Powell Takes The Stage, Followed By Mickey: Fed Speakers And Disney Earnings Dominate Wednesday's Proceedings

(Wednesday market open) Today serves up remarks from Federal Reserve Chairman Jerome Powell for breakfast followed by an after-school snack of Walt Disney DIS earnings. In between, investors can munch on a host of Treasury auctions and Fed speeches. Major indexes traded close to the flat line early Wednesday ahead of all the excitement.

Powell delivers opening remarks at 9:15 a.m. ET to kick off a conference in Washington, D.C. It’s unclear if he’ll discuss policy or the economy, but he gets another bite at the apple at 2 p.m. Thursday when he participates in a panel discussion. Investors might want to stay on their toes for any potential market-moving words. His tone after last week’s Federal Open Market Committee (FOMC) meeting was generally seen as dovish, raising hopes that the Fed may be done hiking rates.

Yesterday marked the seventh straight positive session for the S&P 500® Index (SPX). That’s the longest since late 2021 and came as Treasury yields slipped. The Nasdaq (COMP) has also racked up an impressive winning streak. If you peel back the onion, though, it’s fair to say what we saw this week doesn’t resemble the broad rally that lifted stocks nearly 6% last week. Instead, just a few “mega-caps” propelled the SPX higher as close to half of the stocks in the index fell Tuesday.

Of concern, transport companies that tend to do well when the economy advances aren’t delivering. This includes railroad and package delivery firms. Energy sector stocks and small caps lagged, as well. So did rate-sensitive utilities and real estate, despite falling Treasury yields. The S&P Equal Weight Index (SPXEW), which weighs all 500 of its components equally and is much less reflective of the mega-caps, hasn’t kept up this week with the SPX.

Recent softer-than-expected U.S. economic data, the Fed’s rate pause, and weak export data from China on Tuesday all could be market-friendly from an interest rate perspective but raise worries about economic growth. This week’s plunge in crude oil prices added to the gloom.

“Crude’s weakness here is kind of surprising given the wars, so I’d say the recent downtrend in oil is related to expectations for global economic growth concerns,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Morning rush

• The 10-year Treasury note yield (TNX) inched higher to 4.58%.
• The U.S. Dollar Index ($DXY) was steady at 105.57.
• Cboe Volatility Index® (VIX) futures are at 14.73, near recent six-week lows.
• WTI Crude Oil (/CL) fell another 1.5% to three-month lows of $76.21 per barrel after an unexpectedly large weekly rise in U.S. inventories.

What to watch

Initial Weekly Jobless Claims remain near nine-month lows, but any sudden spike might play into those ideas about the economy slowing. Analysts expect tomorrow’s update to show 218,000 new claims, up from 217,000 a week earlier, according to Trading Economics. The four-week average recently stood at a relatively light 210,000.

This afternoon features a 10-year Treasury note auction, one of several auctions this week. If demand is perceived as poor, it could hurt the Treasury market and potentially drive yields higher.

Jalopy corner: The Manheim Used Vehicle Value Index fell 2.3% in October from September, the first decline in three months. Prices reversed 4% from a year ago. Used vehicle prices played a part in driving up inflation last year, and Manheim, a Cox Automotive brand, said there could be “upward price movements” as holidays approach.

In another data development, weekly mortgage applications popped 2.5%, the Mortgage Bankers Association said today, the first weekly rise in a month. Still, applications remain near 28-year lows with 30-year mortgage rates still above 7.8%.

Stocks in spotlight

Walt Disney DIS earnings take center stage this afternoon. Investors will likely track the company’s cost-cutting efforts and streaming subscribership trends  . Last time out, Disney reported a 7.4% quarterly drop in Disney+ subscribers to 146.1 million. Also listen for possible updates on travel demand heading into holiday season, as Disney’s outlook might have a ripple effect on airline, hotel, and travel website stocks. Theme parks generally were strong earlier this year.

Streaming and the Disney cable network, which includes ESPN, are prime areas of focus, especially after Disney said last week it will complete the purchase of Hulu from Comcast CMCSA. Disney also is considering bringing in a new partner for ESPN and recently began reporting financial details for the unit, Barron’s reports.

Will the house win? MGM Resorts MGM reports after the close today and Wynn Resorts WYNN follows tomorrow. Those, combined with Disney, put entertainment in the spotlight at a time of confusion about consumer trends. On the one hand, it’s unclear if consumer spending can continue to drive economic growth as savings dwindle and jobs growth slows. Still, many service providers like restaurants and hotels report no letup in demand. Casinos and Disney won’t be the final word on Q4 economic potential, but together with retailers reporting next week, they could help provide color.

With more than 80% of S&P earnings reported, most companies are beating analysts’ earnings per share (EPS) estimates but roughly half have missed Wall Street’s revenue expectations. Pricing power appears to be diminished, weighing on margins for many firms. The average analyst Q4 EPS growth estimate of 3.9% is nearly flat to Q3 expected growth, and down significantly from the Q4 estimate of 8.1% on September 30, research firm FactSet said this week.

Eye on the Fed

Early today, futures trading pegged chances at 90% of the FOMC holding its benchmark funds rate steady following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 83%.  

End of an era? The Bank of Japan (BoJ) is the last major central bank to keep monetary policy loose, but that may be changing, and the ripple effect could reach U.S. shores. Policy changes at the BoJ could potentially reverse capital flows, shift global yields higher, contribute to a stronger yen, and increase the value of Japanese stocks, says Jeffrey Kleintop, chief global investment strategist at Schwab. Get more of his thoughts on the matter in his latest post.

CHART OF THE DAY: TAILING OFF. Dow Jones Transports ($DJT—candlesticks) closely tracked the Dow Jones Industrial Average ($DJI—purple line) last week, but the two began to diverge this week as transports lost steam. This divergence could be worth watching because transports are often seen as a helpful barometer of the broader economy. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Deeper dive on jobs: Lower-than-expected jobs growth was just one troubling aspect of last week’s U.S. Nonfarm Payrolls report. As a reminder, it’s composed of two surveys—one of businesses and the other of households. The household data showed a steep drop in job market participation and a rise in unemployment. Approximately 400,000 more Americans reported not being in the labor force in October compared with September, and the number reporting they were employed fell more than 300,000. Household data have weakened since April even as the business survey continued to show strong monthly jobs growth. Historically, such a divergence has signaled the labor cycle heading into recession, but, as Schwab Senior Investment Strategist Kevin Gordon reminds us, “We’re not in normal times.” That means it’s important to look at the broader picture, which is still one of rising nonfarm payrolls. “That said, the fact that the labor force contracted (per the household survey) and the unemployment rate moved higher means that job losses have been happening for the so-called wrong reasons, i.e., not because more labor supply is coming back online,” Gordon adds.

Going the wrong way: As Schwab’s Gordon notes, a growing labor supply can sometimes mean a higher unemployment rate as more people seek work. In a case like that, the rising unemployment rate can be a positive sign, indicating that people have re-entered the labor force because they’re more optimistic about getting a job, but haven’t found one yet. October’s report appeared to show the opposite. Instead of unemployment’s rise reflecting more people participating, people are leaving the labor force, perhaps a sign of softening demand from businesses. A recent drop in the “quit” rate, also tracked by the government, could be another sign of tightening labor needs. More people tend to leave jobs voluntarily when they think they can get a new one quickly.

Fill ’er up: Crude oil’s plunge from above $90 per barrel last month to below $78 Tuesday apparently caught Washington, D.C.’s attention. The Department of Energy announced yesterday it plans to buy three million barrels for the Strategic Petroleum Reserve (SPR), which remains at four-decade lows after the Biden administration tapped it last year to stabilize the market following Russia’s invasion of Ukraine. Government buying could keep prices from falling further. SPR reserves rose in July and August, the first string of two monthly gains since mid-2020, but reserves remain less than half of their peak levels, the government says. In one bearish sign, front-month WTI futures fell below their 200-day simple moving average (SMA) near $78 Tuesday for the first time since late July.

Calendar

Nov. 9: Expected earnings from Illumina (ILMN), Wynn Resorts, (WYNN), and Becton Dickinson (BDX).

Nov. 10: University of Michigan Preliminary November Consumer Sentiment.

Nov. 13: Expected earnings from Tyson (TSN).

Nov. 14: October Consumer Price Index (CPI) and expected earnings from Home Depot (HD).

Nov. 15: October Producer Price Index (PPI), October Retail Sales, November Empire State Manufacturing, and expected earnings from Target (TGT) and Cisco (CSCO).

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