Navigating Crosscurrents: Stocks Up but Investors Weigh Impact of Inflation Data, UAW Strike, Rising Rates

Stocks are on pace for a positive week, but threats to the rally include a firm dollar, rising Treasury yields, and expensive crude oil. Better-than-expected Chinese data provided an overnight lift, but the UAW strike against U.S. automakers may drag shares of those companies.
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Key Takeaways

  • Wall Street on pace for gains this week following Arm’s IPO, relatively benign inflation data

  • China’s latest economic data looks firmer, and may be providing a boost for U.S. stocks
  • Auto workers go on strike, hurting automaker stocks and raising concerns about potential inflation

(Friday market open) After stumbling out of the gate, stocks are on pace for gains this week following yesterday’s rally fueled in part by signs of a reawakening initial public offering (IPO) market.

Shares of Arm Holdings (ARM) soared nearly 25% during its market debut Thursday, and this week’s highly anticipated U.S. inflation data didn’t contain any hidden dragons. On a negative note for automakers, however, United Auto Workers (UAW) employees of Ford (F), General Motors (GM), and Stellantis (STLA), the parent company of Jeep, walked off the job yesterday in a strike against the companies, weighing on automaker shares in premarket trading and threatening to hurt shares of auto supply companies as well.

“There are many crosscurrents given we’re still digesting some of the hotter parts of CPI combined with some of the relatively benign parts of PPI,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research, referring to this week’s two big consumer and producer inflation reports.

Major U.S stock indexes enjoyed their best day since early August Thursday, sending the S&P 500® Index (SPX) to its first close over 4,500 since September 1 and bringing it back to nearly even for the month. It’s also above its 50-day moving average, now near 4,480. The market enters Friday up about 1% for the week. The defensive utilities sector leads gainers over the last week, but it’s not far ahead of cyclical areas like financials and consumer discretionary.

Better-than-expected economic data from China appeared to reinforce positive sentiment this morning, and automakers aren’t down much despite the strike. Be prepared for possible high volume and intraday volatility if you’re trading today, as Friday marks one of four “quadruple witching” (quarter-end) expiration days for stock index futures, stock index options, stock options, and single-stock futures that occur each year.

Also keep an eye on rising Treasury yields, firm crude oil prices, and a climbing dollar. Any or all of these could spell possible trouble for this stock rally.

Morning rush

  • The 10-year Treasury note yield (TNX) is up 3 basis points to 4.32%.
  • The U.S. Dollar Index ($DXY) is steady near recent highs at 105.29.
  • Cboe Volatility Index® (VIX) futures are at 12.76, just above a 2023 low posted earlier.
  • WTI Crude Oil (/CL) fell slightly to $90.43 per barrel.

Just in

Industrial Production and Capacity Utilization reports for August are due out just before the opening bell today. Analysts had expected a pullback in production growth to 0.2% from July’s 1%, according to consensus.

Before that, the September Empire State Manufacturing Survey measuring factory-sector activity in New York State looked better than analysts had expected, with a headline figure of 1.9 outpacing the consensus of -10. A reading above zero marks expansion.

Overnight, China announced better-than-expected August retail sales and industrial production, a welcome change of pace following months of softer economic data. Still, one month and one batch of statistics don’t tell the entire tale. Asian and European markets have advanced this week.

What to watch

Consumer check: Later this morning, investors will receive the preliminary Consumer Sentiment report from the University of Michigan for September, with headline consensus seen at 69.4. That’s down just a touch from 69.5 in August and above levels generally seen earlier this year. The August final report saw inflation expectations rise to 3.5% from 3.4% in July, and September’s inflation data could reflect the impact of higher gas prices.

The week ahead: The Federal Open Market Committee (FOMC) meeting ending next Wednesday afternoon with an interest rate decision and new economic and rate projections will suck most of the oxygen out of the room. Aside from that, Tuesday’s August Housing Starts and Building Permits report is one to watch. On the earnings front, we’ll hear from FedEx (FDX), KB Home (KBH), and Darden Restaurants (DRI), among others.

Stocks in Spotlight

Shares of homebuilder Lennar (LEN) slipped in premarket trading after the company reported earnings late yesterday that easily exceeded Wall Street’s expectations. Deliveries and new orders looked strong, but margins declined, perhaps reflecting lower sales prices. Revenue fell from a year earlier, as analysts had expected, due in part to those falling home prices.

Software firm Adobe (ADBE) also saw shares descend in premarket trading despite an earnings beat. Revenue met analysts’ estimates, but perhaps disappointed bullish investors hoping for better-than-expected numbers.

On strike: While a prolonged labor stoppage at the automakers might raise supply concerns and fuel inflation worries, the Big Three U.S. car companies have decent inventories and demand for new cars has leveled off. Anything longer than a few days would cause concern about the automakers’ stocks, however. GM lost about $3.6 billion in earnings when the UAW walked out of its factories for several weeks in 2019. Another question is the potential impact on companies that supply parts to automakers—everything from glass for windows to semiconductor chips to power various automotive features like back-up cameras and airbag deployment.

What’s up: Retailers were among the strongest sectors Thursday in the wake of stronger-than-expected August Retail Sales, though some of that boost reflected rising gas prices. Energy stocks also climbed as crude oil topped $90 a barrel for the first time in 10 months. Perhaps more importantly, small-cap stocks joined the upswing, with the Russell 2000 Index (RUT) rising nearly 1.5% to finish at a one-week high.

Small-caps are often seen as a barometer of the U.S. economy due to their heavy domestic exposure, and also can reflect financial industry health thanks to the Russell 2000’s heavy weighting toward bank stocks. Small-caps still trail the broader market over the last three months and remain down sharply from their summer peaks.

Rally cap: Another positive sign Thursday was higher-than-average market volume and advancing issues easily outpacing declining ones. Some of the rallies this summer occurred amid light volume or reflected strength in a handful of major stocks, implying lack of widespread conviction. No such issue yesterday, as Treasury yields leveled off on unalarming core inflation data, handing stocks a wider runway.

Eye on the Fed

As of this morning, the probability that the FOMC will maintain current rates after next week’s meeting is 97%, according to the CME FedWatch Tool. The tool pegs the probability of rates being higher after the November meeting at around 35%.

Next week’s meeting includes scheduled updates to Fed economic projections and to its dot-plot of the policy path ahead. When we last heard from the Fed in June, its projections and dot-plot looked like this:

  • 2023 GDP growth: 1%, versus the March projection of 0.4%
  • 2023 unemployment rate: 4.1%, versus March projection of 4.5%
  • 2023 core PCE inflation: 3.9%, versus March projection of 3.6%
  • 2023 Federal funds rate: 5.6%, versus March projection of 5.1%
  • 2024 Federal funds rate: 4.6%, versus March projection of 4.3%

For a discussion of how these projections might change, see below.

Talking technicals: The big question for next week (besides the Fed) might be where do crude oil prices top out? The charts could offer some clues. Last November 7, the front-month contract hit an intraday high of $93.74 per barrel, which closely aligned with an October peak of $93.64. Those seasonal peaks last fall also roughly line up with a downward chart trendline from the spring 2022 high above $130, making the range between $91 to $93 technically significant. Crude is just below that now.

CHART OF THE DAY: KNOCKING ON THE DOOR. WTI crude oil futures (/CL—candlesticks) climbed above $90 per barrel Thursday for the first time in 10 months and are close to last fall’s peaks above $93. The red line is a downward trend line from the early 2022 highs that also rolls in just above current levels, marking possible technical resistance. Data source; CME. 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

Projections “R” us: Back in June, Fed policy makers pegged end-of-2024 rates at 4.6%. That would imply at least a couple of rate cuts next year from the current range of between 5.25% and 5.5%, and the futures market prices in close to a 45% chance of the first rate cut happening by next May. The Fed’s last dot-plot implied one more 2023 rate hike from here. It seems likely that will remain in the September dot-plot, considering the FOMC still has its hawks. But with the “higher for longer” mantra gaining ground not only among analysts lately but also arguably from the European Central Bank (ECB) in its statement Thursday, do the Fed’s 2024 and even 2025 projections (of 3.4% for peak rates that year) need to rise? “Markets are pricing in the likelihood of cuts starting mid-year,” writes Schwab Chief Fixed Income Strategist Kathy Jones. “The markets will be watching to see if that squares with the new Fed estimates.”

Earnings approach: With roughly a month until Q3 earnings season, consider a couple of factors that could help drive results and how investors think. Though daily coverage emphasizes which companies “beat” expectations, investors should look beyond that. “Upcoming earnings season won’t be just about beat rates, but also the differential between bottom and top line and the differential between nominal and real,” writes Liz Ann Sonders, chief investment strategist at Schwab. Think about it like this: There was a lot of excitement in the last learnings season about a high earnings-beat rate; but as there was virtually no revenue growth, most of the earnings lift was via aggressive cost cuts. If revenues continue to decline, there would be minimal signs of strong demand, so earnings would be going up for the “wrong” reasons ... and that likely wouldn’t last in perpetuity. “Nominal versus real” means adjusting companies’ results from the impact of inflation. A big revenue jump based on higher prices may be hard to repeat as customers push back.

Is there gas in the car? As automakers face a strike, consumers face rising gas prices that could clip spending on other items if historic trends hold. Generally, $45–$70 per barrel is optimal for WTI crude in terms of how it affects U.S. gas prices and consumer spending. A reading of $90, which WTI crude hit on Friday for the first time in 10 months, is usually a drag on the economy, notes Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. With the U.S. Strategic Petroleum Reserve (SPR) at 40-year supply lows, there is little relief in sight. This means headline inflation could rise even as core moderates. Kind of the pattern we saw in the August Producer and Consumer Price Index (PPI and CPI) reports.


Sept. 18: No major earnings or economic data.

Sept. 19: August Housing Starts and Building Permits and expected earnings from AutoZone (AZO).

Sept. 20: FOMC decision and expected earnings from General Mills (GIS), KB Home (KBH), and FedEx (FDX).

Sept. 21: August Existing Home Sales, August Leading Indicators, and expected earnings from Darden Restaurants (DRI).

Sept. 22: No major earnings or economic data.


Key Takeaways

  • Wall Street on pace for gains this week following Arm’s IPO, relatively benign inflation data

  • China’s latest economic data looks firmer, and may be providing a boost for U.S. stocks
  • Auto workers go on strike, hurting automaker stocks and raising concerns about potential inflation

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