Positive Spin: Strong Retail Earnings, Subdued Inflation Data Seem To Raise Spirits

Stocks appear to have a more positive tone this morning after relatively subdued inflation data and what sounds like some progress on the Brexit front. Still, trading could be back-and-forth as volatile crude and remarks later today from Fed Chair Powell might keep investors on their toes.

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Key Takeaways

  • Subdued inflation data appears to raise positive sentiment early on

  • Fed’s Powell speaking later today at a Fed conference in Dallas

  • Macy’s is another major retailer to beat analysts’ earnings estimates

(Wednesday Market Open) After waiting for the latest U.S. inflation data, the market rose slightly in premarket trading as the headline consumer price index rose 0.3% in October, in line with Briefing.com consensus forecasts, but slowed to 2.5% on a yearly basis.

While that might not be enough to alter the Federal Reserve’s current track of gradually increasing interest rates, it likely doesn’t do anything to increase the market’s fear that the central bank might become more hawkish and end up tightening monetary policy more quickly. 

Ringing Up Sales Ahead of the Holidays

Another bright spot this morning came as a present from Macy’s (M), which reported earnings per share that handily beat expectations on revenue that was slightly stronger than analysts had forecast, in the latest positive sign for the company’s turnaround story. It’s another retailer that has beaten projections after Home Depot (HD) also beat on top and bottom lines.

Ahead of the holiday season—all important for retailers—data have been showing that the American consumer seems to be doing well amid a strong economy and tight jobs market. Tomorrow morning, government data are scheduled to give a fresh reading on retail sales. This number may be a good one to watch as retailers report earnings. 

Walmart (WMT) is scheduled to report Q3 earnings for fiscal 2019 tomorrow before the market opens. For Q3, WMT is expected to report adjusted EPS of $1.01 on revenue of $125.45 billion, according to third-party consensus analyst estimates. 

Across the pond, Britain and the European Union have agreed on a draft of a Brexit deal. It’s a positive step in one of the geopolitical uncertainties that seem to have been weighing on the market, but it remains to be seen what Britain’s final exit of the trade bloc will look like.

Oil’s Slide Stops...For Moment

Although equities futures were pointing to a higher open this morning, the market could continue its back-and-forth trading as investors look for news on the U.S.-China trade front and monitor developments in the oil market, which this morning seems to be trying to put in a bottom after precipitous declines. 

Yesterday, worries about global growth mixed with concerns about oversupply seemed to keep oil prices under sharp pressure. U.S. crude fell more than 7% while its international counterpart dipped more than 6%. 

Both have been sliding as investors have sold out of riskier assets amid broad market volatility. A rise in the U.S. dollar has also helped pressure crude prices as a stronger greenback makes dollar-denominated oil more expensive for buyers using other currencies, potentially putting a damper on demand. 

Meanwhile, President Trump has urged Saudi Arabia and the rest of OPEC to not cut production. He has granted waivers to key buyers of Iranian oil, cushioning the effect on global supply from sanctions against the Persian Gulf producer. This comes against a backdrop of high production from the United States, Russia, and Saudi Arabia, the globe’s three biggest producers.

OPEC’s most recent monthly report provided more bearish news for the oil market as the cartel said increased production from the group and its ally Russia in October more than offset declines from Iran.

With the decline in oil prices Tuesday, it’s perhaps not surprising that the energy sector was by far the worst performing of the S&P 500 (SPX) sectors. The other sectors ended with modest ups or downs.

Lower oil prices can weigh on producers because they can’t get as much money for their product. But lower crude prices can be good for consumer staples stocks as drivers may end up paying less for gasoline and spend the extra money elsewhere. Manufacturers and transportation companies that use a lot of fuel can also benefit.

Figure 1: Oil Prices and Producers: This chart shows the dramatic slide in U.S. oil prices (candlestick), and the pressure that seems to have placed on the energy sector, shown by a purple line representing the Energy Select Sector Index (IXE), an index made of up oil-related companies in the S&P 500.Data Source: Chart sources: CME Group and S&P Dow Jones Indices. The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Deficit Spending: The U.S. started out its fiscal year with a larger monthly budget deficit. Data from the Treasury Department yesterday showed that the nation’s deficit rose slightly more than expected last month to $100.5 billion, just shy of the Briefing.com consensus of $98 billion and well up from the $63.2 billion in October 2017. The increase over last year is partly due to Oct. 1, 2017, falling on a weekend and the government pushing payments forward, meaning they don’t show up in the 2017 fiscal year. Still, the nation has been running sizable deficits, and the annual deficit is expected to hit $1 trillion, according to both White House and the Congressional Budget Office estimates. To finance the deficits, the U.S. continues to rack up debt. The spend-now-pay-later strategy can have a stimulating effect on the economy in the short term, helping to boost stocks. But that economic growth can be a double edged sword for the market, as signs of overheating could prompt the Fed to become more hawkish.

Is FAANG Losing its Bite? Arguably one of the biggest stories to emerge from the recent weeks of volatility has been what seems like a shift in investor mindset toward the FAANG stocks—Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet’s (GOOG, GOOGL) Google. All of them have fallen below the levels at which they started last month, and they have tended to lead the market volatility both to the upside and the down. They’re all widely held companies that can influence the broader stock market. Pulling back to look at a year-to-date chart through Tuesday afternoon shows a wide divergence in share performance, with FB down more than 21%, GOOGL down more than 2%, AAPL up more than 11%, AMZN more than 37% higher, and NFLX up more than 46%. With this divergence in price performance, widely differing fundamentals, and a market repricing that may not be over, it may be worth asking whether the bloc, taken as a whole, is a good representation of the so-called “momentum trade.”

Above the Turbulence:With all the doom-and-gloom headlines out there it can be easy to lose sight of the bigger picture: The U.S. economy is growing at a relatively robust pace for a developed nation. The Atlanta Fed’s latest GDPNow model estimate, from Friday, shows a seasonally adjusted annual rate of real GDP growth in 4Q of 2.9 percent. Meanwhile, the International Monetary Fund in October said it thinks global growth will come in at 3.7% this year. That includes the impact of trade measures implemented or approved from April to the middle of last month as well as weaker outlooks for some emerging market and developing economies. So it may be worth pulling back and looking at things from a 30,000-foot view. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for this week. Source: Briefing.com
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