Positive Adjustments to GDP Could Feed the Fed Hawks

The U.S. gross domestic product was adjusted higher for the second quarter, news that could just push the Fed to a more hawkish stance.

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5 min read
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Key Takeaways

  • Strong Economic News Could Signal The Fed Has More Work To Do On Inflation

  • Yields Fly Higher on Hawkish Fed Talk 

  • Restaurants and Bars Are Performing Better Than Their Industry Group and Sector 

Shawn Cruz, Head Trading Strategist, TD Ameritrade

(Thursday Market Open) Equity index futures were pointing to a higher open but fell slightly after signs that the U.S. economy is stubbornly strong despite the Federal Reserve’s attempts to slow growth.

Potential Market Movers

Second quarter gross domestic product (GDP) was revised to -0.06%, better than the forecasted -0.08%. The adjustment appeared to be driven by an increase in consumer spending. However, the GDP Price Index was much higher at 9% compared to the estimate of 8.7%, showing that inflation grew at a faster-than-expected pace in the second quarter.

Additionally, the weekly initial jobless claims were lower than expected at 243,000 instead of the projected 253,000.

The two reports reflect a stronger economy that the Fed could see as too strong when their goal is to slow economic growth to reduce inflation. Perhaps, Fed Chairman Jerome Powell will address this in his comments on Friday. The 10-year Treasury yield (TNX) was also higher before the market open and is on track for five straight days of gains. Rising yields may be the market’s way of telling the Fed it has more work to do on inflation.

S&P 500 futures were down slightly after the report but still in positive territory ahead of the opening bell. The Cboe Market Volatility Index (VIX) rose slightly.

A number of stocks were moving in premarket action with fresh earnings reports.

  • Nvidia (NVDA) reported that it fell short of revenue expectations due to a sudden slowdown in demand for computer chips. It lowered its forward outlook causing the stock to tumble 3.4%.
  • Salesforce.com (CRM) reported better-than-expected earnings and revenues but lowered  its forward guidance. The stock was down nearly 7%.
  • Snowflake (SNOW) topped earnings and revenues and then raised its third-quarter and full-year revenue projections. SNOW shot nearly 20% higher on the news.
  • Autodesk (ADSK) also rocketed more than 18% on earnings and revenues that were much better than expected. The company said it was still on track for its fiscal 2023 goals.
  • Abercrombie & Fitch (ANF) reported a surprise loss for the quarter causing the stock to fall nearly 12%. The company cited inflation as a major reason for the miss.  
  • Burlington (BURL) beat earnings estimates despite missing on revenues but still fell more than 12% due to issues with weak consumer demand and ongoing inventory problems.
  • Dollar General (DG) beat on top- and bottom-line numbers but still fell more than 2%.
  • Dollar Tree (DLTR) topped earnings despite missing on revenues but offered lower sales forecasts that caused the stock to fall more than 7%.

After shooting up more than 20% yesterday with an announcement that it was partnering with Amazon (AMZN) to sell its exercise bikes, Peloton (PTON) slid more than 15% this morning after posting heavy losses for its second quarter.

After the market close, Workday (WDAY), Ulta Beauty (ULTA), and Gap (GPS) are scheduled to report earnings.

Tesla (TSLA) investors shouldn’t panic when they see their accounts today. The stock didn’t plunge, it just split 3-for-1. So, shareholders should have three times the number of shares at about a third of the price it closed at yesterday. 

Reviewing the Market Minutes

Stocks moved back into positive territory yesterday with the Nasdaq ($COMP), S&P 500® index (SPX), and the Dow Jones Industrial Average ($DJI) respectively rising 0.45%, 0.24%, the 0.13%. However, stocks are unlikely to move much as investors wait for the Federal Reserve’s upcoming meeting in Jackson Hole, Wyoming.

Minneapolis Fed President Neel Kashkari was able to rouse bond investors with some hawkish talk during Wednesday’s session. He said that the Fed needs to remain vigilant with its tightening efforts because there’s a fear that inflation could become unanchored. The 2-year Treasury yield rose nine basis points to 3.37% and the 10-year Treasury yield (TNX) rose five basis points to 3.11%. After yesterday’s close, the CME FedWatch Tool was calculating a 60.5% probability that the Fed will raise rates 75 basis points near the end of September.

Despite the hawkish talk and the rise in yields, the U.S. Dollar Index ($DXY) was relatively static, closing only 0.01% lower.

Among companies reporting earnings yesterday, high-end retailer Nordstrom (JWN) missed big on expectations and plunged nearly 20% on the day. JWN’s results could be significant—if the wealthy are also pinching pennies, it could lower consumption.

On the bright side, accounting software maker Intuit (INTU) topped estimates and rallied 3.6% in a sign that companies are still growing and investing in their businesses. 

CHART OF THE DAY: DINING OUT. The stock market is commonly broken down by sector, industry group, and sub-industry group. Investors often use these divisions when searching for potential investments candidates using top-down analysis. The Dow Jones U.S. Restaurants & Bars Index ($DJUSRU—candlesticks) is an example of a sub-industry group. It’s down more than 8% over the previous 12 months, but it’s doing better than the broader industry group if compared to the S&P 500 Hotels, Restaurants & Leisure Industry Index ($SP500#253010—blue) which is down 12.6%. Both groups are part of the consumer discretionary sector. The Consumer Discretionary Select Sector Index ($IXY—pink) is down nearly 9.5%. The stronger performance among restaurants and bars may signal to top-down analysts that the sub-industry group could have companies worth examining closer.  Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

FOOD FIGHT: U.S. shoppers are getting out of the house and into brick and mortar stores to do their grocery shopping. According to Gallup, in-person shopping trips increased six points to 37% compared to a year ago. However, shoppers are still using the convenience of online shopping with 28% of grocery orders being placed online which was five points higher than the previous year.

Diners are also going out more than they were last year as the number of people dining out at least once a month increased nine points from 2021. The survey was conducted in early July.

CORN POPS: Corn prices have risen recently as the USDA’s found an increase in corn crops that were rated poor or very poor and the Pro Farmer Midwest Crop Tour examined drought conditions in southeastern South Dakota and reported an increase in corn crops that were rated poor or very poor. U.S. corn futures have risen more than 17% from their July lows and recently broke above June highs.

However, corn prices are still 19% lower than their May highs when uncertainty peaked with Russia’s invasion of Ukraine.

OVERSEAS EARNINGS: According to data from Refinitiv, European Q2 earnings reports look a little different than the U.S. The STOXX Europe 600 is seeing a growth rate of 29.5%, well above the S&P 500’s gain of 8.8% for the period. However, like the U.S., European earnings are being largely driven by the energy sector with a growth rate of 205.8%. S&P 500 energy companies are on track for a growth rate of 120.2% in the second quarter.

The STOXX 600 is also seeing higher growth rates in industrials (42.6%), basic materials (40.9%), consumer cyclicals (22.7%), and health care (18.3%). The weakest earnings growth rates are in real estate (-67.8%), consumer non-cyclicals (-64.3%), and financials (-1.9%).

Notable Calendar Items

Aug 26: Fed Chairman Jerome Powell speaks at Jackson Hole, PCE price index, Michigan Consumer Sentiment, Personal Income, and earnings from Marvell Technology (MRVL) and Dell (DELL)

Aug. 29: Dallas Federal Reserve Manufacturing Index

Aug 30: CB Consumer Confidence, JOLTs Job Openings and earnings from Crowdstrike (CRWD), Hewlett Packard (HPE), Chewy (CHWY), Best Buy (BBY), and Big Lots (BIG)

Aug 31: Earnings from Polestar Automotive (PSNY), Trip.com (TCOM), Cooper (COO), and Five Below (FIVE)

Sept 1: ADP Nonfarm Employment, ISM Manufacturing PMI, and earnings from Broadcom (AVGO), Lululemon (LULU), Hormel Foods (HRL), Campbell Soup (CPB) and Toro (TTC)

Good Trading,

Shawn Cruz

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Key Takeaways

  • Strong Economic News Could Signal The Fed Has More Work To Do On Inflation

  • Yields Fly Higher on Hawkish Fed Talk 

  • Restaurants and Bars Are Performing Better Than Their Industry Group and Sector 

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