Dollar, Crude, Retail Earnings Take Spotlight As New Week Gets Underway

A recent slide in oil prices and disappointing news out of China seems to have underscored fears about global economic growth, even as investors appear to worry about the Fed’s reaction to inflation in the United States.

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Key Takeaways

  • Crude prices bounce back amid signs of production cuts after OPEC meeting

  • Dollar hits new 16-month highs

  • Retail company earnings in focus this week as big box companies report


(Monday Market Open) With the election and Fed meeting behind, focus this week could turn toward retail company earnings, a slight bump in the crude market, and continued strength in the dollar. The stock market had a mixed to slightly negative feel early Monday as investors woke up to face the last full week before Thanksgiving.

U.S. crude, which fell to eight-month lows below $60 a barrel last week, enjoyed a slight bounce early Monday after a weekend meeting where OPEC members and other producers discussed production cuts. Saudi Arabia said it will slice output by 500,000 barrels a day next month. 

One question hanging over investors is whether heavy supplies alone punished oil last week or if it was a function of falling economic demand around the world. If it’s the second answer, than maybe plummeting oil points to more than just an imbalance in supply of the commodity. Though most U.S. economic data still look good, Europe and China have sent mixed signals lately.

Trade might be another factor to consider watching this week as Brexit negotiations continue and the U.S./China tariff battle still seems far from over. 

As concern grows about the situation overseas, it looks like some investors might be flocking to the greenback. The U.S. dollar index, which had retreated earlier this month, turned around Monday to climb to new 16-month highs around 97.50. The Fed’s current hawkish stance, in which it continues to foresee gradual rate hikes, might be one factor helping drive the dollar higher.

One potential bright spot, especially for the tech sector, which seemed to go from high flyer to laggard in recent days, is German software giant SAP’s reported $8 billion acquisition of data analytics startup Qualtrics. The announcement, which comes just days before Qualtrics was set to go public, might breathe some life into the IPO market, and may give hope to the many tech “unicorns” waiting in the wings.  

The Week Ahead

Earnings aren’t quite over yet, and Wednesday brings data on U.S. consumer prices, a key measure of inflation. (See more below.) Fed Chair Jerome Powell is scheduled to make some public comments Wednesday, which could give investors more insight into the Fed’s current thinking. It could be worth checking in on his comments to see if he mentions anything about inflation, oil prices, or tariffs. The closely-watched benchmark 10-year Treasury yield fell back below 3.2% on Friday as worries about overseas weakness might have outdueled concerns about rising U.S. producer prices.

The new week also gives us data on retail sales for October, due Thursday. Sales are expected to climb 0.5%, according to a Briefing.com consensus. Also in the new week, earnings results are expected from Home Depot (HD) and Macy’s (M), along with Wal-Mart (WMT), Nordstrom (JWN), and J.C. Penney (JCP). Many big retailers have been outpacing the broader S&P 500 (SPX) since posting their October lows. These earnings could help give investors a sense of how enthusiastic U.S. shoppers were in the months heading into holiday shopping season and gauge executive sentiment going into the crucial month ahead.

Inflation, China Concerns Hit Market Friday

U.S. producer price data that rose more than expected Friday contributed to the bearish sentiment amid worries that rising inflation could help lead the Fed to a more hawkish stance. Separate data showed that producer inflation in China fell, and auto sales numbers in the Asian nation showed a slump. Amid an economic slowdown and the trade dispute with the United States, China also moved to shore up lending to its private sector, and the move appears to have helped pressure banks in the nation. 

China is a key engine for global economic growth, so any signs of economic weakening there can send shivers through investors. Concerns continued Monday when Alibaba’s (BABA) “Singles Day” pulled in a record $30.8 billion in sales, but recorded the slowest pace of growth in the event’s 10-year history.

The brightest spot for the U.S. market on Friday came from the consumer staples sector. That’s perhaps not too surprising because of those stocks’ defensive nature. Those equities tend to do better when other stocks falter because people still need to buy things like toothbrushes regardless of whether the economy tanks or inflation rises.

We’ve also seen data recently suggesting that the American consumer is healthy, perhaps providing a bullish backdrop for these companies.

There’s been plenty of noise surrounding interest rates, market volatility, and the U.S. midterm elections. But investors may want to pay attention to some international issues that continue to percolate even if they may not dominate the market-related headlines every day. It seems likely that market participants will continue to monitor Brexit negotiations and Italy’s budget situation.

Of course, trade and tariff issues between the U.S. and China have taken up more attention. Investors continue to watch for developments in the dispute between the world’s two largest economies, as some think a trade war could dent global economic growth. The frequency of headlines surrounding the issue may increase as we approach the G20 summit at the end of this month and early December. Trump and China’s president Xi Jinping are slated to meet at the gathering.


Figure 1: Steady As She Goes: Despite the stock market’s flop on Friday, volatility, as measured by the VIX (candlestick), stayed pretty subdued not far off the week’s lows. That could be a sign that investors don’t anticipate the kind of sharp moves seen last month. At the same time, the dollar index (purple line), started moving back toward recent highs, possibly one weight on stocks Friday. Data Sources: Cboe, ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Is the Porridge Getting Too Hot? One factor that has helped the stock market is the so-called Goldilocks scenario for the economy. Basically, we’ve been seeing strong economic growth while inflation readings have been relatively tame. In other words, if the economy were Goldilocks’ porridge, it wouldn’t be too hot or too cold. In recent weeks, rising interest rates and related market volatility have overshadowed optimism about the Goldilocks scenario, so we thought it would be a good time to re-examine it. Investor concerns about inflation on Friday stemming from a higher-than-expected reading on producer prices raise the question about whether we’ve seen a tipping point, or might see one soon. 

Consumer Price Report Coming Up: Consumer prices are the cousins of producer prices as producers often pass their rising costs along, ultimately impacting end buyers. On Wednesday morning, we’re scheduled to see a report on October consumer prices, and it may be worth considering paying attention to given the sensitivity after the stronger-than-forecast producer price reading. While both reports aren’t the only factors that paint the picture of inflation, they’re both important parts of the whole. And if the consumer price reading comes in higher than expected, it could reinforce fears about the Fed becoming more hawkish. Recall that a recent October employment report showed an annualized 3.1% rise in hourly earnings— the highest rate since 2009.

More Bearish News for Oil: One part of the market at least is pointing toward lower inflation. U.S. oil prices entered a bear market Thursday and fell for the 10th straight trading session Friday. The weakness comes against a backdrop of worry about slowing global economic growth putting a dent in demand for black gold even as output is high from key producers. Easing tensions about Iranian supply as the Trump administration has granted waivers to key buyers of oil from the Persian republic have also helped bring down prices. On Wednesday, data showed that U.S. crude inventories rose. Friday provided more bearish news for the market as Baker Hughes, an oilfield services company, reported an increase in the U.S. oil rig count. Much is riding on whether oil prices continue to falter. If consumers pay less at the pump, they might spend the money elsewhere in a potential benefit to consumer discretionary companies. Manufacturers and transport companies that use a lot of fuel could also benefit. But of course, energy producers would likely take a hit.

And finally, a note to all current and former military personnel: Daily Market Update would like to thank you all for your service to our country.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of Nov. 12. Source: Briefing.com
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