Surging Rates and Dollar Worries Set the Stage for a Volatile Week

(Monday Market Open) As this morning’s stock futures continued Friday’s retreat, we’re watching the continued upward march of the U.S. dollar and Treasury yields like everyone else. But we’re also waiting to see what the world’s central banks might do next.

One thing’s likely—when the Cboe Market Volatility Index (VIX) is above 30, things are rarely great. Before the open, the VIX advanced 8% before the open to 32.44. Last week, it was down around 25.

Before the open, major indexes had trimmed earlier losses with the Dow Jones down 0.26%,  the S&P 500 off 0.28%, and the Nasdaq 100 actually nosing up slightly.

This morning, 10-year Treasury yields settled around 3.757% this morning after hitting the highest point in more than a decade last week at 3.81%.

With record lows in the British pound sparking reports that the Bank of England could consider an emergency rate hike this week, we’re focused on central bank activity everywhere. Several Federal Reserve leaders, including Chairman Jerome Powell, are expected to make fresh comments this week.

Also keep watch on China. The world’s biggest manufacturing nation is scheduled to have new economic data out that could potentially move the market.

Potential Market Movers

This week features plenty of economic calendar items, just nothing too important today. The lack of data or major earnings Monday could be a bearish thing for the markets because it means focus will likely remain firmly on all of last week’s bad news about interest rates, recession fears, and strength in the greenback.

However, the calendar gets a bit busier tomorrow as August durable orders, September consumer confidence, and August new home sales all hit the tape.

Last time out, new home sales were a real dud at least for homeowners, with the headline number dropping more than 12% in July to a seasonally adjusted annual rate of 511,000 units. Analysts expect another monthly drop in August, to a seasonally-adjusted annual rate of 500,000, according to Briefing.com.

However, consumer confidence is seen ticking up slightly in September, according to the Briefing.com consensus, to a headline number of 105.0, up from 103.2 last time.

On the corporate front, Amazon AMZN made it official this morning—facing a challenging holiday season from consumers buying early to beat inflation, the online giant will add a second Prime Day savings event to its calendar October 11-12. Reports surfaced back in June that AMZN was already contacting suppliers to start preparing for an event that would capture buyers well ahead of Black Friday and Cyber Monday. Shares were down 0.51% before the open.

Casino stocks were premarket gainers as officials announced tour groups would be welcomed back to Macao from the Chinese mainland after months of stringent COVID restrictions. Las Vegas Sands LVS gained 7.7% and MGM Resorts International MGM advanced 2.46%.

Meanwhile, Planet Fitness PLNT shares got a nearly 3% lift before the open on news that Raymond James had elevated the stock to a strong buy. PG&E PCG gained over 5% premarket on news that it will replace Citrix Systems CTXS in the S&P 500 on October 3.

On the earnings front this week, Nike NKE on Thursday is the biggest name, but don’t forget Bed, Bath and Beyond BBBY and Micron MU that same day.

Reviewing the Market Minutes

On Friday, the Nasdaq ($COMP) fell 1.8% to 10,867. The SPX fell 1.72% to 3,693. The Dow Jones Industrial Average ($DJI) fell 1.62% to 29,590, a new closing low for the year.

Some of the biggest losers among major shares on Friday included Chevron (CVX) falling more than 6% amid a general hammering of Energy stocks as crude lost ground. Boeing (BA) fell more than 5%, Caterpillar (CAT) slid more than 3%, and Goldman Sachs (GS) fell more than 3%, as well.

Generally, stocks related to consumer demand, including airlines and vacation-related firms, had tough days on Wall Street as recession fears grew. Energy was by far the worst-performing sector, down more than 6%. But every sector finished in the red. Utilities, Health Care, and Information Technology fell the least.

The U.S. Dollar Index ($DXY) hit a new 20-year high intraday above 113. The dollar often attracts investors during times of market volatility and uncertainty. Gold, which often trades inversely to the dollar, hit a two-year low below $1,650 an ounce.

The 10-year Treasury yield slid from recent highs to trade at 3.68% by the close, while the rate-sensitive 2-year Treasury yield actually rose to 4.19% after topping 4.2% during the day. This means the yield curve finished the day even more inverted, typically a bad sign for economic growth.

CHART OF THE DAY: SOME FRIEND. You may remember the price channel on the S&P 500 (SPX--candlesticks) we’ve referred to a couple times to help us follow the downtrend, some technical analysts might expect some buying to come in at these levels (white box) in the short term, but the technician mantra is “the trend is your friend” so the assumption would be that the downtrend would continue sooner or later. 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

CHIPPING IN: Last week’s fractured feature was the Info Technology sector, where on Thursday chip stocks moved one way (down) while some of the largest companies like Microsoft (MSFT) and Salesforce (CRM) hung in pretty well. This prevented a big breakdown in the sector that day, Briefing.com observed, and may shed some light on investor thinking, if it continues.

Though one day is never a trend, softness in the chip sector could reflect recession worries following the Fed’s hawkish tone at last week’s meeting. Any slowdown in the economy would likely hurt demand for major consumer items like phones and cars, which heavily depend on microchips.  At the same time, the strength in MSFT was a reminder that we’ve seen investors embrace mega-cap stocks like MSFT during hard times in the recent past. However, keep in mind that MSFT and other mega-caps have heavy exposure to overseas markets where the strong dollar could be a headwind. Still, consider keeping an eye on chips vs. mega-cap Tech going forward to see if this has staying power.

WAIT, DON’T TELL ME: As data come in over the next few weeks, keep in mind that we’re in a “good news is bad news” environment. That was evident last Thursday when investors grew concerned by a better-than-expected weekly initial jobless claims number. Normally, you want to see fewer people claiming unemployment. These days, more people getting jobs appears to send the message that the economy remains too hot and might draw more slings and arrows from the Fed in coming weeks. This could be something to remember the first week of October when the September payrolls report comes out. A hot report could mean the Fed might come up with yet another reason to keep pumping the economy’s brakes.

SMALL PACKAGES: The Russell 2000 (RUT) small-cap index really took it on the chin last week, crumbling more sharply than competing indices. Small-caps are sometimes seen as a canary in a coal mine for the broader market, and also as a proxy for U.S. economic growth. That means the RUT shouldn’t be overlooked despite the smaller size of the average component. The RUT is down nearly 8% so far this month, versus a less than 7% decline for the SPX. Neither is a number to write home about, but the steeper losses in RUT could mean there are deeper investor fears about some of the sectors that make up a large portion of that index, like banks, health care companies, and energy firms.

Notable Calendar Items

Sep 27: Durable goods orders, CB consumer confidence, New home sales and earnings from Cintas (CTAS), Jabil Circuit (JBL), BlackBerry (BB), Cal-Maine Foods (CALM), and Cracker Barrel (CBRL) 

Sep 28: Pending home sales and earnings from Paychex (PAYX)

Sep 29: Gross Domestic Product (GDP) and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)

Sep 30: August PCE Price Index, Personal income and spending, Chicago PMI, September Michigan Consumer Sentiment

Oct. 3: September ISM Manufacturing PMI

Oct. 4: August JOLTS job openings, August Factory Orders, and earnings from Acuity Brands (AYI)

Oct. 5: September ADP Nonfarm Employment, September ISM Non-Manufacturing Index, Trade Balance

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

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