Unyielding: Quarter Off to a Rough Start as Investors Grapple with Rising Rates, Dollar, and Crude Oil

Stocks are under pressure for the second day in a row amid a host of concerns, namely rising yields, crude oil, and the dollar. Robust U.S., European, and Chinese manufacturing data early this week raised inflation concerns and pushed back on rate cut hopes. Tesla's delivery numbers and February U.S. job openings data are awaited.

5 min read
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Key Takeaways

  • Yields, crude oil, dollar all hit fresh highs for 2024 on strong manufacturing data, weighing on stocks

  • Investors await February U.S. job openings data later this morning with eyes on “quits” rate

  • Tesla’s Q1 delivery numbers awaited in a week light on corporate news

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(Tuesday market open) The combined weight of rising Treasury yields, climbing crude oil prices, and a resurgent U.S. dollar rattled major U.S. indexes early Tuesday after the quarter started on a negative note. Mega caps are among the stocks under pressure so far today.

The 10-year U.S. Treasury note yield extended its rally this morning to above 4.35%, a new intraday 2024 high following Monday’s robust U.S. manufacturing data. Meanwhile, the U.S. dollar hit a four-month high and crude oil posted five-month highs. Gold is also at all-time peaks. Several Federal Reserve speakers take the podium today amid worries that a June rate cut may be far from assured in the face of sticky inflation and economic growth.

It’s been more than five months since the S&P 500® index (SPX) experienced a 3% correction. That’s an unusually long stretch because historically the SPX has about three of those a year.

“We are overdue for a pullback of some kind, which could happen at any time, and I’m not sure that a negative catalyst is required,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “If Friday’s jobs report contains any unpleasant surprises, this could trigger some kind of correction.”

Yesterday’s speed bump came courtesy of a parabolic rally in Treasury yields. The 10-year Treasury note yield jumped 13 basis points after the Institute for Supply Management’s Manufacturing PMI® came in at a firmer-than-expected 50.3% in March, up from 47.8% in February and breaking a 16-month string of sub-50 contraction readings. A rise in prices paid, part of the ISM index, added to frayed nerves over possible inflation and may have intensified the pressure on Treasuries, which move the opposite direction of yields.

Stronger-than-expected Chinese and European manufacturing data the last two days also contributed to rising yields and commodity prices.

Climbing yields generally weigh more on interest rate-sensitive sectors like utilities and real estate, as well as small caps. The Russell 2000® (RUT) small-cap index fell 1% yesterday and is up just 3.7% year to date versus nearly 10% for the SPX. Overall, the 10-year yield has risen more than 50 basis points from its February 1 intraday low below 3.81%, a significant increase over just two months.

Futures based on SPX dropped 0.44% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) fell 0.5%. Futures based on the Dow Jones Industrial Average® ($DJI) eased 0.6%.

Morning rush

  • The 10-year U.S. Treasury yield (TNX) climbed five basis points to nearly 4.38%.
  • The U.S. Dollar Index ($DXY) is steady at 104.89 after topping 105 earlier for the first time this year.
  • The CBOE Volatility Index® (VIX) rose to 14.17.
  • WTI Crude Oil (/CL) hit a new high for the year of $85.46 per barrel overnight and recently traded just under $85.
  • Bitcoin (/BTC) plunged 5% to $65,636.

What to watch

Today’s February Job Openings and Labor Turnover Survey (JOLTS) data could help set direction for yields as the day continues. It’s due at 10 a.m. ET and analysts expect it to show job openings totaling 8.75 million, according to Trading Economics. That’s relatively flat versus 8.86 million in January. Keep an eye on the “quits” rate. Workers tend to quit more when they believe jobs at higher pay are relatively easy to find. A drop in the quits rate can indicate a tightening job market and perhaps slower wage growth as fewer compete for open positions.

“Fed Chairman Jerome Powell said on Friday that as inflation continues to moderate, the other side of the Fed’s mandate, employment, grows in importance,” said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “Thursday is initial and continuing claims, but it will all lead up to the labor market report on Friday.”

Friday’s U.S. March Nonfarm Payrolls report dominates the week. Average hourly earnings are seen rising 0.3% month over month and 4.1% year over year, compared with 0.1% and 4.3% in February, according to Trading Economics. Analysts expect job growth of approximately 200,000, down from 275,000 in February, Briefing.com said. Unemployment is seen falling to 3.8%, from 3.9% the previous month.

Going into the JOLTS report, futures trading put June rate cut odds at around 58%, down from nearly 70% a week ago. Sticky U.S. inflation data last week along with the ISM Manufacturing report played a role. Still, it’s unclear how much the economy actually needs rate cuts, considering how well it’s performed with the Fed’s target rate stuck between 5.25% and 5.5% since last July.

Looking farther ahead, the CME’s FedWatch tool still puts the highest odds on two or three rate cuts occurring before the end of the year. There is no chance built in for a potential rate hike, and only a 2% chance that the Fed will keep rates unchanged all year.

Yesterday’s Atlanta Fed GDPNow tool raised the Q1 gross domestic product (GDP) estimate to 2.8% from 2.3%, based partly on the ISM data. That’s down from 3.4% GDP growth in Q4 but still well above the 1% level analysts pegged at the start of the year. The first government Q1 GDP estimate comes later this month.

A host of central bank policy makers speak between today and Friday, and it’ll be interesting to see if they sound hawkish or dovish compared with Powell, who’s been among the more dovish ones lately. If the Fed continues to push rate cut expectations, at some point it’s going to have to bite the bullet. The timing equation gets even more complicated when you consider the presidential election looming in November. Powell and company are under pressure, potentially, to make a move before political season rounds the corner into full gear.

Stocks in spotlight

With Q2 underway, keep in mind that the broader SPX outpaced the tech-heavy Nasdaq Composite® ($COMP) in Q1 as sector rotation continued. So long as there’s sentiment that a soft-landing could be in the cards, money may continue to spread into materials, financials, industrials, and a lot of cyclical names.

Investors await Tesla’s (TSLA) Q1 delivery and production estimates. Consensus on Wall Street as of late last week was just below 460,000 deliveries, according to Electrek, an EV news site. That would be down from around 484,000 vehicle deliveries in Q4, but up from approximately 423,000 in Q1 2023.

In related news, this morning Rivian Automotive (RIVN) reported Q1 production and delivery in line with the company’s own expectations and reaffirmed guidance for annual production of 57,000. The company produced 13,980 vehicles in Q1 and delivered 13,588. The delivery number exceeded FactSet’s expectations.

Dave & Buster’s Entertainment (PLAY) and Paychex (PAYX) report today. Levi Strauss (LEVI) is expected to report results Wednesday, and ConAgra Brands (CAG) is expected to report Thursday.

Stocks on the move:

  • Disney (DIS) fell 0.75% in premarket trading as the company engaged in a proxy battle with activist investor Nelson Peltz. Tomorrow could bring results of a shareholder vote to select board members. The stock is up sharply so far this year.
  • Shares of CVS Health (CVS), Elevance Health (ELV), UnitedHealth (UNH), and Humana (HUM) are all lower this morning as final Medicare Advantage rates disappointed health insurance investors. U.S. regulators didn’t boost payments for private Medicare plans as the industry had come to expect, and took Wall Street by surprise, Bloomberg reported. Humana is most exposed to Medicare among large insurance companies and fell nearly 10% in premarket trading.
  • GE Aerospace (GE) rose 0.5% after GE spun off its energy business as GE Vernova (GEV). The GE symbol will now refer to GE Aerospace. GE Vernova could be a bellwether for monitoring the U.S. trend toward electrification, MarketWatch quoted one analyst note saying.

Monday in review:

Banks were among the market’s weakest performers Monday, likely reflecting concern that elevated interest rates could pinch margins. The KBW Regional Bank Index (KRX) sank 2% after ending at a two-month high last week. The small-cap Russell 2000 was also soft, dropping 1% after closing at a two-year high last week. Energy stocks gained ground as oil reached its highest level since late October. WTI crude is up almost 18% so far this year amid concern over supply disruptions stemming from the Russia-Ukraine war and Middle East conflict.

Eye on the Fed

Early today, futures traders saw 96% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 58%.

Learning opportunity: Is the market still climbing a “wall of worry”? Check in with Schwab’s Chief Investment Strategist Liz Ann Sonders and Kathy Jones, chief fixed income strategist, as they address market breadth, credit spreads, sentiment, and more in their latest OnInvesting podcast, featuring special guest Dr. Ed Yardeni, president of Yardeni Research.

CHART OF THE DAY:  20-20. The S&P 500 Index (SPX-candlesticks) has bent but not broken so far this year, as it continues to track slowly upward above its 20-day moving average (blue line). It hasn’t had a close below that level since mid-January. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest 

Good times, bad times: Not long ago, close ties between stock market and Treasury yield performance appeared to finally break, with stocks able to rally sharply in Q1 despite Treasuries falling and yields—which move the opposite direction of the underlying notes—climbing modestly from Q4 lows. Monday indicated that the divorce may not be final. Treasuries plunged, raising yields to nearly three-month highs after better-than-expected U.S. and Chinese manufacturing data, and the SPX pulled back. It could indicate we’ve returned to a “good news is bad news” environment as hopes for rate cuts slip further with each batch of impressive U.S. economic data. The likelihood of a June rate cut, which had reached nearly 70% as of Monday’s opening bell, plunged to around 55% by mid-morning following the ISM data. The data showed the overall manufacturing environment improving, but, alarmingly, a large jump in prices paid in March. Investors may have written off unpleasant January and February inflation data due to seasonal factors, an idea reinforced by the Fed. But any sign of inflationary trends continuing into March hurts the “seasonal” explanation and implies next week’s Consumer Price Index (CPI) and Producer Price Index (PPI) may not be benign. At least that’s how the market traded Monday.

Spring in the air: April marks the last month of what’s historically a seasonally stronger time of year. Though seasonals aren’t completely reliable, late spring and summer months sometimes feature lackluster trading, and historically April’s been a strong month. April is also a stronger month in the energy market as refinery demand grows ahead of the U.S. summer driving season. WTI Crude Oil recently climbed above $80 per barrel for the first time since last fall. Any further gains could drag on profits for airlines and other transport stocks. Treasuries remain an important direction marker in April. The sharp rally late last year in fixed income faded in Q1 as inflation stayed stubborn, the Bank of Japan hiked rates, and investors dialed down U.S. rate cut expectations for 2024 from six to three. For more on the week ahead, check Schwab’s Weekly Market Outlook, hosted by Chief Global Investment Strategist Jeffrey Kleintop.

Talking technicals: Despite Monday’s slight drop in the SPX, chart patterns remain bullish technically. The upward trend persists, with the 20-day moving average a potential support point on any pullbacks. The SPX hasn’t closed below its 20-day moving average since January 17 and hasn’t even touched it on an intraday basis since February 21. Not only that, on recent days when there’s been a downward move, including Monday, it hasn’t typically been met by much selling interest. There hasn’t been too much buying interest up near the recent market highs, either, which suggests investors could be waiting for a catalyst like this week’s payrolls data or earnings season later this month.


April 3: ADP® Employment Report

April 4: Expected earnings from Conagra (CAG).

April 5: March Nonfarm Payrolls

April 8: No major earnings or data expected.

April 9: No major earnings or data expected.


Key Takeaways

  • Yields, crude oil, dollar all hit fresh highs for 2024 on strong manufacturing data, weighing on stocks

  • Investors await February U.S. job openings data later this morning with eyes on “quits” rate

  • Tesla’s Q1 delivery numbers awaited in a week light on corporate news

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