Oil Fuels Stock Rally; Muted CPI Reading Eases Inflation Fears

The oil rally seems to be helping the stock market, as is news of muted consumer inflation.

5 min read

(Thursday Market Open)  Oil fuels a lot of things. On Wednesday, it helped to fuel a move higher in stocks, with that momentum spilling over into the pre-market this morning ahead of news of muted consumer inflation.

The U.S. crude benchmark handily topped $70 a barrel yesterday, helping energy companies even as the wider market didn’t seem too worried about the inflation implications. As we watch crude oil futures this morning, it appears we may butt up against a resistance level at $71.90.

Speaking of inflation, the U.S. consumer price index rose less than expected, marking the second big inflation measure this week to come in below forecast. For the time being, that helps to ease some worries about a fourth rate hike this year, keeping equities futures buoyant. Bond yields ticked lower on the news.  Headline CPI rose 0.2%. Consensus among economists was for a 0.3% CPI rise in April, according to Briefing.com. The reading declined 0.1% in March. On Wednesday, the April producer price index rose less than had been expected.

Nvidia (NVDA) is scheduled to report Q1 fiscal 2019 earnings after the closing bell today. After better-than-expected earnings reports from competitors Intel (INTC) and Advanced Micro Devices (AMD), some analysts have suggested this could indicate a strong quarter for NVDA. For the quarter, NVDA is expected to report adjusted EPS of $1.65 on revenue of $2.91 billion, according to third-party consensus analyst estimates.

Crude and Confidence

Energy led the S&P 500 Index (SPX) higher yesterday as U.S. and global oil benchmarks rallied more than 3% following President Trump’s decision to pull out of the nuclear deal with Iran. In other bullish news for oil, U.S. government data showed a decline in crude inventories. Exxon (XOM) helped lead the Dow Jones Industrial Average ($DJI) to its fifth consecutive close in the green.

Some investors may be considering oil as a barometer of consumer confidence. If it continues to contribute to controlled upward inflation, that could play right into the Fed’s strategy.

The information technology and financial sectors also helped move stocks higher, with the broad based rally perhaps indicating a delayed positive reaction to a bumper earnings season. Amid the bullishness, the defensive utilities and telecom sectors were the only sectors in the red on Wednesday.

S&P 500 and 10-Year at Psychological Levels

The S&P closed just shy of the important psychological level of 2700, so it might be interesting to watch where the index moves from here—whether that level proves to be resistance or becomes support if the index can push above it.

The bullishness came despite the 10-year Treasury yield topping 3% again. Previous flirtations with 3% seemed to cause weakness in the stock market, yet this week's rise in yield comes in lockstep with a march higher in equities. It seems that 3% figure—which had worried market participants because it might reflect higher inflation expectations—may now be the new normal. See figure 1 below.

Fun & Games on the Earnings Beat

In corporate earnings news after the bell Wednesday, streaming company Roku (ROKU) reported a smaller loss than expected and raised its full year outlook for adjusted earnings before interest, taxes, depreciation and amortization. Its streaming hours rose dramatically, reflecting the wider trend of cord-cutting as more and more TV watchers get their content from streaming services.

Still, cable isn’t dead. Fox (FOX) saw strong growth in its cable division, which helped the company beat Wall Street expectations for revenue. But it missed on earnings, as its TV and film divisions didn’t do as well as some expected.

S&P 500 and 10-year yield at critical levels


The yield on 10-year U.S. Treasuries closed above the psychologically significant 3% level yesterday, just as the S&P 500 (purple line) and other stock indices moved higher. Both sit at or near significant levels. Data source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Sentiment Sounding: After readings on producer and consumer prices this week, the preliminary University of Michigan consumer sentiment index for May is scheduled on Friday. The preliminary reading for April fell to 97.8, coming in under Briefing.com consensus expectations. “The monthly drop was due to worries about trade policies and expectations for rising interest rates,” Briefing.com said. So it could be interesting to see whether sentiment has changed much in a month. Economists polled by Briefing.com are expecting Friday’s sentiment reading to come in at 98.0.

Bond Junkies: There’s been a lot of attention paid to the yield on the 10-year Treasury trading around 3%. (It rose back above that level on Wednesday, as noted above). That’s important because of what it potentially says about inflation expectations, the expected health of the economy, and corporate borrowing. But there are other rate-related considerations investors might want to keep in mind. First, shorter-term Treasury rates are more responsive to Fed interest rate hikes while longer term rates are more affected by economic growth and inflation expectations. Also, it may be worth paying attention to what’s happening with the yields on corporate bonds.

Based on the market for lower quality corporate debt, investors don’t seem particularly worried about the economy. If they were, they would be asking for higher rates because they would be worried about potential defaults. But that doesn't appear to be happening. One measure of junk bond yields, the ICE BAML US High-Yield Master II Index, starts the day at around 3.45%, a stone's throw from its 10-year low of 3.24%, according to the St. Louis Fed's FRED® database.

A Different Kind of Mining: When NVDA reports earnings today, you may want to consider watching what, if anything, management says about blockchain-related mining, the process where computers compete against each other by solving mathematical equations in hopes of collecting cryptocurrency coins as a reward. The company has said that cryptocurrency mining has been driving demand in the gaming segment. And NVDA isn’t the only company seeing blockchain-related demand. It might be interesting to watch how the vagaries of cryptocurrency prices affect shorter term demand for processing power. Longer term, blockchain technology could become much more widely adopted.

Good Trading,

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Source: Briefing.com

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