Debt Ceiling, Deposits and Disney Set Stage for a Wobbly Open, But Positive PPI Numbers Could Offer a Tailwind

Regional banking stocks are back in the news today following a deposit decline at PacWest, which weighed on major indexes early Thursday. However, signs of progress on the inflation front led to hopes for a Fed pause and may support the market on any shifts lower.
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Key Takeaways

  • April producer prices rose less than expected, providing more hopes of slower inflation

  • Regional bank jitters return following drop in deposits at PacWest

  • Market now pricing in nearly 100% odds that Fed will pause hike at next meeting

Alex Coffey, Senior Trading Strategist, TD Ameritrade

(Thursday market open) ) After a few days out of the spotlight, regional banks popped back into the news this morning as shares of PacWest (PACW) slid 20% following a sharp loss in deposits. This came as a reminder that we’re not out of the woods yet on issues with smaller banks.

Other regional banking shares fell in sympathy ahead of the opening bell, and major indexes also came under pressure. While a deposit decline at one bank doesn’t necessarily signal broader problems, the market is hypersensitive to anything affecting this sector.

Another delicate issue is the debt ceiling, which takes center stage Friday for the second time this week when officials in Washington, D.C., meet again for high-level discussions. There were no signs of progress after Tuesday’s meeting, but stock market volatility doesn’t reflect much strain yet. That could occur if we approach the June 1 ceiling deadline with no deal.

Also dragging the market this morning is weakness in Disney (DIS) shares after the entertainment company reported quarterly results that reflected additional subscriber losses for its TV streaming platform.

In the latest data news, April producer prices rose 0.2%, according to the Producer Price Index (PPI) just released this morning. That’s below Wall Street’s expectation of 0.3% but up from a negative reading in March. Core PPI rose 0.2% as well. Major indexes bounced back into green territory after the data.

Morning rush

  • The 10-year Treasury note yield (TNX) fell 6 basis points to 3.36% and is back toward recent lows. The yield weakness accelerated following in-line PPI data.
  • The U.S. Dollar Index ($DXY) inched up to 101.8.
  • The Cboe Volatility Index® (VIX) futures climbed to 17.34 but remain well under last week’s peaks.
  • WTI Crude Oil (/CL) dipped to $72.11 per barrel after a slight rally earlier this week.

The Fed’s hawkish policy could be one reason crude prices remain relatively low. Higher rates often support the U.S. dollar, and a strong dollar tends to depress crude. The dollar is well below last year’s highs but remains relatively strong, historically, versus other currencies.

Just In

Producer prices rose 0.2% in April after falling a revised 0.4% in March, but the sequential increase largely reflects higher energy prices. Core PPI (which strips out food and energy) also rose 0.2%, up from a flat reading the prior month but below the 0.3% average analyst estimate. These readings were in line with market thinking and could reinforce ideas of a Federal Reserve pause.

Also this morning, weekly jobless claims jumped to 264,000—the highest reading since October 2021 and another sign that the labor market may be slowing.

In overseas news, the Bank of England (BoE) raised rates 25 basis points, in line with analysts’ expectations. Inflation there remains in the double digits. In happier tidings, the BoE said it’s been surprised at the economy’s resilience and raised its projections from contraction to growth.

JPMorgan Chase (JPM) CEO Jamie Dimon, in an interview with Bloomberg, said he would “happily take a mild recession right now.” He believes commercial real estate and office loans are an issue and may take a few banks down.

Talking technicals: Major indexes are breathing thin air in terms of their long-term ranges. From a technical perspective, the S&P 500® index (SPX) hasn’t successfully clawed above 4,200 since last summer despite numerous attempts. Support could be near 4,050, an area near the 50-day moving average that the SPX bounced off last week.

Stocks in the Spotlight

No enchanted evening for Disney: We’ve been hearing for a while that people want experiences outside the home as the pandemic recedes. Disney’s (DIS) latest quarterly report released after yesterday’s close reflects that, with theme park revenue taking off like a flying elephant while streaming video keeps losing ground.

Returning DIS CEO Bob Iger didn’t exactly get a warm welcome from the Disney+ streaming platform, which continues to bleed subscribers. Four million more abandoned the service during the most recent quarter. Still, DIS described things positively by noting the unit’s narrowing losses, which came thanks in part to higher prices paid by North American subscribers. In a press release, DIS noted “the improved financial performance of our streaming business.”

Theme park reopenings in Asia helped ignite a 17% gain in the Parks and Experiences category, DIS said. Overall, quarterly revenue and earnings met Wall Street’s expectations, but the focus on streaming subscriber losses seemed to disenchant investors. Shares fell 5% in premarket trading.

And beyond…: Shares of Trade Desk (TTD) bounced in premarket trading after the advertising technology company beat Wall Street’s earnings expectations. Also, Beyond Meat (BYND) shares sizzled ahead of the open, up 8% after an earnings beat. The stock is at just a fraction of its 2019 highs, recorded back when BYND was a hot initial public offering (IPO).

As earnings season winds down, the market’s focus will likely shift back to bigger-picture subjects, such as inflation, the economy, and the path of Fed policy.

Eye on the Fed

The probability of a June rate pause stands at 98%, according to the CME FedWatch Tool. That’s up from about 90% a week ago. The tool also prices in about a 99% chance that the Federal Reserve will cut rates by the end of this year. Fed Governor Christopher Waller speaks at 10:30 a.m. ET today.

Yesterday’s April Consumer Price Index (CPI) rose 0.4% month over month and 4.9% from a year ago, the smallest annual increase since April 2021. This got a generally warm reception on Wall Street, helping send the tech-heavy Nasdaq 100® (NDX) index up more than 1% Wednesday. Tech is considered among the more rate-sensitive sectors and might benefit from a Fed rate pause.

However, 4.9% inflation remains well above the Fed’s 2% goal, and Fed Chairman Jerome Powell made it clear this month in his post-Federal Open Market Committee (FOMC) press conference that the Fed isn’t entertaining ideas of adjusting that goal upward, as some economists have suggested.

What to Watch

Remember to listen closely for reactions to PPI this week from Waller and other Fed speakers. There are signs already from recent data—like April wage growth—that the Fed is having less progress against rising prices.

There’s one more number on the way for data-weary investors, and that’s tomorrow’s preliminary May University of Michigan Consumer Sentiment reading. Sentiment’s been in the dumps for months, and analysts don’t expect a major surge of enthusiasm. The consensus is 62.9 for headline sentiment, said, down from 63.5 in April and from highs above 110 back in the 2017-2019 period. Investors will likely pay close attention to the report’s year-ahead inflation expectations, which held steady at 4.6% in April’s final report. An uptick there might lower investor sentiment.

CHART OF THE DAY: VOLATILITY STALLS…FOR NOW. Despite hand-wringing over the debt ceiling, volatility (VIX-candlesticks) remains not far off its 2023 lows and dipped below 17 yesterday. Gold (/GC-purple line), which, if it rallies, can sometimes indicate the kind of economic jitters associated with such things as possible default, continues to trade above $2,000 an ounce and not far from record highs. The gap seems likely to narrow, but will it be gold receding or VIX rising? Data sources: CME Group, Cboe. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Miles of aisles: It’s almost time for big box stores and other retailers to start opening their books. Home Depot (HD) is expected to kick things off next Tuesday, followed by Target (TGT) on Wednesday and Walmart (WMT) next Thursday. Lowe’s (LOW) and Best Buy (BBY) approach the register the following week. Judging by how earnings season’s gone so far, it seems fair to expect solid results from many of the major retailers. Consumers spent freely during much of Q1, though the government did record softness in Retail Sales data during February and March after a robust January. Those numbers, however, included automobile sales, which looked relatively underpowered during the quarter and lowered the overall sales number. With autos excluded, retail sales generally seemed healthy.

Earnings hint at resilience: What’s behind claims of consumer health? Recent earnings reports, for the most part. Visa (V), for instance, said revenues rose 11% in its most recent quarter, with payments volume up 10%. The fact that volume nearly kept up with actual revenue suggests that the growth didn’t simply reflect price inflation. Low unemployment (near 3.5% much of Q1) possibly kept customers coming through retailers’ doors. Also consider reports from large consumer products companies like Coca-Cola (KO) and McDonald’s (MCD) indicating that customers kept buying despite higher product prices. And DIS just yesterday reported solid gains in its theme park business. Lots to unpack here, and once we do, we’ll have a better sense of how consumers held up amid inflation and high rates.

Bull still sleeping: The SPX has risen 18% since its 2022 low below 3,500 posted back in mid-October. That’s very close to the 20% needed to run up a new bull market flag, but not quite, research firm CFRA pointed out in a note to investors this week. However, CFRA expects the SPX to continue trading in its long-term range between 3,800 and 4,200 during what traditionally are seasonally soft months between now and October. On a positive note, 10 of the 11 S&P sectors have posted double-digit gains since the October low—a sign of at least some market breadth. That said, the two leading sectors over that period are information technology and communication services, which include the dominant “mega-cap” tech stocks that have the most influence on the SPX’s weighting. The small-cap Russell 2000® (RUT) index is not a participant in the rally, by the way, down 6% over the last six months. This could reflect high interest rates, credit tightening, and concerns about a possible U.S. recession, all of which presumably would have a deeper effect on smaller companies that depend on financing, and which are generally more exposed to domestic economic trends.


May 12: Preliminary May University of Michigan Consumer Sentiment

May 15: May Empire State Manufacturing

May 16: April Retail Sales and expected earnings from Home Depot (HD).

May 17: April Housing Starts and Building Permits, and expected earnings from Target (TGT).

Happy trading,                                  



Key Takeaways

  • April producer prices rose less than expected, providing more hopes of slower inflation

  • Regional bank jitters return following drop in deposits at PacWest

  • Market now pricing in nearly 100% odds that Fed will pause hike at next meeting

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