Powell on Speed Dial: Market Looks To Fed Chair for Direction After November's Surge

(Friday market open) Federal Reserve Chairman Jerome Powell will take the podium this first morning of December, a day after the Fed’s favorite inflation indicator, Personal Consumption Expenditures (PCE) prices, showed continued moderation. Stocks had a mixed tone in premarket trading after major indexes surged in November on hopes for rate cuts next year.

It’s unclear if Powell will discuss the mild inflation numbers or interest rate policy in his 11 a.m. ET remarks, but it’s generally a good idea to stay on your toes if you’re trading when Powell takes the mic. Fed speakers so far this week sounded a gentler tone, but Powell leaned more toward hawkish in his most recent speech.

“Consider watching for his outlook on the ‘higher for longer’ theme since the markets are shortening that time horizon,” says Collin Martin, a director of fixed income strategy at Schwab. “Powell may push back on rate cut expectations and reiterate points he’s made in the past that discussions around rate cuts aren’t happening.”

One thing Powell may try to avoid is language that pushes down Treasury yields too much. The economy and stocks are ultra-sensitive to yields now, and a further decline from the already dramatic drop over the last month might accelerate economic growth even as the Fed tries to keep things in check with its rate policy. Dovish Fed remarks earlier this week helped send the 10-year Treasury note yield (TNX) below 4.3% for the first time since mid-September, and likely contributed to Wall Street’s brisk rally. Several signs point to slowing, even in the sizzling services sector, but the Fed likely doesn’t want people to celebrate an inflation touchdown on the five-yard line, so to speak.

Thursday’s PCE report was largely consistent with patterns in other widely followed inflation measures, such as the Consumer Price Index (CPI), in showing price pressures gradually receding over the past year. Overall PCE in October rose 3% compared with the same month in 2022, slightly less than expected, while the core rate, which strips out volatile energy and food prices, met expectations with a 3.5% year-over-year change. Still, both readings remain well above the Fed’s 2% goal, though futures trading builds in strong chances of the Fed cutting rates by mid-2024, long before the Fed’s projections show inflation returning to 2%.

Morning rush

• The TNX was steady at 4.34%.
• The U.S. Dollar Index ($DXY) rose slightly to 103.54, still near recent two-month lows.
• Cboe Volatility Index® was flat at 12.95, slightly above recent three-year lows.
• WTI Crude Oil (/CL) futures slipped to $75.87 per barrel.

OPEC announced its crude production strategy Thursday, but unlike your fifth-grade teacher, it’s not too strict. Members volunteered to trim output by varying amounts starting in 2024, but not under any cartel-wide commitment. OPEC has a hard time keeping members from pumping additional amounts above quota even when it makes cuts part of its official policy. With trimming now up to individual members, the diminished output Saudi Arabia hopes for seems farther off. Crude prices eased on the news (see more on possible long-term price and market ramifications below).

What to watch

There’s the Powell speech, and then there’s everything else.

Shortly after the open come two data points worth watching, though neither necessarily packs the same punch as yesterday’s inflation number.

November’s Institute for Supply Management (ISM) Manufacturing Index kicks things off at 10 a.m. ET. It’s been in contraction territory below 50% for 12 consecutive months as goods demand continues to sputter following the pandemic era surge. Analysts expect that weakness to continue in November, pegging the headline number at 47.5%, according to Briefing.com.

October Construction Spending also bows at 10 a.m. ET and is expected to rise 0.3% from September, Briefing.com says. Private and public construction each grew 0.4% in September, with residential spending up a firm 0.6%. Housing shortages remain an inflationary issue, but gains in residential construction could ease supply constraints.

Peek ahead: Next week starts the countdown to November’s Nonfarm Payrolls report, due a week from today. Analysts expect a slight uptick to 175,000 jobs created from 150,000 in October, says Trading Economics, but October’s number might have been held down slightly by the auto workers’ strike that ended last month.

Tuesday’s October Job Openings and Labor Turnover Survey (JOLTS) is also worth a look (see more below).

The ISM Non-Manufacturing PMI for November is due Tuesday and arguably deserves scrutiny after recent data suggested the hot services sector might be showing signs of cooling. Another PMI report, Chicago PMI, was shockingly strong at 55.8 for November versus the Briefing.com consensus of 45 and 44 the prior month. Anything over 50 indicates expansion. Both new orders and production moved into expansion territory. The report appeared to put some pressure on Treasuries early Thursday, and if ISM Manufacturing PMI® today shows strength, similar pressure on Treasuries isn’t out of the question.

Earnings pick up later this month after a sleepy start. Companies to watch include home builder Lennar (LEN), Darden Restaurants (DRI), and Oracle (ORCL).

PMI prints: Overnight news included month-over-month improvements in manufacturing PMI readings from a handful of European countries including Germany, France, and the U.K., though all remained in contraction. China’s November Caixin PMI rose to 50.7, which put it into expansion territory above 50 but contrasted with this week’s official PMI reading that remained in contraction.

Stocks in spotlight

Recent weakness in tech shares likely reflected consolidation after firm gains earlier this month. The Nasdaq Composite® ($COMP) could also face some technical resistance around 14,350, a level where sellers stepped in back in July.

Additionally, “we may be seeing early signs of rotation as investors look toward other non-tech sectors, which haven’t participated as much in the recent rally,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “It could be a healthy development for the bulls if we see continued broadening of participation.”

November nostalgia: As December begins, investors look back on a November to remember. The S&P 500® index (SPX) and Nasdaq-100® (NDX) rallied 8.9% and 10.7%, respectively, to notch their best monthly performances since July 2022. The Dow Jones Industrial Average® ($DJI) surged 8.8% for its best month since October 2022.

Stocks turned in a late day rebound yesterday on growing ideas that the Fed could cut rates next year. Over the last five sessions, leading SPX sectors include real estate, materials, financials, and industrials, but the overall SPX is only up narrowly over that period, hurt by weak performance from the so-called “mega-cap” info tech and communication services sectors

Eye on the Fed

Early today, futures trading pegged chances at 99.2% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 93.1%. The market prices in chances of the Fed cutting rates 25 basis points by its March meeting at 48%, a major upward shift from 21% a week ago Looking farther out, to the May meeting, futures trading suggests an 80% chance that at least one rate cut will have occurred.

Thinking cap

Ideas to mull as you trade or invest

Heads and tails: Under the new OPEC output strategy of voluntary cuts for each member, the bias for prices arguably looks bearish—and potentially friendly for U.S. transportation stocks. Sure, if crude prices keep falling it could crimp production due to basic laws of supply and demand, eventually putting a floor under the market. However, in a low-price scenario, some OPEC members might get desperate for revenue and forgo the voluntary cuts. Low prices in that scenario would beget higher production, in part because some OPEC members depend a great deal on crude revenue to run their economies. On the other hand, if crude prices rise, so could production as members reach for the brass ring. At a price of $90 or $100 for WTI, it’ll likely be tempting to open the taps, putting a potential cap on the market. That said, it seems unlikely crude would fall completely out of bed as it did in 2014, partly because the U.S. government announced months ago it would buy WTI at prices near $70 per barrel to refill the depleted Strategic Petroleum Reserve (SPR). The Dow Jones Transportation Average™ ($DJT) gained more than 1% Thursday, outpacing the broader market.

Sister act: Though next Friday’s Nonfarm Payrolls report dominates all other data on the way, a jobs report earlier in the coming week might also have market ramifications. The October JOLTS data due Tuesday morning was once a ho-hum monthly release that played weak sister to the payrolls report, but it’s taken on more importance in recent years thanks to the Fed’s laser focus on slowing the jobs market to help fend off inflation. Job openings stayed stubbornly high in recent months, but other labor market metrics have slowed, so the question is whether that showed up in October’s JOLTS data. Trading Economics sees job openings pulling back to 9.4 million in October from the 9.553 million recorded in September, but anything above 9 million will likely be seen as elevated. As always, the “quit” rate is another key element because it can indicate whether workers feel comfortable leaving jobs to find new ones. If it drops, it might indicate a tighter jobs picture.

Setting things straight: Maybe over Thanksgiving, an aunt or uncle cornered you to ask what you think of the Dow’s performance lately. Hopefully you made it clear to them that the $DJI and its 30 stocks make up only a sliver of the broader market and directed them to more closely watch the SPX in the future for a better sense of Wall Street’s progress. The $DJI’s narrow scope was on display again early Thursday as it rose more than 500 points, or 1.5%, behind solid earnings results from Salesforce (CRM) even as the SPX rose a mere 0.4%. Though the $DJI’s gains weren’t all due to Salesforce, a single stock can easily affect the $DJI and send you a distorted signal about market performance. Even the SPX can be less than ideal, because it’s affected so much by the heavy influence of the so-called “mega-caps.” The SPX is up more than 18% year-to-date, but the Equal Weight SPX (SPXEW) that isn’t weighted by market capitalizations, has only risen 4.5%. That might be the best indicator of what kind of year the biggest U.S. stocks are having.

Calendar

Dec. 4: October factory orders

Dec. 5: October JOLTS and expected earnings from AutoZone (AZO) and Toll Brothers (TOL).

Dec. 6: Expected earnings from GameStop (GME), Chewy (CHWY) and Campbell Soup (CPB).

Dec. 7: October wholesale inventories and expected earnings from Broadcom (AVGO) and Dollar General (DG).

Dec. 8: November Nonfarm Payrolls, Preliminary University of Michigan December Consumer Sentiment.