Rising Volatility, Yields, Keep Pressure Churning On Wall Street

(Wednesday Market Open) Amid surging volatility and a dollar that just keeps climbing, stocks began Wednesday on shaky footing. Even a slight dip in yields following a move by the Bank of England to buy bonds didn’t seem to give the market much support ahead of the opening bell.

The benchmark 10-year Treasury yield topped 4% briefly this morning for the first time since 2010, and continues to pressure equities.

All this comes as Hurricane Ian surges toward Florida with dangerous winds this morning. The storm in Florida might not have a huge impact on the crude oil industry in the Gulf of Mexico because it’s east of most oil production, but hurricanes often hurt business activity across wide swaths of territory. Walt Disney DIS parks are closed.

Speaking of business, today’s Bloomberg report that Apple AAPL is backing off plans to increase production of its new iPhones this year due to lack of demand could be another blow. This shows a real change in consumer behavior since smartphones are pretty much ubiquitous these days . Any signs of faltering consumer demand could indicate a slowing economy. Shares of AAPL plunged 3% in futures market trading.

The Cboe Volatility Index® (VIX) reflected all this uncertainty, climbing above 34 in  the early morning hours before falling back below 33.. With VIX in the mid-30’s, investors should be prepared for some major market swings. Anyone trading should use more caution than usual. Consider placing smaller trades or tightening up stops.

And with unusual things happening in the global economy—including the Bank of England referring to “dysfunctional markets” and escalating tension in Ukraine—it wouldn’t be surprising not to see a lot of buyers Wednesday in the stock market. Technical support for the S&P 500 Index (SPX) might come in around the 3,620 or 3,615 levels. But no other major support points above this have really held lately.

Potential Market Movers

Today isn’t a big data day aside from a pending home sales report, but tomorrow and Friday are. One highlight to mark on your Thursday calendar is the final government read on Q2 gross domestic product, where consensus is for a 0.6% drop, even with the prior estimate, according to Briefing.com. This is a backward-looking item that’s unlikely to have a major market impact unless it’s way out of whack.

A Thursday data point with more potential to affect prices is the weekly new jobless claims number where consensus on Wall Street is 213,000, flat against the prior week. If the number does come in at that level or somewhere near it, the market is likely to read it as more evidence that the economy continues to run too hot, and it may put more pressure on stocks and bonds.

However, if the number starts consistently rising over the coming weeks, investors may see that as a sign the Fed’s higher rates are starting to slow jobs growth. Potentially, that could be a good sign for the inflation picture—another example of bad news perhaps being perceived as “good news” again.

On the corporate front, tomorrow gives us a trifecta of earnings with Nike NKE, Bed, Bath & Beyond BBBY, and Micron MU all scheduled to report. Earnings from Paychex PAYX looked positive early Wednesday.

Also in corporate news, the U.S. railroad sector could be under a continued microscope this week after yesterday’s downgrades by UBS of Norfolk Southern NSC and CSX CSX. If you haven’t already noticed, the transport sector has gotten nailed lately, mainly due to recession fears. While retail earnings season is a long way off, any better-than-expected news from that industry might be what transport stocks need to rebound ahead of the holidays.

Fed speakers remain top of mind too. Yesterday, there were hawkish comments from several of them, including St. Louis Fed President James Bullard, who said rates may have to move up to the “4.5% range.” That’s pretty much in line with the Fed’s recent dot-plot, so it shouldn’t surprise anyone, especially coming from a hawk like Bullard.

Reviewing the Market Minutes

The market got the equivalent of a “split decision” Tuesday as the S&P 500® (SPX) and Dow Jones Industrial Average® ($DJI) both finished lower, while the Nasdaq® (COMP) and Russell 2000® (RUT) managed to end the day higher.

The final tallies didn’t look like there was much excitement Tuesday, but don’t tell that to anyone who was trading. An early 300-point pop in the $DJI got extinguished after a set of bullish midmorning data helped send the 10-year Treasury yield to new 2022 highs.

August durable orders fell, but September CB Consumer Confidence and August new home sales both easily exceeded analysts’ consensus views. That basically set up a speed trap for stocks, with the SPX sliding to a new low for 2022 intraday to its lowest close since 2020. The $DJI fell officially into bear market territory, off 20% from its highs.

It goes back to what we said last week about good news being bad and vice versa. The two hot economic reports Tuesday reinforced ideas the Fed may have to continue longer on its hawkish path to get the economy cooled down. However, there was one positive nugget in the consumer confidence report (see more below).

The U.S. Dollar Index ($DXY) continued its fierce rally Tuesday, topping 114, another multi-decade high. And, as noted above, volatility shows little sign of calming down.

On the sector side yesterday, there was a slight move toward more “risk-on” stocks, with materials, consumer discretionary, and information technology among S&P sectors ending in the green Tuesday. Some of the more “defensive” sectors like utilities and consumer staples suffered sharp losses. However, one day is not a trend. The day’s action may just reflect perceived oversold conditions among some growth stocks.

Energy stocks, cruise lines, and airlines were some of the best performers yesterday, while staples firms fared poorly.

CHART OF THE DAY: The Cboe Volatility Index® (VIX) (candlestick) is rapidly approaching last spring’s highs as the market grows more nervous about the rapidly rising 10-year Treasury yield (purple line). Data Source: Cboe. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

SILVER LINING: With most investors anxious about what the Fed might do next (judging from the wobbly market over the last week), one way to figure out the Fed’s possible thinking is to keep a close eye on daily data. Though strong economic data at this point is generally more of a hindrance than a help for stocks, the Conference Board’s Consumer Confidence Index for September had a silver lining. While bond yields jumped and stocks fell when the strong headline confidence number hit the tape, it’s worth noting that one-year inflation expectations ticked down to 6.8%, down from 7% in August and a high of 7.9% in June. The 6.8% figure is the lowest so far this year.

This could come as a relief to Jerome Powell and company. Over the last year, Powell and other Fed officials have often said one of their main fears is that consumer expectations for high inflation might become entrenched, which would make it even harder for the Fed to tame prices. When high inflationary expectations stick around for months, they can create a “wage-price spiral” like the kind we saw back in the 1970s, when high inflation fed on itself and only double-digit interest rates could ultimately slay the beast.

FED GETS REINFORCEMENT: The slight decline in inflation expectations helped reinforce something Powell said at his press conference last week. “Longer-term inflation expectations appear to remain well-anchored,” he said then. However, he added, “That is not grounds for complacency.” The question is whether other data start to reinforce the Fed’s feelings about inflation expectations being “anchored.” The obvious place to check would be the Fed’s preferred measure of inflation: Personal Consumption Expenditure  (PCE) prices. Conveniently, the Fed (and the rest of us) get a look at that this Friday. Unfortunately for any bulls, analysts’ consensus expectations are for 0.2% growth in August headline PCE prices and 0.4% in core PCE prices, according to Briefing.com. That’s up from -0.1% and 0.1%, respectively, in July. A sharper-than-expected PCE increase could put even more pressure on fixed income, and represent another bump in the road for stocks.

IT’s A GAS: The Conference Board cited “falling gas prices” as a major contributor to lower inflation expectations. While gas prices can often be a proxy for how people generally feel about the inflationary environment, they’re a small part of overall spending and may not reflect the overall inflation environment. And the 6.8% inflation growth the surveyed consumers expect is still historically high. Remember, the Fed’s goal is to bring inflation back down to 2%, and Chicago Fed President Charles Evans said Tuesday he’s “cautiously optimistic” the economy can avoid a recession. Getting inflation down to that level without a recession would be quite a feat.

Notable Calendar Items

Sep 29: Gross domestic product 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, and 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, and Trade Balance

Oct. 6: Earnings from Conagra (CAG) and McCormick (MKC).

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

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