Flat Tired: Sluggish “Pre-Fed Mode” Seems to Take Hold with Key Price Data Awaited

This flat trend appears to be continuing early today with the S&P 500 Index still just shy of a record high. Things are in a waiting mode for tomorrow’s consumer price data and European Central Bank meeting, along with next week’s Fed meeting.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/bears out: selloff picks up steam
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Key Takeaways

  • Flatness continues as major indices were hardly changed overnight

  • Memes continue their volatile ride, with Wendy’s latest to join

  • ECB meeting, U.S. consumer price data awaited tomorrow

(Wednesday Market Open) The way things went on Wall Street Monday and Tuesday, it felt like the market got ahead of itself a little. About a week ahead, actually. 

It’s a week from today when the Fed finishes its next meeting, and stocks generally trade in a narrow range right before that with no real direction. We’re still seven days out, but it feels like “Fed Week” already. The S&P 500 Index (SPX) looked very lackluster yesterday, not seriously testing an all-time high right above current levels. That record high remains at 4238. 

Sectors that helped power things earlier this year, including Tech and Financials, haven’t really been able to get the motor running since mid-May. The leading SPX sector over that time has been Real Estate, surprisingly. This could be a reflection of investors looking for what they hope might be protection from inflation in a sector that traditionally pays high dividends.

Data Could Inject More Excitement Ahead

Things could get more interesting as the week continues. Data picks up in a big way tomorrow, starting in the morning with weekly initial jobless claims. Last week’s claims fell below 400,000 for the first time since Covid, but remained well above the pre-Covid average of around 225,000. Going into tomorrow, analysts expect a reading of 365,000, according to research firm Briefing.com. That’s down a bit from 385,000 the previous week.

The European Central Bank (ECB) wraps up its meeting tomorrow morning and a policy announcement is expected around the time the U.S. market opens Thursday. Europe is starting to emerge more from the pandemic, but recent economic data hasn’t exactly blown anyone away. The question going into the meeting is whether the ECB will indicate any new direction in its stimulus plans or give any new insight into the economic growth picture there. 

Arguably the biggest event tomorrow morning is the May consumer price index (CPI), which we discussed in detail yesterday. From a top-line perspective, analysts expect a 0.4% rise in both headline and core CPI, Briefing.com said. The core number strips out volatile food and energy prices.

Keep an eye on the year-over-year CPI rise, too. It was 4.2% in April, the biggest gain since September 2008. Core rose 3%. However, keep in mind that the year-over-year comparison could look more dramatic because most of the economy was locked down a year ago and crude prices sank to record lows. So take any big annual gains with a grain of salt or two. 

Anything near the 0.8% and 0.9% headline and core monthly growth numbers from April would probably raise some eyebrows around Wall Street as people wonder what the Fed reaction might be. 

At this point, rate and tapering fears appear kind of muted, with the 10-year Treasury yield falling yesterday below 1.55% to near the bottom end of its recent range. By morning, it was at 1.5%, which could set up a test of the 100-day moving average, now near 1.48%. It hasn’t been below the 100-day since early October (see chart below). 

At the same time, CME Fed funds futures put chances of a rate hike before the end of the year at just 5%, down from 8% a week ago. Slower than expected May jobs growth might play into this more relaxed attitude around rate expectations, but an upside surprise in CPI could mean worries resurfacing.

Inflation: Transitory or Here to Stay?

Confounding the inflation story is the arguably masterful job by the Fed of—as the saying goes—“getting ahead of it.” Chair Powell was out front early saying any inflation would be “transitory,” so in that sense, the numbers may be taking a back seat to the narrative. As we’ve seen in this market—particularly with meme stocks (see more below)—narrative can be a powerful driver of markets in the short term.   

In the short term, i.e., today, inflationary trends are apparent. Just look at these three stories—two directly inflation-related and one indirect. 

The first two are simple enough: U.S. crude moved above $70 a barrel and Chinese producer prices rose the most in 13 years. If crude stays above $70 for a while, it could start to take a bite. Think about it: People are going back to work but many still are hesitant to use public transportation due to Covid. That’s probably a formula for more money spent on gas. At $70, crude prices might have to be looked at more seriously as a possible weight on the economy if this level holds. 

Then there was Campbell Soup (CPB) earnings today. The company—which benefited last year from people eating at home—fell short of Wall Street analysts’ estimates for revenue and earnings, and also cited a much more costly supply chain. It will be interesting to see how some of the other stay-at-home winners perform as the economy starts to lap the worst days of Covid a year ago. 

And in the longer term, it’s worth monitoring the market (and the Fed’s words) for any changes to the transitory inflation narrative. 

Market Exhaustion? Record Proves Elusive

Despite the drop in yields and fewer tapering concerns, the stock market can’t seem to make much hay this week. That could be a function of lack of upside catalysts, as we discussed yesterday. 

Lots of investors are wondering, “What’s the next big story?” People want something to trade on. Infrastructure progress in Washington looked like it might be a hook the market could hang its hat on, but bipartisan talks ended Tuesday without an agreement and President Biden is scheduled to fly to England today for the Group of Seven (G7) conference (see more below). 

Failure to thrive could also reflect a little exhaustion after the big run-up to record highs earlier this year. Valuations are still on the high side historically, at around 21 vs. 12-month forward earnings expectations for the SPX. The historic average is more like 16. 

Last quarter’s impressive earnings cycle did help bring valuations down, but not by much, basically from 22 to 21. This continued valuation concern—along with widespread ideas that maybe reopening economic growth is peaking and companies are likely to face much tougher year-over-year earnings comparisons—could be keeping people from getting too bullish. 

In an interesting data point yesterday, the monthly Job Openings and Labor Turnover Survey (JOLTS) report showed job openings increasing to a record 9.286 million in April. It’s more evidence, perhaps, that employers are having trouble filling jobs, and maybe a sign of pent-up demand in the economy. 

Reverting to the Memes

If you’re one of those looking for a story to trade, you’re not going to find much on the earnings front this time of the quarter. Having said that, GameStop (GME) is expected to report this afternoon and Chewy (CHWY) goes tomorrow.

Speaking of GME,  the so-called “memes” were at it again yesterday. Clover Health (CLOV) was the latest to get a boost from this trend, rising 85% by late Tuesday. Even fast-food company Wendy’s (WEN), up 25% yesterday, may be joining the “meme” crowd, at least in the minds of some investors. 

It sounds like a broken record because we keep saying it, but many of these stocks are volatile and arguably aren’t really trading on fundamentals. When people go into the memes, they have to be very ready for the risk they’re taking. Everyone’s comfortable with making money. But do you realize what you’re risking on the downside in order to make that money?

philadelphia semiconductor index

 CHART OF THE DAY: 10-YEAR YIELD TESTING POSSIBLE SUPPORT LEVEL: The 10-year Treasury yield (TNX—candlestick) has been easing down ever since last week’s jobs report, and recently fell toward a support level some technical analysts see near 1.52%. Any lower and it could test support at the 100-day moving average (blue line), now near 1.48%. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Fixed Income Seems Back in Vogue, Volatility Fades: It’s interesting to see continued strength in the bond market even amid talk that the Fed might be getting ready to “talk about talking about” some sort of taper. The move toward fixed income might reflect that the overall picture just isn’t clarified in many investors’ minds right now, especially rates and inflation. It’s possible some people are buying bonds as a place of storage, if you will, to see what happens with the equity market so they can eventually repurpose some of that money back into stocks. But we’ll have to wait and see. 

Typically you tend to see more interest in fixed income when volatility is heavy in stocks, but that’s not the case. The Cboe Volatility Index (VIX) hit seven-week lows yesterday near 16.5, compared with the historic average of around 20. It’s popped back up above 17 this morning, but it doesn’t look like a major move, by any stretch of the imagination. 

Talking Taxes as G7 Meets: The Group of Seven (G7) conference later this week in the UK comes after recent headlines about a possible 15% minimum corporate tax across these economies. Some investors might worry about the impact of that on U.S. stocks, considering many effectively pay no corporate income tax now. Would instituting a 15% minimum tax mean that corporations now paying less than that due to various state government incentives will suddenly be asked to fork out millions of dollars or more to meet that minimum standard? One corporation that could potentially end up in the crosshairs is Amazon (AMZN), whose Luxembourg subsidiary paid zero corporate tax in 2020 on sales from across Europe of 44 billion euros last year, media reports said. AMZN recently won a court case in Europe asking that it pay back taxes. 

If you’re tempted to worry about the kind of dent a 15% minimum tax could possibly put into a company like AMZN, try to keep things in perspective. Any change like this is probably far, far, from becoming reality, considering all the different countries’ legislatures would have to approve it. 

First Sign of a Taper? One news item that went a bit under the radar last week was the Wall Street Journal reporting that the Fed is going to start selling off the corporate bonds and exchange-traded funds it bought last year at the peak of Covid when default fears plagued the markets. The Fed told the newspaper that the sales, which should be completed by the end of this year, are unrelated to monetary policy. Still, you can’t help but think this could be a sign of the Fed acknowledging improvement in the economy, something historically associated with tightening monetary conditions. Also, the Fed isn’t on its own with this move. Other central banks are also shedding some of their corporate bonds, media reports said. 

Good Trading, 

JJ

@TDAJJKinahan

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

  • Flatness continues as major indices were hardly changed overnight

  • Memes continue their volatile ride, with Wendy’s latest to join

  • ECB meeting, U.S. consumer price data awaited tomorrow

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