Bi-Coastal: Inflation Data Loom, but Week's Focus Could Turn to D.C. Shutdown Debate, Biden/Xi in San Fran

(Monday market open) Wall Street kicks off its final preholiday season week up more than 7% from late-October lows yet struggling for traction early Monday. While Friday’s sparkling rally tied a nice ribbon around the box, inflation and retail sales due out in coming days could help make or break hopes for a third straight week of gains.

At the same time, Washington, D.C. looms large this week as lawmakers struggle against a Friday deadline to keep the government open. Headlines from the capital could add volatility to the market in coming days.

Info tech, communication services, and consumer discretionary led the sector scoreboard last week, but small-caps struggled. The Russell 2000 (RUT) fell 3.1%, taking some bloom off the rose.

Another disappointment came after markets closed Friday when Moody’s lowered its outlook on the U.S. credit rating to “negative” from “stable.” Earlier this year, Fitch, another ratings agency, downgraded the U.S. government’s top credit rating and investors rushed into perceived “safe haven” investments, including–somewhat ironically, considering the downgrade–U.S. government bonds.

Speaking of U.S. bonds, a disappointing 30-year Treasury bond auction last week briefly sent stocks into a tailspin before Friday’s recovery. There’s concern about excess supply and weak demand as Washington borrows massive amounts to fund its needs. When demand weakens, yields tend to rise, often causing pain on Wall Street.

“Yields will be in the driver’s seat for the time being, in terms of the stock market’s direction,” says Kevin Gordon, senior investment strategist at Schwab.

Morning rush

• The 10-year Treasury note yield (TNX) ticked up 2 basis points to 4.64%.
• The U.S. Dollar Index ($DXY) is steady at 105.9.
• Cboe Volatility Index® (VIX) futures rose to 15.03 but remain near seven-week lows.
• WTI Crude Oil (/CL) traded up and down overnight but recently rose 0.3% to $77.39 per barrel.

Stocks advanced broadly Friday even as the benchmark 10-year Treasury note yield remained above 4.6%. That’s down from recent intraday highs above 5% but above lows seen early this month. The S&P 500® Index (SPX) clawed back above key technical resistance at 4,400 on Friday and closed near intraday highs, a positive technical development that didn’t appear to spill over into Monday’s premarket trading.

What to watch

The week ahead: Inflation takes center stage starting at 8:30 a.m. ET Tuesday with the October Consumer Price Index (CPI), followed Wednesday morning by the October Producer Price Index (PPI) report and Retail Sales.

Here are the analysts’ consensus estimates for CPI from Trading Economics:

• October CPI monthly: 0.1%, versus 0.4% in September
• October CPI annually: 3.3%, versus 3.7% in September
• October core CPI monthly: 0.3%, versus 0.3% in September
• October core CPI annually: 4.1%, versus 4.1% in September

If the core annual reading does rise 4.1%, that would represent a slight brake on downward progress, though September’s growth was the lowest in two years. Stubborn inflation for shelter accounted for much of September’s gains. A stall in the downtrend, if it occurs, would be the first since an uptick in March from February that raised eyebrows but turned out to be ephemeral. Falling energy prices in October might ease headline inflation but will likely have less of an effect on core CPI, which strips out food and energy.

Some analysts like to check “all items less shelter,” which strips shelter costs from CPI. It rose just 2% year-over-year in September and is worth looking at for October trends. The cost of rent fell more than 2% in September from August, the largest monthly price drop in a year, according to RentGroup, Inc.

For Retail Sales, analysts build in a small monthly decline of 0.1% after 0.7% growth in September, according to Trading Economics. Early consensus for core monthly PPI growth is 0.2%, down from September’s 0.3%.

Washington, D.C., takes the spotlight later this week as Friday’s deadline approaches to prevent a government shutdown. Before that, on Wednesday, President Biden is expected to meet with Chinese President Xi Jinping, media reports said, with possible implications for the semiconductor market as the two countries tangle over U.S. export limitations.

It’s an important week for data out of Japan, and it began with a sharp 0.4% decline in the monthly Producer Price Index (PPI) when analysts had expected no change, according to Briefing.com. The Bank of Japan (BoJ) kept monetary policy loose for years even as other central banks tightened, but recently ended its efforts to cap the 10-year yield at 1% after inflation exceeded the BoJ’s 2% target for the past 18 months.

Stocks in spotlight

Boxed in: A host of major retailers report this week and could provide insight on consumer trends. Names on deck include Home Depot (HD), Target (TGT), Macy’s (M), Gap (GPS), and Walmart (WMT). Cisco (CSCO), which isn’t a retailer, of course, is also due to report and can be a good barometer of global tech demand.

Home Depot kicks things off early tomorrow, followed by Target on Wednesday and Walmart on Thursday. Last time out, Home Depot disappointed Wall Street with a cautious forecast, saying customers bought fewer big-ticket items. Some of that reflects purchases getting pulled forward during the pandemic when many people embarked on major home projects. Now, interest rates appear to be a barrier. Large home projects are often paid for by credit, but with rates near 16-year highs some of that demand might be fading.

Sliding demand was a factor for chipmakers earlier this year, but signs of improvement came Friday when Taiwan Semiconductor Manufacturing (TSM) posted a nearly 35% rise in monthly revenue. Strength from the world’s largest dedicated independent semiconductor foundry suggests possible improved chip demand and perhaps a more robust global business picture, though it’s just one month and one company. The Philadelphia Semiconductor Index (SOX) jumped 4% Friday to its highest level in more than two months.

Boeing climbs: Shares of Boeing (BA) enjoyed a tailwind in premarket trading after Bloomberg reported China may soon announce the purchase of the 737 Max for the first time since 2018. In addition, MarketWatch reported a “flurry of new deals” for Boeing at the Dubai Air Show.

Eye on the Fed

Early today, futures trading pegged chances at 85% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the December 12–13 meeting, according to the CME FedWatch Tool. That’s down from 90% at the end of last week. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 73%, down from 77% on Friday.

Thinking cap

Ideas to mull as you trade or invest

Halftime show: Almost midway through Q4, debate swirls about the state of the U.S. economy. Aggressive fiscal policy and postpandemic demand for entertainment and restaurants likely kept U.S. consumers and consumer-oriented businesses relatively healthy the first three quarters of 2023 despite rising borrowing costs. Can this vigor last? The jobs picture likely plays a big part. “Data has pointed to a gradual slowdown in the labor market,” says Joe Mazzola, director of trading and education at Schwab. “That is bullish for bonds, and possibly for equities.” A slower labor market that leads to tougher times for small businesses and consumers might normally be negative for stocks, but with so much focus on rates and inflation, the market arguably remains in a “bad news is good news” regime.

Talking technicals: Friday’s rally arguably put the SPX into a more bullish place on the charts as it closed above key technical resistance around 4,400. Even before that, it had made strides by emerging from a downward pattern on the charts that extended back to August and piercing the 50-day simple moving average (SMA). “The SPX consolidating above the 50-day SMA this week is an incremental bullish development,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “Additionally, if we can close above 4,400, this would help validate recent bullish momentum, at least from a technical perspective.”

Myth-busting: The so-called “Santa Claus rally” and “January effect” don’t always occur, despite popular myths. Another piece of supposed Wall Street wisdom suggests alternative energy stocks tend to thrive under Democratic presidents. This dates to the Obama administration’s support of solar and wind power firms. Those companies are struggling, however, under President Biden. One large exchange-traded fund (ETF) tracking alternative energy is down 30% this year and off more than 50% since January 2021, when Biden took office, The New York Times reports. This arguably isn’t the president’s fault. It reflects rising interest rates, increased costs, and declining customer enthusiasm, according to the newspaper. Meanwhile, U.S. crude oil production recently posted record highs and the industry saw two huge mergers as firms sought to increase their oil reserves. You’ll likely hear a lot about the Santa Claus Rally and the January Effect in coming weeks. Take all that with a grain of salt and remember what Abraham Lincoln said that can be applied to investing: “Give me six hours to chop down a tree, and I will spend the first four sharpening the ax.”

Calendar.

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).

Nov. 16: October Industrial Production and October Capacity Utilization, and expected earnings from Walmart (WMT), Macy’s (M), Applied Materials (AMAT), and Gap (GPS).

Nov. 17: October Housing Starts and Building Permits.

Nov. 20: October Leading Indicators and expected earnings from Zoom (ZM).