(Thursday Market Open) Trade fears stalk Wall Street early Thursday. Stocks fell triple-digits in pre-market action amid concerns that China and the U.S. could be edging closer to a full-scale trade war.
President Trump plans to announce later today at least $50 billion worth of annual tariffs and other penalties on China for its alleged theft of technology and trade secrets, The New York Times reported.
The trade measures are expected to target imported Chinese goods in as many as 100 categories — hitting everything from shoes and clothing to consumer electronics — and will impose restrictions on Chinese investments in the United States. That potentially sets the stage for China to counter-strike with restrictions of its own against U.S. goods.
Aside from trade concerns and lingering rumination over yesterday’s Fed rate hike, today could be a flashback to earnings season as several major firms report. Conagra (CAG), Accenture (ACN), and Darden Restaurants (DRI) are among the big names this morning, with Micron (MU) and Nike (NKE) on the calendar after the closing bell. CAG’s earnings per share came in ahead of Wall Street analysts’ estimates, but the company just missed analysts’ revenue expectations. In its press release, CAG cited “elevated” costs. DRI also missed slightly on revenue, which came in at $2.13 billion, just below Wall Street's estimate of $2.15 billion. Earnings, however, came in at $1.71 a share, above the estimate of $1.64.
Nike could be particularly interesting. China has been one of the company’s core growth areas, so anything its executives say on their call about possible trade tension might come under a microscope. NKE has beat earnings estimates in each of the past eight quarters, although top-line results have been more mixed. After beating top-line estimates in fiscal Q2, NKE reaffirmed its full-year revenue guidance and raised its gross margin outlook amid growth in its more profitable, direct channels, and management’s expectations for product launches coming up in fiscal Q4.
Trade with China was one item Fed Chairman Jerome Powell didn’t directly address in his press conference Wednesday at the conclusion of the Federal Open Market Committee meeting. However, as widely expected by markets and participants, the FOMC raised its target rate for Fed funds by a quarter-point to 1.5%-1.75%. Powell’s first meeting as chair was marked by some notable changes to the statement and a fresh outlook on future unemployment, according to the statement.
The Fed attempted to make clear that the economy was still running well and that strength in the labor market could continue to keep rates rising on a “gradual” pace. That likely wasn’t a surprise to Fed rate watchers. What might have been, however, was that while the committee is keeping its plan to raise rates three times this year, it expects to raise them three times next year instead of two.
There were small changes in the language of the statement, most notably that “economic activity has been rising at a moderate pace,” rather than “stronger,” as noted in its December missive. “Household and business fixed investment have moderated from their strong fourth-quarter reading,” the statement said. It also noted that the “economic outlook has strengthened in recent months,” adding that “economic activity will expand at a moderate pace in the medium term.”
The Dow Jones Industrial Average ($DJI) climbed as much as 250 points in the minutes after the Fed announcement, and then swung to a negative reading before climbing back 100 points and then descending to finish with losses. It looked like the market might have been churning based on analyst and investor interpretations of Powell’s remarks even as he made them. At first, investors seemed to interpret the Fed’s statement and Powell’s comments as dovish, but then switched to a hawkish interpretation before the end of the session. Focus might have moved toward the Fed’s so-called “dot plot” which showed a median projection of 3.4% for rates at the end of 2020, up from the previous 3.1%.
Powell, in his press conference, attempted to put that higher projection into perspective, saying basically that it’s way too early to know what the rate situation might be nearly three years out. He called 3.4% “modestly restrictive” but added that it’s “highly uncertain.”
He also addressed the mystery of why wages have risen so slowly despite unemployment falling from more than 10% at the height of the financial crisis to 4.1% now. Powell speculated that low productivity growth might be keeping wages from swelling as much as they had in past recoveries. For those worried about how long this recovery might last, Powell had some words that might bring relief, saying he doesn’t see the possibility of a recession being particularly high.
Though yields in the interest rate complex climbed ahead of Wednesday’s Fed announcement, most eased when the news hit the market. The benchmark 10-year yield, which moved toward its February highs earlier in the day, fell back below 2.9% after Powell finished his comments. By early Thursday, the yield was down to 2.85%.
Tech stocks took a dive during the press conference. That included the so-called “FAANG” names. Apple (AAPL) and Amazon (AMZN) got hit pretty hard. But bank stocks made moderate gains, perhaps helped in part by the Fed’s improved economic forecast its slightly higher rate expectations for 2019 and 2020. On the other hand, small-cap stocks performed well. The Russell 2000 index of small caps easily led all indices for the day with a gain of nearly 0.6%. All other major indices lost ground.
Leaving the Fed aside for a moment, keep in mind that Congress needs to act by the end of the week to avert a possible government shutdown. There were news reports Wednesday that Congress and the president were moving toward agreement to keep the government funded through the end of the fiscal year. It looks like Congress might be voting as soon as today on the budget package, so that could play a part in Thursday’s market action. Watch for possible headlines from D.C.
On the corporate front, Facebook (FB) — in the news all week about a data breach — responded late in Wednesday’s trading day to investor concerns. CEO Mark Zuckerberg put out a statement saying the company has a responsibility to protect user data and is taking additional steps to improve security. One question is how or whether these steps might affect use of the site or advertising revenue. Some analysts think the steps could affect users’ ability to log-in to apps through FB, potentially limiting revenue. FB shares did rise a bit Wednesday before sinking again in pre-market trading early Thursday.
Can Hike Help Flagging Dollar? Often, though not always, a rate hike cycle can give the dollar a lift. When the Fed tightens rates, it’s tightening the money supply, meaning fewer dollars in circulation. Tighter supplies often mean higher prices. However, the Fed’s rate hikes over the last year haven’t seemed to much if anything to help the dollar index, which fell to below 90 by late Wednesday from 103 at the start of 2017 despite four rate hikes over that time period. In fact, since the Fed’s previous rate hike in mid-December, the dollar is down about 4%. Yesterday’s hike puts the Fed’s benchmark rate back at its highest level since 2008, but rates remain relatively low historically, and sometimes the dollar rallies into a likely rate hike only to fade after the news occurs. So there’s no guarantee of any Fed rescue party coming for the greenback.
On the Home Front: Friday morning brings new home sales for February, a report that might draw more attention than normal considering the month’s big drop in housing starts and building permits. New home sales were already flagging in January, when they fell nearly 8% from the prior month and 1% year over year. Since then, mortgage rates haven’t gotten any lower. The average 30-year fixed mortgage rate already has climbed from 4.15% to 4.54% since Jan. 1. The question is whether yesterday’s rate hike helps send mortgage rates higher, or if they level off now that the hike is in place. Either way, analysts do expect a slight uptick in new home sales to a seasonally-adjusted annual rate of 620,000, according to Briefing.com. Another metric to watch is the median home price, which rose 3% or less in December and January compared with much higher increases last fall. Perhaps home prices are starting to feel the pinch from those higher mortgage rates.
Durables Coming Up Friday: After the recent industrial production report surprised on the upside, durable goods will be reported tomorrow and is seen as a leading indicator of future manufacturing activity. Orders for durable goods are expected to bounce back 1.7% in February following a mostly soft January that included a sharp aircraft-related downswing in the headline rate but also weakness in the ex-transportation and capital goods readings. The consensus for February ex-transportation orders is a solid gain of 0.6 percent with core capital goods expected to rise 0.7% according to Econoday.
All the best,
Helpful Educational Content and Programming
- Check out all of our upcoming Webcasts or watch one of the many archived ones, covering a wide range of topics from market commentary to portfolio planning basics to trading strategies for active investors. No matter your experience level, there’s something for everybody.
- Looking to stay on top of the markets? Check out the TD Ameritrade Network, which is live programming that brings you market news and helps you hone your trading knowledge.
- Plus, there's a new playlist on the TD Ameritrade YouTube Channel: Introduction to Volatility, featuring recent content from the TD Ameritrade Network.
The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.