Yield The Floor: Treasuries Remain Under Pressure Amid Firm Economic Data, Sending Yields Toward 2022 Peak Levels

(Thursday market open) An August funk that’s sent the broader market down 4% since July 31 loosened its grip early Thursday as investors digested encouraging earnings results from Walmart WMT and Cisco CSCO. Even so, Wall Street begins the day at five-week lows following Wednesday’s release of hawkish minutes from the last Federal Open Market Committee (FOMC) meeting and as Treasury note yields flirt with their 2022 peaks.

The S&P 500® Index (SPX) finished Wednesday down 4% from the July 31 closing high for the year near 4,600. Wednesday’s close was the lowest since July 7. All the major indexes fell below their 50-day moving averages this week, and so did eight of 11 S&P sectors.

Every S&P 500 sector declined over the last week, with consumer discretionary taking the hardest fall due to worries that higher Treasury yields could raise borrowing costs and sap consumer spending. Last year’s 15-year high of 4.33% for the 10-year Treasury note yield is just a few ticks above current levels.

Mega-caps that bolstered Wall Street through July took it on the chin this month. Tesla TSLA, for instance, recently traded near $225 per share after topping $290 a month ago. Worries about China’s economy teamed up with Treasury yields to slam Tesla and other mega-caps.

Morning rush

  • The 10-year Treasury note yield (TNX) inched up 2 basis points to 4.28%.
  • The U.S. Dollar Index ($DXY) slipped to 103.19 but remains near recent highs.
  • Cboe Volatility Index® (VIX) futures dropped slightly to 16.4.
  • WTI Crude Oil (/CL) rose to $80.26 per barrel after dropping below $80 yesterday for the first time in a week.

Eye on the Fed

Futures trading indicates a 13.5% probability that the FOMC will raise interest rates by 25 basis points next month, according to the CME FedWatch Tool. That’s up from below 10% earlier this week. The probability of rates being 25 basis points higher than they are now after the November meeting is near 40%.  

Bullish investors might have hoped for a refreshing breeze from July’s Federal Open Market Committee (FOMC) meeting minutes released yesterday. Instead, they got a slap in the face.

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” the minutes said.

Though the FOMC minutes made clear the Fed doesn’t necessarily consider itself done with its 17-month rate-hike cycle, the futures market didn’t send signals of any imminent moves. Chances of a September rate increase are up just a bit from a week ago. The probability seems more tilted toward possible Fed action during its November meeting, according to CME Group futures.

The hawkish minutes likely mean investors will place even more emphasis on Fed Chairman Jerome Powell’s speech at next week’s Jackson Hole Economic Symposium. Powell may be under pressure to demonstrate the Fed’s inflation-fighting resolve, especially after this week’s strong data on Retail Sales and Industrial Production.

Just in

Weekly Initial Jobless Claims of 239,000 compared with an upwardly revised 250,000 a week ago and the Briefing.com consensus of 240,000. The number was roughly in the middle of the recent range and probably won’t have much impact on trading.

On the other hand, the Philadelphia Fed Index jumped to 12 in August, well above consensus for a negative reading and from –13.5 the prior month. A reading above zero indicates expansion. It follows surging Industrial Production and Retail Sales earlier this week and might provide additional support for Treasury yields.

Stocks in Spotlight

Walmart beats: The giant retailer easily beat analysts’ earnings per share (EPS) consensus, while quarterly revenue narrowly exceeded Wall Street’s expectations. Retailers reporting over the last week said customers appear to be tightening their belts, so budget-cutting likely helped Walmart and its discount offerings. U.S. same-store sales rose more than 6% in the quarter. Online sales also looked hearty. The company raised its 2024 guidance and sees Q3 results roughly in line with Wall Street’s views. Shares rose close to 1% in premarket trading.

Walmart’s president and CEO Doug McMillon said in the earnings press release he’s encouraged by results in general merchandise versus expectations when the quarter began, and that Walmart is in good shape with inventory. Not long ago, inventories were a drag for many retailers.

Cisco gains: Shares of the networking technology giant turned higher in premarket trading after the company said in its earnings conference call that orders rebounded in the company’s fiscal Q4. Cisco also beat analysts’ average EPS and revenue estimates. The company’s revenue forecast for fiscal 2024, however, just missed the average Wall Street forecast. Its biggest business, secure agile networks—which includes data center switching and enterprise routing—had a solid quarter with 33% year-over-year revenue gains, Cisco said.

Inflation barometer? Deere (DE) reports tomorrow and could give investors a sense of whether moderating inflation is starting to have an impact on large manufacturing firms. During its fiscal Q2 call in May, Deere executives said they expected “price realization to moderate” in the second half of the company’s fiscal year versus the first half.

Executives also said then that the agriculture business was performing better than expected, with a 53% year-over-year revenue gain to above $7.8 billion in fiscal Q2. This reflected increased shipment volumes and, yes, “price realization” that it expects to moderate as inflation eases. Another question is whether China’s failure to recover from last year’s shutdowns had any impact on Deere’s sales of construction and farm equipment.

What to Watch

Industrial Production for July was another hot number yesterday, with an increase of 1.0% month-over-month—well above Briefing.com’s consensus estimate of 0.3% and a downwardly revised drop of 0.8% in June. This followed a better-than-expected Retail Sales report on Tuesday and could serve as further evidence of a rebounding economy.

The Conference Board’s July Leading Economic Index (LEI) is due out soon after the open today. Analysts tracked by Briefing.com expect leading indicators to slip 0.4% in July, a narrower decline than 0.7% in June. Still, a drop would mark the 16th-straight monthly decrease.

Q2 Earnings results: With 92% of S&P 500 companies reporting, 80% have beaten on EPS, but only 58% have beaten on revenues. The revenue beat rate is well under the five-year average and could reflect declining inflation that’s compressed companies’ pricing power versus a year ago.

Talking technicals: Tuesday marked the SPX’s first close below the 50-day simple moving average since March. That’s technically bearish and suggests the index might need a deeper correction before attracting interest from investors on the sidelines, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. He adds that it’s tough to persuade buyers to step in when yields on the 10-year Treasury note continue to creep toward fresh cycle highs.

CHART OF THE DAY: NET, NET. The 50-day moving average (blue line) had formed a technical net for the S&P 500 Index (SPX—candlesticks) that had held since back in March. The net broke this week not just for the SPX but for other major indexes as well as they, too, dropped under their 50-day MAs, triggering technical selling. The 100-day MA (red line) for the SPX is well below current levels at 4,288, and it also hasn’t been torn since March. Data source: S&P Dow Jones Indices. Chart source: thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Business cycle’s death exaggerated: Solid U.S. economic growth, low unemployment, and expectations for improved earnings all became talking points recently for those noting that high interest rates aren’t the speed bump they once were. Some even say the economy’s performance hints that the business cycle as we once knew it is over. After all, the Fed raised its target rate range more than 500 basis points over the last 17 months, yet unemployment remains at 50-year lows. Consumer confidence rebounded and the stock market rose 15% this year. However, the economy is far from out of the interest-rate woods. “We can’t compare decades of zero interest-rate policy to barely two years of non-zero interest-rate policy,” notes Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. “It’s way too early to say that the economy is fine with 5%+ rates, especially given real revenues are now contracting and cracks in the labor market are growing larger. Thus far, the economy has handled the rapidity of rate increases well; the next test is how it handles sustained higher rates.”

Elevator repair: The old expression about stocks climbing the stairs up and taking the elevator down comes to mind following Wall Street’s recent struggles. The SPX took seven months to rise 19% between December 31 and July 31, then plunged 4% in less than three weeks. However, it’s still up 15% year-to-date—a major improvement from the 2022 bear market and nowhere near the 10% drop that would mark a formal correction. This sell-off also removed some froth, though the forward price-earnings (P/E) multiple remains historically high.

No news is good news?: China announced this week it would no longer share data on youth unemployment, The New York Times reported. Unemployment for Chinese people aged 16–24 rose each month in 2023 to a high of 21.3% in June. While every country decides which data to share, Beijing’s decision disappointed some investors and executives, who told The New York Times this is an example of how government control of information makes it more difficult to do business in China. A Chinese government spokesman told the media that the surveys the government uses to collect the data need improvement. Earlier this year, Beijing halted the monthly release of consumer confidence readings after those numbers plummeted in 2022.

Calendar

Aug. 18: Expected earnings from Deere (DE) and Estée Lauder (EL).

Aug. 21: Expected earnings from Zoom Video (ZM).

Aug. 22: July Existing Home Sales and expected earnings from Medtronic (MDT), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Macy’s (M), and Toll Brothers (TOL).

Aug. 23: July New Home Sales, and expected earnings from Foot Locker (FL), Kohl’s (KSS), and Nvidia (NVDA).

Aug. 24: July Durable Orders and expected earnings from Dollar Tree (DLTR) and Gap (GPS).

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

Image sourced from Shutterstock

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