Foot on the Brake: Short Week Begins with Dollar, Yields on Rise, Pressuring Major Indexes

Soft data from Europe and China helped push U.S. currency and yields higher in the early going, weighing on stocks. U.S. factory orders later this morning are expected to be on the lighter side, while the Fed's Beige Book and ISM Services data loom tomorrow.
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Key Takeaways

  • Major indexes under early pressure as holiday-shortened week gets underway

  • Eyes on crude oil as prices hover just below recent 2023 highs

  • Treasury yields tick up again and appear likely to remain a major influence on stocks

(Tuesday market open) Investors return from a long weekend to a short week. And unlike recent weeks, this one isn’t jammed with key data, influential earnings, or speeches by the Federal Reserve chairman. There just isn’t that much on the calendar the next few days.

That said, crude oil prices may be a bearish force in the days ahead. They rose for seven straight sessions, and are near their 2023 peak above $85 per barrel for the front-month U.S. futures contract. Last Friday’s jobs report looked mostly constructive from an interest-rate standpoint, but a rally Friday in U.S. Treasury note yields surprised many investors and could reflect worries over rising crude prices and their potential impact on inflation.

Friday’s rising yields and quick retreat from the early rally may be evidence that despite what some analysts called “Goldilocks” data, there’s a contingent of investors who remain worried that firmness in the economy will keep the Fed on call. Yields are up again early Tuesday.

Also, September is historically the worst month of the year, averaging a 1.1% drop for the S&P 500 Index between 1928 and 2022, according to Dow Jones market data. That said, hopes of an improving earnings picture in the quarters ahead could keep some optimism in the room.

Morning rush

  • The 10-year Treasury note yield (TNX) rose 5 basis points to 4.22%.
  • The U.S. Dollar Index ($DXY) jumped to a fresh four-month high of 104.72, possibly reflecting weak overseas data.
  • Cboe Volatility Index® (VIX) futures ticked higher to 14.18.
  • WTI Crude Oil (/CL) futures slipped slightly to $85.44 per barrel.

Just in

Green shoots: The dollar index is on a roll this morning, reaching a nearly four-month high and knocking on the door of 105 for the first time since March. Soft data from Europe and China early Tuesday likely plays into the greenback’s rally, as China’s Caixin Services PMI fell in August to its lowest level of the year and Eurozone services PMI indicated continued contraction. Strength in the dollar, if it continues, would likely get a bearish read from U.S. stock market investors, as a rising dollar makes U.S. products more expensive overseas. The dollar has traded in a narrow range between 100 and 105 all year.

While a strong dollar may be a speed bump particularly for sectors like tech, materials, and industrials with heavy overseas exposure, its rally also points to investor perceptions of a diverging global growth story with the U.S. economy looking resilient and others losing steam.

What to watch

Month ahead: Investors have new worries as the month begins, including a possible government shutdown, the conclusion of back-to-school spending, the pending resumption of student loan payments, and crude oil prices near 2023 highs. All of these could clip consumer spending, which helped drive the rally in June and July.

Stocks could also see their upside capped by valuations, as the forward price-earnings ratio for the S&P 500® Index (SPX) hovered near 20 by the end of last week. That’s historically high and up from around 17 at the start of the year. When you combine high valuations with Treasury yields at current levels, it may get a bit tougher for stocks to build on recent gains. The last three Septembers saw sharp losses for major indexes, so we’ll see if Wall Street can break this pattern.

Data rehash: Looking back, the August U.S. Institute for Supply Management (ISM) Manufacturing PMI released Friday continued the string of weak U.S. manufacturing going for a tenth straight month. Construction spending did rise more than analysts had expected in July, however, according to additional data released Friday.

Barrel scraping: Factory Orders today looks like the most prominent U.S. data due, while the Fed’s Wednesday Beige Book release and the ISM Non-Manufacturing Index (also due Wednesday) might be worth a look. Keep an eye out for Chinese trade data this week, as well.

Consensus for Factory Orders, due at 10 a.m. ET, is for a July retreat of 2.4%, according to The key part of the report to check is factory orders excluding transportation. That metric rose just 0.2% in June after falling 0.4% in May. Business spending was light in June, with just a 0.1% rise in new orders for nondefense capital goods excluding aircraft.

The Q2 earnings season is largely complete, but a few more company results will trickle out this week. Some include GitLab Inc. (GTLB) and Zscaler Inc. (ZS) on Tuesday and American Eagle Outfitters (AEO) and Dave & Buster’s Entertainment (PLAY) on Wednesday. Kroger Co. (KR), one of the country’s biggest supermarket chains, is expected to report results Friday.

Northern lights: A little closer to home, the Bank of Canada meets this week. Overnight rates in Canada now stand at 5% for the first time in 22 years; analysts expect a pause Thursday following a surprise Q2 contraction in Canada’s economy that economists blamed in part on drought and wildfires, Bloomberg reported.

Eye on the Fed

As of this morning, the probability that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will maintain current rates after its September 19–20 meeting was 93%, according to the CME FedWatch Tool. There’s a slightly higher than 40% chance built into futures trading of a rate hike at the November meeting.

Cleveland Fed President Loretta Mester—known as an inflation hawk—spoke Friday shortly after the jobs report and said the jobs market remains strong but inflation is “too high.” However, she didn’t say specifically what she thinks the FOMC should do at its meeting September 19–20.

Collin Martin, a fixed income strategist at the Schwab Center for Financial Research, says the employment report was benign enough to make it highly likely the FOMC will hold interest rates unchanged at its next policy meeting. The report “doesn’t rule out another rate hike later in the year,” Collin says. “This should mean that the Fed can stay on hold at least until November.”

The old week ended with investors dialing in around a 40% probability of a rate cut at the FOMC’s meeting next March, six months from now. The probability rises above 50% by the May meeting.

CHART OF THE DAY: WINDS OF CHANGE. WTI crude oil (/CL—purple line) had come off recent highs in late August as the 10-year Treasury yield (TNX—candlesticks) posted 15-year highs. The drop in 10-year yields early last week seemed to help fuel a rally in crude, though there’s far more to the story, including tight supplies. Still, falling yields often give crude and other commodities a boost, so that could be part of what we’re seeing. Data sources: CME Group, Cboe. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Recession barometer: Keep an eye on small-cap stocks and the dollar. Smaller companies tend to do more of their business domestically, which is why they’re sometimes seen as a canary in the coalmine for U.S economic growth. Recent data, like softer-than-expected U.S. job openings and Gross Domestic Product (GDP), could feed into ideas of an economic pullback—but if the dollar strengthens, it could signal a firmer U.S. economy and better small-cap stock performance. Signs last week were more negative than positive; the Russell 2000 (RUT), which tracks smaller stocks, was the only major U.S. stock index to not climb significantly back above its 50-day moving average. Worries about a potential government shutdown this fall could also be a source of pressure as September rolls along, because the government is a big customer for many smaller businesses.

Freight fraught: Investors may want to keep an eye on the trucking, package delivery, and rail industries in coming months. “Freight finding its footing is definitely key as we close out the year,” notes Schwab Senior Investment Strategist Kevin Gordon. “Freight volumes have been negative year-over-year for six out of the past seven months.” Lower transport volumes sometimes reflect economic struggles, and current high interest rates remain a possible threat to consumer spending. Major retailers have already issued conservative holiday-season guidance, suggesting goods demand will stay soft through the end of the year. That’s why some economists continue to worry that the Fed will hike the economy into a recession.

Inversion narrows, but why? The 2-year Treasury note yield is still higher than the 10-year, but the gap narrowed on Friday when the 10-year ran up sharp gains versus the 2-year. Relative weakness in the Fed-sensitive 2-year yield might have reflected less fear of a rate hike, but the big jump in the 10-year yield defied easy explanation. A variety of factors could be at play, including recent auctions of Treasury notes that flooded the market with supply. Investors may also have decided to jump out of longer-term Treasury notes and back into stocks after what looked like a relatively bullish jobs report. Also, the labor market still looks firm by historic standards. Jobs growth pre-pandemic had averaged only around 160,000 a month in 2019, and 187,000 in August was well above that. Unemployment remains below 4%. Strong demand for labor is fine, as long as the supply of workers is there. Otherwise, there’s still inflation risk, perhaps another reason why the 10-year yield rose.


Sept. 5: July Factory Orders and expected earnings from GitLab Inc. (GTLB) and Zscaler Inc. (ZS).

Sept. 6: MBA Mortgage Applications Index, Trade Balance for July, Institute for Supply Management Non-Manufacturing Index for August, Fed’s Beige Book.

Sept. 7: Nonfarm Productivity and Unit Labor Costs for Q2.

Sept. 8: July Consumer Credit and expected earnings from Kroger (KR).

Sept. 11: No major earnings or economic data.


Key Takeaways

  • Major indexes under early pressure as holiday-shortened week gets underway

  • Eyes on crude oil as prices hover just below recent 2023 highs

  • Treasury yields tick up again and appear likely to remain a major influence on stocks

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