Check the Receipts: Cyber Monday Dawns Calmly Ahead of Key Inflation Data, Fed Talk Later In Week

Check the Receipts: Cyber Monday Dawns Calmly Ahead of Key Inflation Data, Fed Talk Later In Week

Key Takeaways

    It’s PCE week—Fed’s favorite inflation measure arrives Thursday

    Potential positives for China in ’24, but Asian shares down on weak China industrial profits

    Two Fed governors on tomorrow’s calendar, preceded today by several Treasury auctions

(Monday market open) Calmness prevails Monday as volatility recently dipped to its lowest levels since January 2020, but major indexes turned red overnight ahead of several U.S. Treasury auctions later today and key inflation data Thursday. The broader market is on a four-week win streak and early receipts from Black Friday shopping look solid.

The Cboe Volatility Index® (VIX) trades just above 13 this morning after touching a nearly four-year low Friday at 12.45. The light VIX reading speaks to absence of uncertainty on Wall Street and could herald smaller moves in the S&P 500® Index (SPX). However, a low VIX can also be a contrarian signal, so investors shouldn’t get too relaxed now that the holiday is over.

Most major U.S. indexes gained during Friday’s shortened session, led by small caps. Shares of Target (TGT) and Walmart (WMT) helped the retail sector turn in one of the day’s firmest performances as shoppers flocked to stores for Black Friday sales and several more retailers report in coming days. Today marks Cyber Monday and shares of Amazon (AMZN) climbed in premarket trading. Dollar Tree (DLTR), Foot Locker (FL), and Kroger (KR) are among the major retailers expected to report this week.

Another item getting attention this morning is a 7.8% year-over-year drop in profits earned by China’s industrial firms in October, which pressured Asian stocks earlier Monday. Profits are well below the all-time peak reached in December 2021.

Though Treasury yields are off their recent two-month lows, the market remains underpinned by growing investor conviction that interest rates have peaked and the Federal Reserve will stop hiking. That optimism has helped lift the S&P 500® Index (SPX) more than 10% over the past month. The benchmark 10-year yield is below 4.5% this morning but up from recent lows below 4.4% and could continue to direct traffic on Wall Street.

Morning rush

    The 10-year Treasury note yield (TNX) fell 3 basis points to 4.45%.The U.S. Dollar Index ($DXY) traded at 103.25.Cboe Volatility Index® (VIX) futures were at 13.07.WTI Crude Oil (/CL) dropped 1% to $74.70 per barrel.

Several Treasury auctions are scheduled today, including of 3- and 6-month notes and of 5-year notes. Soft demand in some recent auctions helped send Treasury yields higher, hurting stocks.

What to watch

Week ahead: Housing dominates the morning calendar with October New Home Sales due out just after the open. The report follows a surge in mortgage applications last week. The Freddie Mac Primary Mortgage Market Survey®, released a day early due to Thanksgiving, found the 30-year fixed rate loan dropped 15 basis points as of Nov. 22 compared with a week earlier to 7.29% from 7.44%. For the same week last year, the rate averaged 6.58%.

“In recent weeks, rates have dropped by half a percent, but potential homebuyers continue to hold out for lower rates and more inventory,” said Sam Khater, Freddie Mac chief economist, in a press release. “This dynamic is reflected in the latest data showing that existing-home sales have fallen to a 13-year low.”

Lower supplies of existing homes can drive demand for new housing, but last readings on Housing Starts and Building Permits showed subdued activity.

The consensus for headline October New Home Sales is a seasonally adjusted annual rate of 730,000, down from 759,000 in September, according to Trading Economics.

Personal Consumption Expenditures (PCE) prices Thursday could be among the most influential data of the week. It comes at an auspicious time, following rate-friendly October consumer and producer price reports that helped fuel this month’s stock and bond rally. Consensus is for a 0.2% monthly rise in core PCE prices and a 0.1% rise in the headline number, according to Trading Economics. Annual core and headline PCE are seen rising 3.5% and 3.1%, respectively, down from 3.7% and 3.4% the prior month. Core strips out volatile energy and food prices.

Other key reports ahead include Wednesday’s second government estimate of Q3 Gross Domestic Product (GDP) and the Institute for Supply Management’s (ISM) Manufacturing Index for November. GDP is expected to rise at an annualized rate of 5%, up from the first government estimate of 4.9%, Trading Economics reports.

Stocks in spotlight

Black Friday recap: Online sales rose 7.5% year-over-year to a record $9.8 billion on Black Friday, according to Adobe Analytics. Mastercard (MA) said retail sales not including autos rose 2.5% year-over-year that day.

Credit check: It’s getting easier to find a loan, conceivably good news for companies trying to grow their footprints after so much concern earlier this year about tightening credit trends following several high-profile bank failures.

“Credit spreads have fallen sharply over the last few weeks and are near their lowest levels since early 2022,” says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “High-yield spreads have also declined, but not as much as investment-grade on a relative basis.”

If this trend continues, it may be positive for financial stocks, especially smaller banks that rely more on making loans to small businesses. Small- and mid-sized banks have a heavy population in the small-cap Russell 2000 (RUT) index, which came under pressure earlier this year when a handful of banks failed and investors worried about a credit crunch. The RUT is up 9% over the last month, lagging a 10% gain by the SPX.

In an encouraging development, market breadth appears to be expanding, meaning the rally isn’t fueled simply by a handful of mega-caps. In fact, during Friday’s light-volume session, most of the so-called “magnificent seven” lost ground even as the SPX rose. Around three-quarters of SPX stocks trade above their 50-day simple moving averages. A healthy rally that lifts all boats, so to speak, would feature an even higher percentage above the 50-day.

Eye on the Fed

Early today, futures trading pegged chances at 96.8% 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 88.8%. The market prices in chances of the Fed cutting rates 25 basis points by its March meeting at 25%.

Two Fed governors speak Tuesday, including Gov. Christopher Waller that morning addressing the “Economic Outlook” and Gov. Michelle Bowman speaking about “Monetary Policy and the Economy.” The Fed was relatively quiet last week but speakers in coming days could have some impact on the market. The last time we heard from Fed speakers, before Thanksgiving, the takeaway was that rates could stay higher for longer than the futures market seems to expect.

Check the Receipts: Cyber Monday Dawns Calmly Ahead of Key Inflation Data, Fed Talk Later In Week

CHART OF THE DAY: MIND THE GAP. Since the October lows, the equal-weight S&P 500 (SPXEW-blue line) has recovered back to positive territory year-to-date, but the S&P 500 (SPX-candlesticks) maintains its massive lead due mainly to the massive market capitalizations of a handful of heavyweight info tech and communication services stocks. If this gap narrows over coming months, it might be a healthy sign of improved market breadth. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Inflation insight: If this week’s Personal Consumption Expenditure (PCE) prices report ends up mild like the recent consumer and producer price readings, U.S. consumers might want to thank key exporter China for the discounts. A 3% drop in the yuan versus the U.S. dollar over the last year plays into this. However, the dollar’s recent weakness—fueled by hopes of 2024 Fed rate cuts—could change things if it continues. A softer dollar wouldn’t be such good news for inflation watchers or U.S. importers but might help large multinational U.S. companies with their overseas sales, as well as international stocks. “If a weaker U.S. dollar—or even the lack of dollar strength—is the start of a new trend, this could provide a currency kicker to the performance of international stocks.” says Michelle Gibley, director of international research at the Schwab Center for Financial Research. The U.S. Dollar Index trades near two-month lows and fell below its 200-day moving average Friday.

Brighter China? Consumer confidence in China is near multi-decade lows as the property market remains a drag on consumers, says Jeffrey Kleintop, chief global investment strategist at Schwab. He adds, however, that China may have a brighter outlook for 2024 if domestic growth stabilizes and export growth improves as the global manufacturing recession slowly recovers. “These drivers may combine to lift corporate profits…” Kleintop says. “But a brighter outlook does not mean China’s stocks will deliver steady gains in 2024, with China’s historical volatility likely to combine with 2024’s unique challenges to make for a bumpy ride.” Important data from China are due later this week, including a read on November manufacturing. The official NBS Manufacturing PMI is due out late Wednesday U.S. time after an unexpected October drop into contraction territory.

Crude on tap: Eyes turn to crude oil Thursday when OPEC holds the meeting it delayed. The surprise postponement last week hinted at possible disagreements about further production cuts, which the oil market took as a bearish signal. Top producer Saudi Arabia has been disciplined in keeping production down by one million barrels a day and may want the rest of the cartel to cut output further. That may not sit well with smaller OPEC producers struggling with a 20% price drop from September’s peak. Arguably, Saudi output cuts haven’t been enough to prop oil, and the Middle East war initially raised prices before becoming less of a market factor. Media reports late last week suggested the cartel might not agree to additional cuts.

Calendar

Nov. 28: November Consumer Confidence and expected earnings from Hewlett Packard Enterprise (HPE) and CrowdStrike (CRWD).

Nov. 29: Q3 GDP-Second Estimate, Fed Beige Book, and expected earnings from Dollar Tree (DLTR), Foot Locker (FL), and Hormel (HRL).

Nov. 30: OPEC meeting, November Chicago PMI, October Personal Spending, October Personal Income, October Personal Consumption Expenditure (PCE) prices, and expected earnings from Kroger (KR), Salesforce (CRM), and Dell (DELL).

Dec. 1: November ISM Manufacturing.

Dec. 4: October Factory Orders

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