As Middle East Conflict Continues, Yields Recede, Giving Stocks A Light Tailwind

(Tuesday market open) Back from their three-day holiday weekend, U.S. Treasury note yields slipped early Tuesday, initially providing traction for stocks in premarket trading before the market flattened ahead of the open. Trepidation persists due to the Israel-Hamas conflict, but volatility pulled back from yesterday’s highs.

“It’s too soon to know the ramifications of the current war, but it serves as a reminder that we are entering an era of more geopolitical uncertainty,” says Kevin Gordon, senior investment strategist at Schwab.

In addition to news from the Middle East, investors are on the lookout for key U.S. inflation data tomorrow and Thursday, as well as bank earnings on Friday. Price action could be tentative ahead of the data. Once again, Treasury yields might help determine direction; for now they’re weaker in the aftermath of the attack. This could suggest a “flight to safety” trade in which investors embrace perceived stability in fixed income.

Chances of another rate hike by the Federal Reserve this year tumbled in the wake of the attack on Israel, suggesting that central banks might be less likely to raise rates amid geopolitical tensions. Recently, some Fed policymakers have indicated that rising Treasury yields might do some of their work for them, perhaps making additional rate hikes less likely. All this plays into Treasury market action, as well.

Morning rush

• The 10-year Treasury note yield (TNX) fell 7 basis points to 4.7%.
• The U.S. Dollar Index ($DXY) is steady at 106.04.
• Cboe Volatility Index® (VIX) futures are flat at 17.79.
• WTI Crude Oil (/CL) fell slightly to $85.93 per barrel.

Stocks rebounded vigorously Monday from early losses as investors appeared encouraged by lower global bond yields and signs that, for now, the Middle East conflict doesn’t appear to be spreading. Most sectors posted gains, and there were signs of speculative buying and short-covering. Gold, which often rises during periods of uncertainty, added 1.6% yesterday to hit one-week highs.

Monday marked the second straight session in which stocks struggled early in the day due to knee-jerk reactions to news—Friday after the September jobs report, and Monday after the outbreak of the Israel-Hamas war—only to recover as investors digested the developments. These two sessions hold a potential lesson for investors: Being first to trade isn’t always the best idea, and sometimes it can help to wait for the initial dust to settle.

Just in

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) fell to a four-month low, driven by a large drop in economic expectations. Owners remain pessimistic about future business conditions, the NFIB’s chief economist said, and inflation remains the most important problem. Sales growth has slowed. Small businesses are also worried about credit, with many of those polled saying it’s more difficult to get a loan.

What to watch

Price signals: Inflation data this week include Wednesday’s U.S. September Producer Price Index (PPI) and Thursday’s Consumer Price Index (CPI). The order is switched, as usually CPI comes out before PPI.

Here are estimates for tomorrow’s PPI data, due out at 8:30 a.m. ET, according to Trading Economics:

• September monthly PPI growth: 0.3%, versus 0.7% in August
• September monthly core PPI growth: 0.2%, versus 0.2% in August
• September annual PPI growth: 1.6%, versus 1.6% in August
• September annual core PPI growth: 2.3%, versus 2.2% in August

The Fed’s inflation goal is 2% year-over-year. Core inflation data strips out food and energy prices.

Looking ahead to Thursday, analysts expect headline and core CPI to rise 0.3% month-over-month, compared with 0.6% and 0.3%, respectively, in August. On an annual basis, analysts see headline CPI up 3.6% and core CPI up 4.1% in September. That’s down from 3.7% and 4.3% in August.

“If inflation data surprise to the upside and don’t show signs of slowing significantly, it could raise the likelihood of another rate hike this cycle,” says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “Currently, another rate hike is about a coin-flip.”

The Minutes from the last Federal Open Market Committee (FOMC) meeting are due out on Wednesday afternoon. They could provide more insight into how FOMC members came up with their latest rate projections.

Later this week, we’ll get a look at inflation and trade data from China, as well (see more below).

Stocks in spotlight

The Q3 earnings season begins this week, highlighted by a host of big bank earnings on Friday. Other expected earnings include Walgreens Boots Alliance WBA, Delta Airlines DAL, and Domino’s Pizza DPZ. The big banks Friday are JPMorgan Chase JPM, Citigroup C, and Wells Fargo WFC.

Earnings could help investors better understand how companies are functioning in the current environment, and if they’re also starting to feel the impact of slowing inflation growth and tighter financial conditions.

“This is a critical earnings season to help validate the bullish thesis and the current market multiple,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. In other words, if earnings don’t live up to Wall Street’s expectations, it could call into question the market’s current levels and ideas that we remain in a bullish uptrend.

PepsiCo kicked off earnings season this morning by beating analysts’ earnings per share and revenue estimates and raising guidance. Shares rose 2% in premarket trading. But one measure investors watch closely, volume, continued to fall, perhaps raising questions about whether the premarket gains will hold up.

Eye on the Fed

Early today, the probability that the FOMCwill raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was almost 18%, according to the CME FedWatch Tool, up from 12% yesterday. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 31%, up from 26% yesterday.

Several Fed speakers are on the calendar this week, including Fed Governor Christopher Waller giving a speech this afternoon. Fed Governor Michelle Bowman and Waller both take part in “discussions” tomorrow, according to the Fed’s calendar.

Talking technicals: “There was a pretty convincing ‘bounce’ off the 200-day Simple Moving Average on the S&P 500 Index (SPX) so it still feels like there was a bullish shift late last week,” Schwab’s Nathan Peterson says. “The Russell 2000 (RUT) was able to hold support around 1,700 as well, which is supportive of a bullish shift.”

Monday’s rebound lifted the SPX above a near-term resistance level at 4,330. The index closed just above that for the first time since September 19. The next resistance level beyond that is probably around 4,510–4,515, where the market encountered selling in early-to-mid September.

Thinking cap

Ideas to mull as you trade or invest

Reverse order: Investors tend to focus more on CPI, but having PPI come out first could be helpful from an informational standpoint if you’re an investor. It tracks trends in core Personal Consumption Expenditures (PCE) prices such as core PCE services excluding housing—a data point the Federal Reserve watches closely. Producer prices also can be a sneak preview of future consumer prices, as companies often feel inflation’s first bite at the wholesale level and then pass their costs along to customers. Core PPI, which strips out volatile food and energy and is the metric more scrutinized by the Fed, rose 0.2% month-over-month in August. That’s where September’s reading is expected to be, according to Wall Street analysts, and it’s one key to watch for any sign that rising energy prices started trickling down into wholesale costs beyond the energy space itself.

Beijing bulletin: China’s markets reopened after Golden Week and that means crucial monthly data on tap from the world’s second-largest economy. September’s China inflation and import/export numbers are due out Thursday, and they could have an impact on the dollar, U.S. Treasuries, and sectors like tech, materials, and others with exposure to China. “Holiday travel and spending are expected to see a big jump compared to low levels a year ago,” says Michelle Gibley, Schwab’s director of international research. “CPI is expected to rise 0.2% from a year ago and post the second month avoiding deflation. The data indicate China’s economy started stabilizing in August, as we’ve shown in gauges of pollution rising. This data comes from U.S. consulates.” However, the property market slowdown in China could linger, weighing on household wealth, consumer confidence, and spending. “Therefore, we might see slower growth for longer in China,” Gibley adds.

Israel and markets: The U.S. trade relationship with Israel doesn’t compare in terms of raw money with other U.S. import/export markets like China and Europe, but it’s not insignificant, either. U.S. goods and services trade with Israel totaled $50.6 billion in 2022, the U.S. government said, including $14.2 billion in exports, up 24% from 2021. Transportation, travel, and financial services dominate U.S. exports to the country. Israel also saw $42.5 billion in U.S Foreign Direct Investment (FDI) last year. FDI is a good way of measuring business links between countries and can include holding companies and manufacturing affiliates. That’s small compared to total U.S. FDI globally but represents more than half of all U.S. FDI in the region.

Calendar

Oct. 11: September PPI and September Core PPI.

Oct. 12: September CPI and Core CPI, and expected earnings from Delta (DAL), Domino’s (DPZ) and Walgreens Boots Alliance (WBA).

Oct. 13: University of Michigan Preliminary October Consumer Sentiment, and expected earnings from JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), United Health (UNH), and BlackRock (BLK), and.

Oct. 16: October Empire State Manufacturing

Oct. 17: September Retail Sales, September Industrial Production, September Capacity Utilization, and expected earnings from Lockheed Martin (LMT), Goldman Sachs (GS) Johnson & Johnson (JNJ) and United Airlines (UAL).

 

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