of trepidation going into the Jackson Hole symposium later this week, but it’s important to keep things in perspective. Even if the Fed does start getting more granular about a possible taper, that’s not necessarily a reason to panic. It’s also possible that the Fed could do what New Zealand’s central bank recently did by temporarily delaying any tightening of monetary supplies until Covid eases.

If a taper is in the cards, the Fed seems to have done a good job of telegraphing it. A taper could even be seen as bullish. The Fed probably wouldn’t contemplate pulling the punch bowl away if it continued to have lots of doubts about the economy.

Remember, too, that even though Fed Chairman Jerome Powell’s 10 a.m. EDT speech Friday gets top billing, plenty of other speakers will be at their podiums over the next couple of days. This includes a bunch of Fed officials. All this noise about possible central bank strategies and economic insights could cause market turbulence, which might be one reason volatility is a bit higher than a couple of weeks ago despite strength in the major indices. 

Volatility may be higher, but a Cboe Volatility Index (VIX) reading of just over 17 probably isn’t going to “scare the children.” It was well above 20 a week ago but is still above recent lows. 

Instead, the mood on Wall Street so far this week has been risk embracing, not avoiding. Travel-related stocks had a good day Tuesday following the U.S. Food and Drug Administration’s (FDA) approval of the Pfizer PFE and BioNTech BNTX Covid vaccine. They also got help from research reports on Wall Street suggesting the pace of new case growth may be slowing. That’s something you might need to be an epidemiologist to have a really good grasp of, but any sign of slowing growth in Covid numbers would be welcome after what we’ve just been through. 

Reopening Recharge

Airlines, hotels, and casinos have all been on the upswing so far this week as people appear anxious to get back out. Also, crude has had an amazing recovery the last couple of days, and airline shares all rose 3.5% to 4% yesterday despite crude propelling toward $68 a barrel from lows near $62 last week. Not surprisingly, then, Energy led all sectors yesterday and has been on a roll. 

Overall, the market (stocks and Treasury yields)  appeared to get new life early this week from a combination of things, not just reopening exuberance. Big gains in the China tech sector, a strong new home sales figure from the Commerce Department, and the FDA vaccine news all lifted spirits. So did talk from some analysts that Powell may punt on Friday and push any taper down the road while the Fed awaits more employment data and Covid developments. That remains to be seen and is far from certain. 

With airlines and hotels, the virus isn’t just one of the stories out there. It’s arguably the only story, and there’s a direct link between news (or expected news) about Covid and how the stocks perform. Just a week and a half ago hotels and airlines were having a tough time. 

In these stocks and others, it’s becoming tougher to trade the market because there’s so much uncertainty around this medical issue. With Powell’s speech not until Friday and earnings pretty much over, the virus may be the big story driving things up or down the next couple of days. 

Also later this week, consider watching the latest consumer sentiment number on Friday from the University of Michigan. We’ll talk tomorrow about where analysts see that one coming in after a very disappointing initial August read a couple of weeks ago. 

The data tomorrow centers around initial weekly jobless claims and a second government estimate on Q2 gross domestic product. 

Analyst consensus for jobless claims is 355,000, according to research firm Briefing.com, up from 348,000 a week earlier. The GDP growth number is forecast at 6.5%, right in line with the government’s first estimate. Lately, some of the GDP data have come in lower than Wall Street expected, so be on the lookout tomorrow morning in case there’s another disappointing figure.

CHART OF THE DAY: CHIPPING AWAY. The relationship we talked about a week ago between the rising dollar ($DXY—purple line) and falling crude (/CL—candlestick) is breaking down a bit this week. Crude is now approaching levels that can represent a challenge for transport stocks, near $70 a barrel, but the chart pattern appears to remain negative from a technical perspective. Data sources: CME Group, ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Inflation Bear Still Prowling: When the major indices continue to trade near all-time highs, some analysts (and investors) are on the lookout for anything that could throw a wrench into the works, so to speak. A more hawkish Fed comes to mind, obviously. So does a possible peak in earnings growth. And geopolitical uncertainty like we saw recently can be another factor, along with weakness in major economies like Europe and China. 

The other thing that comes to mind these days is more stubborn inflation. The Fed sees inflation as “transitory,” and there are signs it might be easing. Some of the items that saw prices rise most earlier this year like lumber, copper, and crude have all kind of eased the last couple of months. Certain items like used car prices that drove overall inflation to its biggest gains in decades also seem to be coming down. Another way to track inflation is to look at how many items in the overall economy are seeing price gains. At the moment, it’s 85% of all product categories, The New York Times recently reported, which is near the historic norm. 

Speaking Of Which… Since we’re talking inflation, let’s look ahead to Friday’s monthly report from the government on Personal Consumption Expenditure (PCE) prices. Consensus on Wall Street is for a 0.4% rise in July, according to research firm Briefing.com, down from 0.5% in June. That would follow a consumer price index (CPI) report for July that also showed a small dip in the pace of inflation growth. The Fed says it looks very closely at PCE, so investors should also consider a close look. 

Also, remember that today’s year-over-year inflation readings reflect that so many items were at extremely low levels during Covid lockdowns a year ago. As the economy “laps” that time period, inflation could start to look a bit less scary, and also businesses can address scarcity by building up supplies. A supply build, if it happens, also has a chance to make inflation look a bit more mellow in months to come, but no guarantees.

Itchy Trigger Fingers With Market At All-Time Highs: It wouldn’t be surprising if the direction is down in the near-term, by the way, because we’ve had so many new highs. This can sometimes cause some people to have an itchy trigger finger, so to speak. That doesn’t necessarily mean a 5% or 10% selloff, just the chance that we could see some profit-taking, especially if Powell sounds hawkish. Also, as we pointed out yesterday, the volume behind this rally just hasn’t been too incredible. Volume was lower than average again on Tuesday. People apparently are having a tough time buying at these levels, and that can show in the relatively low volume, though there’s a seasonal aspect to the light trading as well.

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

Image by Free-Photos from Pixabay