Yields Still Directing Traffic: Sentiment Check Awaited After Long Wall Street Rally Fizzles

(Friday market open) As this placeholder week between substantial bundles of data and earnings winds down, stocks treaded water early Friday with a close eye on the bond market following yesterday’s late sell-off that ended the long rally on Wall Street.

“Yields are still in the driver’s seat when it comes to equity volatility—especially on an intraday basis—for now,” says Kevin Gordon, senior investment strategist at Schwab, citing yesterday’s market activity as evidence.

Despite media reports to the contrary, bond trading is open today despite tomorrow’s Veteran’s Day holiday. There’s no closure Monday, either, according to trade group Securities Industry and Financial Markets Association (SIFMA).

Speaking of bonds, disappointing results from yesterday’s 30-year Treasury bond auction slammed the door on long rallies in the S&P 500® Index (SPX) and Nasdaq (COMP) on Thursday as Treasury yields climbed across the spectrum amid concerns about large Treasury supplies. Most yields are now back at their 50-day moving averages after falling below them.

“Recent bond buying may be reaching short-term exhaustion,” said Joe Mazzola, director of trading and education at Schwab. “Yields could be putting in a higher near-term floor absent a major recessionary event.”

Every S&P sector dropped yesterday, but yield-sensitive ones like real estate, utilities, and consumer discretionary were among the worst performers. Tesla (TSLA) shares took a 5% blow following news of a product recall.

Today is light on data and earnings aside from a reading on consumer sentiment, but things soon accelerate. “Next week brings a rash of economic reports,” says Liz Ann Sonders, chief investment strategist at Schwab. Key ones to watch include the October Consumer and Producer Price Indexes (CPI and PPI), October Retail Sales, and a look at small business sentiment.

Morning rush

• The 10-year Treasury note yield (TNX) slipped 3 basis points to 4.59%.
• The U.S. Dollar Index ($DXY) is near its high for the week at 105.80.
• Cboe Volatility Index® (VIX) futures retreated to 15 and remain near six-week lows.
• WTI Crude Oil (/CL) rose about 1% to $76.53 per barrel but remains on pace for its third straight lower week.

What to watch

The week ahead: The inflation rollout starts Tuesday with the October Consumer Price Index (CPI), followed on Wednesday by the October Producer Price Index (PPI) report.

CPI could be a market mover, with expectations for core CPI to rise 4.1%, year-over-year but remain flat from the previous month. Any upside surprise could undo some of the recent retreat in Treasury yields, says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.

October Retail Sales are also due out Wednesday, with analysts building in a small monthly decline of 0.1%, according to Trading Economics. That’s after surprisingly hot September growth of 0.7%.

Stay tuned, too, for key Japanese economic data as Bank of Japan (BoJ) policy remains top of mind for many (see more below).

Closer to home, eyes could turn toward Washington, D.C., next week as the November 17 deadline (next Friday) looms to keep the government open.

Sentiment check: Soon after the open today we’ll get a look at preliminary November Consumer Sentiment from the University of Michigan. Analyst consensus for the headline figure is 63.7, down from 63.8 in October, according to Trading Economics. Year-ahead inflation expectations jumped to 4.2% in October from 3.2% in September, which may have reflected rising gas costs. The inflation expectations aspect of the report is important to watch today.

Speaking out: There aren’t enough fingers on both hands to count all the Fed speakers this week. Two more are on tap today, and it doesn’t end there. Atlanta Fed President Raphael Bostic, known as one of the more dovish voices at the Fed, speaks again on Saturday. Just yesterday, Bostic said rate policy “is likely sufficiently restrictive,” Bloomberg reported, which could imply he sees less chance of additional rate hikes. However, he’s not a voting member of the Federal Open Market Committee (FOMC), and his words quickly got lost in the shuffle as Fed Chairman Jerome Powell gave a more hawkish take, leaving the door open to possible rate increases. Other Fed speakers lined up more in Powell’s court than in Bostic’s late this week.

Stocks in spotlight

Big box time: A host of major retailers report next week, perhaps providing more color on the consumer economy after upbeat earnings from entertainment industry companies this week like Walt Disney (DIS) and MGM Resorts (MGM). Names on deck include Home Depot (HD), Target (TGT), Macy’s (M), Gap (GPS), and Walmart (WMT). Shares of Walmart and Target have gone different directions so far this year, with Walmart benefiting in part from customers seeking low prices as credit conditions tighten and student loan payment obligations resume.

Before the big boxes, one more large entertainment company reported yesterday afternoon. Unlike MGM the day before, Wynn Resorts’ (WYNN) results didn’t hit a jackpot with investors, who sent shares down more than 5% in premarket trading. This despite Wynn beating analysts’ estimates for earnings per share (EPS) and revenue.

In a related development, Bloomberg reported today that three Las Vegas casino companies, including Wynn, reached labor deals with the city’s hospitality union, averting a possible strike.

A word on bonds: While it’s possible the recent rally in bonds is losing steam and might push yields higher to the possible detriment of stocks, as we saw yesterday, some perspective is also important. Yesterday’s pain in Treasuries had a lot to do with disappointing demand for new supply at the Treasury auction. While supply is an important fundamental component of the market, there are others, too.

“We still believe that Treasury supply concerns should only be one factor driving yields, not the only factor,” says Schwab’s Collin Martin. “We don’t expect those supply concerns to pull yields up materially higher. The direction of yields should be driven by growth and inflation expectations—both coming down—and what that means for Fed policy.”

Eye on the Fed

Early today, futures trading pegged chances at 90% 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 80%.   

Rate debate: Some economists still see chances for a recession in early 2024 as consumer savings dwindle and high interest rates hurt companies with loans to refinance. That may be one reason why investors bake in better than 60% chances of at least a quarter-point Fed rate cut by next June, according to CME futures trading this morning. That’s similar to what the market had been tracking even before Powell’s hawkish comments yesterday. However, a trim that soon seems unlikely based on current economic metrics, and as a reminder, a year ago the market was also pricing in rate cuts expected to occur by now. Instead, the Fed has rates at 22-year highs and inflation remains somewhat sticky.

Thinking cap

Ideas to mull as you trade or invest

Rising sun: The coming week could have ramifications for interest rates … in Japan. It starts Sunday with a reading on Japan’s October producer prices and accelerates late Tuesday with Q3 Gross Domestic Product (GDP). October exports data follow late on Wednesday, U.S. time. The Bank of Japan (BoJ) kept monetary policy loose for years even as other central banks tightened, but recently ended its efforts to cap the 10-year yield at 1% after inflation in Japan exceeded the BoJ’s 2% target for the past 18 months. The end of yield-curve control “signaled a likely shift toward ending quantitative easing (QE) and hiking interest rates in 2024,” says Jeffrey Kleintop, Schwab’s chief global investment strategist. The BOJ finally tightening may lead to moves in financial markets around the world, including upward pressure on bond yields in other developed countries, an increase in the value of the yen, and gains in Japanese stocks as capital returns to Japan. All this arguably means it’s a good idea for investors to pay more attention to Japanese data, including the numbers about to hit.

Rockford files: If you were around in the late 20th century you might remember compact cars like the Dodge Omni and Plymouth Neon. Many were built at a massive Chrysler plant visible from the Illinois interstate near Rockford, but that facility collected dust for months after its production of the Jeep Cherokee ended. The tentative agreement between Stellantis (STLA) and the United Auto Workers Union could breathe new life and almost $5 billion of Stellantis funds into the nearly 60-year-old facility that once employed nearly 6,000 workers, the Chicago Tribune reports. The factory is being retooled to build a mid-sized truck, and Stellantis will also build an adjacent electric vehicle battery plant and create a parts distribution center. Together, this could bring 2,500 jobs to the region.

Recession suggestion? The Stellantis news comes at an interesting juncture for U.S. manufacturing, which struggled the last two years as spending on “experiences” like travel and casinos rose and spending on goods tailed off. The economy lost thousands of manufacturing jobs in October alone, though the UAW strike played a role. A manufacturing rebound might quiet recession worries that emerged after last week’s disappointing economic data. But a revival would take more than one retooled auto plant. Look for more insight on the “goods economy” as retailers report next week. Earlier this year, many retailers said consumers were shying away from more expensive “discretionary” purchases.

Calendar.

Nov. 13: Expected earnings from Tyson (TSN).

Nov. 14: October Consumer Price Index (CPI) and expected earnings from Home Depot (HD).

Nov. 15: October Producer Price Index (PPI), October Retail Sales, November Empire State Manufacturing, and expected earnings from Target (TGT) and Cisco (CSCO).

Nov. 16: October Industrial Production and October Capacity Utilization, and expected earnings from Walmart (WMT), Macy’s (M), Applied Materials (AMAT), and Gap (GPS).

Nov. 17: October Housing Starts and Building Permits.