No Clear Answer Yet on Taper Timing Ahead of Powell Speech, but Some Hints

GDP data match analyst estimates and jobless claims slightly rise. All eyes on the Fed as the Jackson Hole symposium kicks off tomorrow morning.

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Key Takeaways

  • Strong earnings continue, this time from Salesforce as company raises guidance
  • Dell, Peloton scheduled to report after close, but Fed Powell speech tomorrow is key focus

  • Second-quarter GDP is 6.6%, in line with analysts’ estimates, while jobless claims rise

(Thursday Market Open) Intrigue is growing ahead of tomorrow’s speech by Fed Chairman Jerome Powell.

The market seems convinced there will be a taper of the Fed’s $120 billion a month bond purchase program at some point, but the question is whether Powell gives any definite timing in his speech. Considering the virus caseload keeps rising due to the Delta variant, his speech tomorrow could be a bit of a letdown after all the hype if he just promises to keep checking the data and see what happens. It feels like Wall Street wants more clarity.

There was some intrigue just before the open after Kansas City Fed President Esther George told CNBC, “I would be ready to talk about taper sooner rather than later.” St. Louis Fed President James Bullard also sounded hawkish. Both of them are saying it may be about time to taper. You just wonder how much of this is a preview of Powell’s speech and how much it’s just their own opinions. But it is kind of interesting to hear the day before the speech.

We’ll talk a bit more about Jackson Hole lower down. Meanwhile, this rally really has been amazing, with the S&P 500 Index (SPX) recently posting its 50th record high of the year. We’ll see if it can make a run for the all-time annual record, which is more than 70.

That being said, we’ve seen light volume as people await the Powell speech. It feels unlikely that volume will increase much from here before Friday, and in fact it might decrease. So consider how you size your trades going into that. Sometimes when volume is light the way it has been, that can signal a lack of conviction, perhaps leading to skepticism about how much this rally might actually matter.

On the corporate front today, we’re scheduled to get earnings from Dell (DELL) and Peloton (PTON) after the close. There’s also some positive action in shares of Salesforce (CRM) this morning after the company reported solid results late yesterday. The company topped analysts’ expectations and raised guidance. It’s a familiar story in an earnings period that’s seen so many S&P 500 components surprise to the upside.

Looking at data, there’s not much drama in this morning’s numbers. The government’s second estimate for Q2 gross domestic product (GDP) growth of 6.6% matched the average analyst estimate. Jobless claims of 353,000 were in line with estimates, but up slightly.

“Cyclicals” Keep Pushing the Gas Pedal

As the slow, light-volume grind higher continued yesterday, once again it was the so-called “cyclical” sectors like Energy and Financials leading the way.

Both those sectors have been keying off some fundamental touchpoints. With Energy, it’s the rise of crude back to above $67 a barrel after its three-month low down near $62 last week (crude is down slightly this morning). With Financials, it’s the strength of the 10-year Treasury yield, now above 1.34% after falling to 1.22% a week ago (see chart below). The yield kept climbing this morning, reaching nearly 1.36%. Rising yields could provide a check on “growth” stocks like the Tech sector if they keep going up, but may be supportive for Financials.

We’ve seen both crude and yields fake investors out plenty of times here in the Covid era, making people think strength could last only to lose steam on the way up. That could happen again. For crude, $70 a barrel is where some challenges might start from a technical perspective. The same goes for yields near 1.4%. Both those areas are where they washed out on previous rallies.

For now, however, it feels like both metrics tell a story of economic optimism that goes beyond just Financials and Energy. If yields and crude are climbing, that could speak to rising demand just as we prepare to hear from the Fed at its Jackson Hole symposium over the next day or two.

Of course, the Fed could have hawkish things to say about a possible taper, but you don’t taper economic stimulus unless the economy has enough natural stimulus to maintain itself. That’s why a taper—if it comes—could be viewed as positive.

Will Powell’s Speech Provide Taper Info? A Firm “Maybe”

The overriding theme remains what’s the Fed going to do? There’s so much expectation out there, but the Fed might not actually do much on Friday. Basically, the Fed has been buying $120 billion a month in bonds to help prop up the economy and keep borrowing costs low, and Wall Street wants to know when the Fed is going to start cutting back on that.

Powell’s speech is at 10 a.m. EDT tomorrow, but the Fed sometimes releases a copy of Powell’s remarks just before he delivers them, so think about being on the lookout anytime after 9 a.m. Friday in case people see the wording and start trading on it.

If the Fed doesn’t give us more information on a possible taper or its timing, the data from here on could start to gain more significance as people continue trying to figure out what the Fed might be thinking based on a close look at the numbers. Even data that doesn’t historically have a lot of influence could start having more of an impact on day-to-day trading as everything gets magnified amid concerns about Fed policy.

Remember that Powell isn’t the only one speaking at Jackson Hole (virtually). Other Fed leaders and officials from overseas central banks also get their turns at the mic, so it’s possible the next day or two could see some intraday market volatility based on anything coming out of the proceedings.

2021 Retail Earnings, but Comparisons to 2019

Other than the Fed, retail earnings are the big story this week. It’s been a tale of two cities the last couple of days, with Nordstrom (JWN) shares getting hit hard yesterday while Best Buy (BBY) and Dick’s Sporting Goods (DKS) both rose solidly after their reports.

The problem for JWN, some analysts said, wasn’t the quality of their quarter compared to expectations, as the company beat Wall Street’s consensus projections. What set JWN apart from some other retailers is that it couldn’t match results from the same quarter back in 2019, before Covid, and that’s apparently the benchmark for success that some investors are judging retail companies on.

JWN also caters to the high-income customer through fancy department stores. The fact that its sales were lower than results from its same quarter in 2019 despite the huge growth in wealth since then among high-income people may be scaring some investors away. The comparison to 2019 sales levels isn’t just an issue for JWN. Consider keeping an eye on this metric once we get to Q3 earnings, because it may continue to drive how the market reacts to retail company results.

Maybe it seems depressing to think winter is approaching, but the holiday season is only a couple months from starting, and that typically means even more consumer spending. There seems to be a lot of money out there and, judging from Q2 retail results, people appear ready to spend.

treasury yields bounce off support

CHART OF THE DAY: TESTING LEVELS. The 10-year Treasury yield (TNX—candlestick) has pushed through near-term resistance at the 20-day moving average (blue line), but may face a bigger challenge getting through the 50-day MA (red line). Going back over the last three months, as this chart does, you can see the 50-day (now near where the yield trades at around 1.34%) has been an area where yields have often topped out, but some analysts now think a test of the 1.5% level could be in store. Data source: Cboe Global Markets.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

High Demand for Homes and Not-Yet-Homes: The good news for homebuyers is that new home inventory surged in July by around 5.5% month over month, according to the Census Bureau. But if you’ve been driving around neighborhoods seeing skeletons of what’s to become the foundations for new homes, most of which are barely staked into the ground, well, that’s the not-so-good news: many of those not-yet-homes make up the “new home” inventory, and lots of them have already been sold. 

While July’s increase of 367,000 units is the highest level of new inventory since November 2008, over 90% of those homes haven’t been completed or haven’t even  been started, though some have already been sold and many counted as existing inventory. So, despite the surge in new homes for sale, high demand continues to sustain tightness in supply. In short, if you’re planning to buy and move into your new home right away, you might want to bring a tent along with a few camping supplies. 

Tech Talk: One thing that could potentially provide a roadblock to this long rally is worry that even as the S&P 500 Index (SPX) has continued rising, the advance/decline line hasn’t been making new highs. That could mean there are fewer advancing stocks and more declining ones. 

This could reflect what we’ve been talking about lately in which a few heavily-weighted “mega-cap” stocks are keeping the SPX well above water while many smaller components of the index are struggling. Typically it can be bearish when you see declines start outnumbering advances, and it’s not too surprising to see that considering the market is at record highs. 

For What it’s Worth: Here’s one of those data points you come across and can feel free to take or leave as you wish.  It’s now been over 200 days since the last 5% drop in the S&P 500 Index (SPX). That’s not surprising considering how well it’s performed, but it’s historically been a bit of a bearish indicator. Past doesn’t determine the future, obviously, but historical research shows that when streaks of 200 days or longer happen (most recently in 2018 and 2015), short-term gains in the SPX tend to be limited. We’ll have to wait and see if that’s the case again.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Strong earnings continue, this time from Salesforce as company raises guidance
  • Dell, Peloton scheduled to report after close, but Fed Powell speech tomorrow is key focus

  • Second-quarter GDP is 6.6%, in line with analysts’ estimates, while jobless claims rise

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