Pre-Weekend Pop: Stocks Boosted by Falling Treasury Yields as Hopes for Early 2024 Rate Cut Grow

(Friday market open) Treasury yields began Friday near two-month lows, providing fresh support for Wall Street as the weekend approached. Stocks are on pace for another positive week, buoyed by mild inflation data despite mixed earnings results the last few days.

There’s arguably been a sea change in perception since the recent jobs and inflation data. Investors have gone from dreading the next Federal Reserve rate hike to anticipating the first rate cut. Futures trading builds in nearly zero likelihood of a rate increase in December or January, and it begins the day placing odds of a rate cut by March at around one in three.

U.S. markets aren’t the only ones on the upswing. Across Europe and Asia, it’s also been a positive stretch, with most major indexes on pace for higher weekly closes. European stocks are up nearly 3% week-to-date as of early Friday, supported by a cool Eurozone inflation reading that bolstered ideas that central banks could be done hiking.

The housing market is in focus with new data this morning, while next week brings a host of earnings and Fed minutes before the holiday break.

Morning rush

• The 10-year Treasury note yield (TNX) is down 3 basis points at 4.41%, the lowest since mid-September.
• The U.S. Dollar Index ($DXY) is near recent two-month lows at 104.12.
• Cboe Volatility Index® (VIX) futures trade down near 13.9, not far off seven-week lows.
• WTI Crude Oil (/CL) bounced 1% to $73.82 per barrel.

WTI crude starts today near five-month lows following a large U.S. supply build and weaker-than-expected October Industrial Production data—though the autoworkers’ strike, now ended, likely sapped the industrial report. Crude also felt pressure from sliding Chinese imports. OPEC meets the weekend after Thanksgiving, and analysts say it’s likely to extend production cuts into 2024.

Just in

October Housing Starts and Building Permits both surpassed Briefing.com’s consensus estimates at a seasonally adjusted annual rate of 1.372 million and 1.487 million, respectively.Consensus had starts at a seasonally adjusted annual rate of 1.365 million units. Permits had been expected to drop slightly to 1.445 million. Though the headline numbers looked strong, the government downwardly revised September’s starts total.

“The heavy revision lower for starts in the prior month makes October’s gain pretty much a wash,” says Kevin Gordon, senior investment strategist at Schwab.

What to watch

Up next: It’s wrong to think Thanksgiving week is quiet. Sure, Thursday’s the holiday and next Friday features an early close and no major data or earnings. Leading up to that, however, there is a flurry of earnings and numbers to digest before those holiday meals.

Leading off: The action begins just after the open Monday with the Conference Board’s Leading Indicators for October, which will likely be watched closely for more signs of slowing growth following a light October jobs report and inflation’s retreat. Consensus on Wall Street is for a 0.7% monthly drop in the headline figure, the same as in September, according to Trading Economics. The Leading Economic Index (LEI) has fallen 18 consecutive months beginning in April 2022, and historically, it’s unusual to see that kind of stretch without a recession.

Tuesday morning puts housing front and center with October Existing Home Sales. Analysts don’t expect much change from September. On Wednesday there’s an update on Initial Jobless Claims. These normally run on Thursday but moved up a day due to the holiday.

Minutes on tap: Next Tuesday also features minutes from the recent Federal Open Market Committee (FOMC) meeting, which could help shed light on conversation ahead of the unanimous FOMC vote to keep rates unchanged. While there’s been a lot of data under the bridge since then, the minutes could reveal any specific concerns policymakers had heading into the final two months of the year.

One question is how worried they were about the pace of economic growth. The futures market builds in rising chances of rate cuts as soon as March, but the minutes could help investors know if that’s too bullish. Cleveland Fed President Loretta Mester said Thursday the focus on rate cuts is premature, MarketWatch reported.

Speaking of rates, next week also features a handful of Treasury auctions. These have taken on more significance than usual lately due to worries about hefty supplies overwhelming demand and forcing yields higher. A disappointing 30-year Treasury auction last week laid an egg on Wall Street.

Stocks in spotlight

Had your fill of earnings this week? Plenty remain on the plate ahead of Thanksgiving, so loosen your belts.

Nvidia (NVDA) becomes the final mega-cap firm to report when it opens its books Tuesday afternoon. The chip firm, a leader in artificial intelligence (AI), recently saw shares approach record highs and has consistently impressed with results and guidance. However, its last two quarters are a hard act to follow. We’ll discuss specifics next week.

Tuesday features the final burst of retailer earnings before this busy part of the season ends. Lowe’s (LOW), Kohl’s (KSS), Dick’s Sporting Goods (DKS), Best Buy (BBY), and Nordstrom (JWN) are all on the calendar. Health care chips in with word from medical device firm Medtronic (MDT).

The unofficial close of earnings season comes early Wednesday when Deere (DE) reports. That puts food in focus, fittingly, a day before the turkey feast.

Remember that it’s easy to put all retailers together in a box, as people sometimes do with semiconductors. But just as semiconductor companies include some that focus on cars, others on video games, and still others on phones or laptops, retail includes a variety of store types and markets. The divide was clear this week when shares of Walmart (WMT) and Target (TGT) went their separate ways following earnings.

Walmart’s disappointing guidance, along with a cautious outlook from Cisco (CSCO), brought pressure yesterday, and only “mega-caps” saved the S&P 500® Index (SPX) from falling. The equal-weighed SPX, which weighs all 500 companies equally to blunt the impact of a few mega-cap names, fell 0.3% as declining stocks led advancing ones by a wide margin. Still, seven of 11 S&P sectors logged gains Thursday. A sharp drop in crude weighed on energy shares. But energy is the only sector down for the week.

Eye on the Fed

Early today, futures trading pegged chances at nearly 100% 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 96%. The market prices in chances of the Fed cutting rates 25 basis points by its March meeting at 33%.

Talking technicals: The U.S. 10-year Treasury note yield keeps twirling the baton for stocks, trading in a relatively tight range between 4.5% and 5% the last two months. It’s recently dipped below its upward-trending 50-day simple moving average, “which suggests that a potential trend change is underway, either from an uptrend to sideways or potentially uptrend to downtrend,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. 

Thinking cap

Ideas to mull as you trade or invest

Better breadth: Earlier this year, concern centered around Wall Street’s rally being one-track, led mainly by mega-caps. Things have improved recently, with a broader group of stocks flexing their muscle. As of Thursday, 67% of SPX stocks traded above their 50-day moving averages, up from 41% a week earlier, notes Joe Mazzola, director of trader education at Schwab. However, the small-cap Russell 2000 (RUT) index failed to take out its 200-day moving average this week and fell from there. Mazzola would like to see more small-cap participation to believe the rally has legs. He’s also concerned about waning outlooks for Q4 earnings growth, noting that the average Wall Street Q4 earnings per share (EPS) estimate has retreated from 11% in late September to less than 6%.

Financials sector dive: It’s been a tough year for financial stocks when you consider bank failures, a tight housing market, and light Initial Public Offerings (IPOs). The S&P 500 financial sector is up 1.2% year-to-date, trailing the overall S&P 500® Index’s (SPX) gain of nearly 17% (though that includes a huge contribution from the largest handful of stocks). Financials, however, are the fourth best-performing sector over the last month as Treasury yields retreat. The sector isn’t just banks, but one possible reason behind the recent rally is ideas that if the Fed ultimately reduces rates, bank margins might improve as they pay less to depositors. “The idea that the timeframe for rate cuts might be pulled forward is likely helping banks,” says Collin Martin, a director of fixed income strategy at Schwab. In addition, lower yields might sap demand for products like U.S. Treasuries that compete with banks for investor funds. Lower yields might also make small businesses and households more interested in taking on new projects, raising demand for loans. However, banks can’t root for yields to fall too much, as that might indicate a recession brewing. If that were the case, investors might be more inclined to shift their money toward “defensive” parts of the market like utilities and health care.

Pricing beyond borders: News of receding U.S. inflation dominated the headlines this week. The same trend appears to be happening abroad. Inflation rose just 0.1% month-over-month in the Eurozone, was flat in the U.K., and dropped 0.1% in Canada. Inflation in the Eurozone rose 2.9% year-over-year in October, the lightest gain since July 2021. “Emerging market (EM) central banks started cutting rates over the summer, and developed market central banks are likely to join EM central banks in cutting rates next year,” says Michelle Gibley, director of international research at the Schwab Center for Financial Research. “If central banks keep rates unchanged, the lower inflation figures actually increase real rates, which is a drag on economic growth and a reason to cut rates next year if the inflation trends persist.”

Calendar

Nov. 20: October Leading Indicators and expected earnings from Zoom (ZM).

Nov. 21: Expected earnings from Nvidia (NVDA), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Autodesk (ADSK), HP Inc. (HPQ), Medtronic (MDT), Kohl’s (KSS), and October Existing Home Sales.

Nov. 22: October Durable Goods, October Durable Orders, Final November Consumer Sentiment from the University of Michigan, and expected earnings from Deere (DE).

Nov. 23: U.S. markets closed for Thanksgiving holiday.

Nov. 24: No major data or earnings expected. Markets close at 1 p.m. ET.