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Why Rising Treasury Yields Are a Headwind on Stocks

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What’s in Today’s Report:

  • What is Country Garden and Why Does It Matter?
  • Equity Risk Premium: Why Rising Bond Yields Are a Headwind on Stocks
  • Chart – Growth Stocks Approach Key 2023 Support

U.S. equity futures are tracking global markets lower this morning amid more negative news flow out of China while Treasury yields continue to test to cycle highs with the 10-Year Note yield above 4.20%.

Multiple Chinese economic reports badly missed estimates overnight with Retail Sales notably rising just 2.5% vs. (E) 4.2% in July.

The bad data and renewed concerns about the property market prompted surprise rate cuts by the PBOC but the policy action was seen as underwhelming by investors and markets traded with a decisive risk-off tone overnight.

Looking into today’s session, the headlines out of China will continue to influence money flows, however there are several key U.S. economic reports to watch this morning including: Retail Sales (E: 0.4%), Empire State Manufacturing Index (E: -0.4), Import & Export Price (E: 0.2%, 0.1%), and the Housing Market Index (E: 56).

Markets continue to look for “Goldilocks” dynamics in the data, consistent with easing growth, a loosening labor market, and continued drop in inflation. Anything that contradicts those trends could further risk assets including stocks today.

There is also one Fed speaker today: Kashkari (11:00 a.m. ET) but it is doubtful he wavers from the Fed’s narrative and is unlikely to move markets.

Tom Essaye Quoted in Barron’s on August 9th, 2023

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Stocks Pause Ahead of Inflation Data

“The Italian government clarified that a windfall tax on bank profits would be capped, sparking a relief rally in European financials and general risk-on trade in global markets,” Essaye writes. “There are no notable economic reports and no Fed officials are scheduled to speak today which is setting the session up to be fairly quiet as traders await tomorrow’s CPI release.” Click here to read the full article.

Jobs Day

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What’s in Today’s Report:

  • Jobs Report Preview (Abbreviated Version)

Futures are slightly higher thanks to good AMZN earnings and solid EU economic data.

AMZN and AAPL, the last two big earnings reports for Q2, were mixed but generally fine. AMZN posted strong results (stock up 8%) while AAPL’s numbers were slightly underwhelming, but nothing terrible (stock down 1%).

Economically, EU data was solid as German Manufacturers’ Orders and EU Retail Sales beat estimates.

Today focus will be on the jobs report and estimates are as follows:  Job Adds, 200k.  Unemployment Rate, 3.6%.  Wages, 0.3% m/m, 4.2% y/y.  The key for markets today is the reaction of the 10-year yield to the jobs report.  If the jobs report is “Too Hot” then 10-year Treasury yield will rise and it’ll likely pressure stocks.  Conversely, if we get a Goldilocks number, then the 10-year yield should fall modestly and stocks can extend this early rally.

How to Explain Inflation Base Effects to Clients and Prospects

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What’s in Today’s Report:

  • How to Explain Inflation to Clients and Prospects
  • JOLTS Return to Pre-Covid Trend Path, But Is That Enough for the Fed?
  • ISM Manufacturing Index Takeaways – Another “Goldilocks” Report
  • The Yield Curve Will Return to Zero, How It Gets There is What Matters Most (Chart)

Stock futures are trading lower with global risk assets after a U.S. credit downgrade late yesterday.

Fitch Ratings downgraded the U.S. from its top rating AAA to AA+ yesterday, citing the massive fiscal deficit, but the downgrade should not result in any forced selling of Treasuries and therefore should have a limited near-term impact on yields and markets more broadly.

Looking into today’s session, focus will be on the U.S. credit downgrade as investors digest the potential implications on fixed income markets and re-assess valuations of risk assets, but we also get the first look at July jobs data in the form of the ADP Employment Report (E: 185K) ahead of the bell. If the data comes in “too hot” or “too cold” market volatility may pick up this morning. Motor Vehicle Sales will also be released (E: 15.6 million) but that data should not move markets.

There are no Fed speakers or notable Treasury auctions today, so beyond the early jobs data investors will continue to focus on Q2 earnings season with CVS ($2.12), KHC ($0.74), and PSX ($3.54) releasing results before the open while PYPL ($1.16), QCOM ($1.63) and MET ($1.85) will report after the close.

 

Sevens Report Technicals – Five Recessionary Bear Market Signals to Watch

The biggest risk to equity markets right now is a hard economic landing developing in H2’23 or sometime in 2024. Using modern market history as a guide, stock market rallies following yield curve inversions are typically reversed entirely during subsequent recessions (so all of the 2023 gains are at risk, and then some).

So, in this week’s edition of Sevens Report Technicals we included a list of Five Recessionary Bear Market Signals to Watch, which includes specific levels to monitor in various asset classes that will help us realize the onset of a looming recession in real time.

The feedback on Sevens Report Technicals has been overwhelmingly positive since its launch in May. One subscriber recently wrote in: “Having been in the business for 36 years and retired for 16, I truly believe this is the best report I have ever seen. The way you organize it and the info I glean from it helps my trading. I really look forward to each Monday’s report.”

To access this week’s edition of Sevens Report Technicals, please send an email to info@sevensreport.com to start a risk-free subscription. We offer a 30-day money back guarantee, so you risk nothing to see for yourself how Sevens Report Technicals can help you and your business.

How to Explain Any Pullbacks to Clients

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What’s in Today’s Report:

  • How to Explain Any Pullbacks to Clients (Why Too Hot or Too Cold Data Is a Negative for Markets)
  • Weekly Market Preview:  Can Goldilocks Data Continue to Support Stocks?
  • Weekly Economic Cheat Sheet:  All About Jobs (Jobs Report Friday, Claims Thursday, ADP Wednesday, JOLTS Tomorrow)

Futures are little changed following mixed global economic and inflation readings.

In China, the July PMIs were mixed as manufacturing was slightly better (49.3 vs. (E) 49.2) while services were worse (51.5 vs. (E) 52.9) and the result is markets will still want more stimulus from Chinese officials.

On inflation, EU flash core HICP (their CPI) rose 5.5% y/y vs. (E) 5.4% y/y, hinting at stickier than expected inflation.

This will be a busy week of data and earnings, but it starts slowly as there’s just one notable economic report today, the Chicago PMI (E: 43.5) and only a few notable earnings: ANET ($1.43), ZI ($0.23), WDC ($-2.01).  So, barring any major negative earnings announcements, we’d expect generally quiet trading ahead of an increase in activity starting tomorrow.

What Caused Thursday’s Reversal?

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What’s in Today’s Report:

  • What Caused Thursday’s Reversal?
  • How Economic Data Was “Too Hot” Yesterday

Futures are modestly higher despite a slightly hawkish surprise from the Bank of Japan.

In a move that was telegraphed in trading on Thursday, the BOJ made a slightly hawkish shift and allowed the yield on 10-year Japanese bonds to move above the previous cap of 0.50%.  Technically, this is a hawkish move, although it’s a very small one.

Today focus will be on inflation, as we get two of the bigger inflation reports in the Core PCE Price index (E: 0.2% m/m, 4.2% y/y) and Employment Cost Index (E: 1.1%).  Markets will want to see continued signs of disinflation (so numbers at or below estimates) while readings that are higher then expected will push Treasury yields higher, and that will be a headwind on stocks (as we saw yesterday).

Earnings also continue and some notable reports we’re watching include:  XOM ($2.00), PG ($1.32), CVX ($2.95), CL ($0.75).

FOMC Preview

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What’s in Today’s Report:

  • FOMC Preview
  • Composite Flash PMI Takeaways – Service Sector Growth Falters
  • 10-Yr Note Yield Maintains Long-Term Uptrend (For Now) – Chart

Futures are little changed as mostly upbeat earnings in Europe were offset by a weaker than expected ECB Survey while focus turns to big cap tech earnings and this week’s central bank meetings.

The ECB’s latest Lending Survey revealed that corporate loan demand collapsed to the lowest on record in Q2 underscoring tighter credit conditions and the threat of a further slowdown in growth in the Eurozone.

Today, focus will be on economic data early with the Case-Shiller Home Price Index (E: 0.8%) and Consumer Confidence (E: 111.8) reports both due to be released while the July FOMC meeting gets underway.

There is a 5-Yr Treasury Note auction at 1:00 p.m. ET which could move yields and have an impact on stocks, but a material move in markets ahead of the Fed decision remains unlikely unless it is driven by earnings.

Speaking of which, today will be a busy one for corporate earnings as: VZ ($1.17), GM ($1.65), GE ($0.46), MMM ($1.65) are all scheduled to release results before the bell while tech giants MSFT ($2.54) and GOOGL ($1.32) report after the bell. Additionally, V ($2.11) will release results after the close.

Could A Recession Just Be Delayed (And Not Avoided?)

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What’s in Today’s Report:

  • Could A Recession Just Be Delayed? (And Not Avoided)
  • Weekly Market Preview:  Fed/ECB/BOE Decisions This Week and Key Earnings Reports
  • Weekly Economic Cheat Sheet:  Fed Decisions and Inflation Readings In Focus This Week

Futures are modestly higher despite underwhelming economic data as markets look ahead to a busy week of central bank decisions, earnings and economic data.

Economically, data was not Goldilocks as the Euro Zone and UK flash PMIs missed estimates, falling to 48.9 vs. (E) 49.6 and 50.7 vs. (E) 52.2 respectively, and they reminded investors rate hikes can still slow growth.

Today focus will be on the July Flash Composite PMI (E: 53.1), as this is the first “big” number of July, and markets will want to see stability in the data to keep the Goldilocks rally going.

The major earnings reports occur later in the week but results we’ll be watching today include:  DPZ ($3.04), NXPI ($3.29), WHT ($3.80), LOGI ($0.45) and we’ll be looking for any signs of margin compression due to on going disinflation.

Tom Essaye Quoted in Market Watch on July 17th, 2023

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Why U.S. stock-market investors shouldn’t expect positive economic data to push S&P 500 materially higher

While it’s undeniable that fears of a hard landing, inflation and hawkish Fed have not materialized, the reality is that the current level of the S&P 500 largely factors all of that in, so last week’s CPI and PPI reports didn’t provide the market with a new positive catalyst, but instead just reinforced what was already widely assumed,” Tom Essaye, founder of Sevens Report Research, wrote in a Monday note. Click here to read the full article.

How Disinflation Can Be Negative for Stocks

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What’s in Today’s Report:

  • How Disinflation Can Be Negative for Stocks

Futures are modestly higher on more Goldilocks global economic data and after there were no major earnings disappointments overnight.

Economically,  Japanese CPI met expectations (up 3.3% y/y) while UK Retail Sales were better than expected (0.7% vs. (E) 0.1%).

On earnings, transports CSX and KMX both missed estimates, but it’s not impacting the broader markets as results were expected to be soft and the companies offered some positive commentary.

Today there are no notable economic reports so focus will be on earnings, and the highlight today is AXP ($2.80), as markets will want to hear insight into the state of more affluent spenders.  Other notable results today include AN ($5.83) and CMA ($1.89).