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Why Have Markets Become Volatile?

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What’s in Today’s Report:

  • Why Have Markets Become Volatile?
  • Weekly Market Preview:  Are the Three Pillars of the Rally Under Attack?
  • Weekly Economic Cheat Sheet:  Key Growth and Jobs Data This Week

Futures are slightly higher following more small stimulus steps from Chinese authorities, as investors look ahead to an important week of economic data.

Chinese authorities reduced the stamp tax on stock investment, providing a small economic tailwind and boost to Chinese stock prices.

Economically, the only notable number was the EU Money Supply (M3) and the number was bad as M3 declined –0.4% vs. (E) 0.6%.

Today there are no notable economic reports so markets will focus on the tech sector to see if it can continue to stabilize after last Thursday’s ugly reversal.

Why Didn’t NVDA Earnings Spark A Rally?

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What’s in Today’s Report:

  • Why Didn’t NVDA Earnings Spark A Rally?

Futures are bouncing modestly following a quiet night of news and as investors look ahead to Powell’s speech later this morning.

EU economic data was soft again overnight, as German IFO Business Expectations missed estimates (82.6 vs. (E) 83.6) and added to the list of disappointing economic reports this week.

Today focus will be on Powell’s speech (10:00 a.m. ET) and if Powell’s tone implies “higher for longer” on rates, that will boost Treasury yields and pressure stocks.  Conversely, if he talks about being “patient” with the 2% inflation target, that will be seen as dovish.

Away from Powell, the only notable reports are Consumer Sentiment (E: 71.2) and the One-Year Inflation Expectations (E: 3.3%) and Five-year Inflation Expectations (E: 2.9%).   If inflation expectations are solidly under estimates, that’ll be a mild positive for markets.

Is Bad Economic Data Good For Stocks Now?

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What’s in Today’s Report:

  • Is Bad Economic Data Good For Stocks Now?  No.
  • EIA Analysis and Oil Market Update

S&P 500 futures are solidly higher thanks to strength in tech following very strong NVDA earnings.

NVDA beat earnings estimates and raised guidance on strong AI chip demand and the stock is up 8% pre-market and boosting Nasdaq and S&P 500 futures.

However, the “non-tech” parts of the market are flat to down as investors digest Wednesday’s disappointing economic data.

Today another AI driven rally in tech, following the NVDA earnings, should help support markets.  But, away from tech, markets will be focused on Jobless Claims (242K) and Durable Goods (E: -4.0%), and again the key here is stability, in that the data doesn’t show a sudden deterioration in activity (so spike in claims, drop in Durable Goods) or extreme strength (which would undo yesterday’s Treasury yield decline and weigh on the markets).

Economic Breaker Panel: August Update

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What’s in Today’s Report:

  • Sevens Report Economic Breaker Panel – August Update
  • A Surprising Warning from Macy’s
  • NVDA Earnings Could Trigger a Huge Move In the Stock: Chart

Stock futures are solidly higher this morning ahead of the widely anticipated release of NVDA earnings after the close today while Treasuries yields are retreating on the back of weak economic data overseas.

The Eurozone PMI Composite Flash indicated the economy fell deeper into contraction territory this month (47.0 vs. E: 48.4) led by an unexpected drop off in service sector activity which is weighing on bond yields this morning and easing some concerns about continued aggressive policy by central banks.

This morning, focus will be on economic data with the U.S. PMI Flash data due out just after the open at 9:45 a.m. ET. The Manufacturing Flash is expected to come in at 48.8 while the Services Flash is expected to hold expansion territory at 52.0).

The market is looking for stabilization in the manufacturing sector and moderation, but not contraction, in the service sector. Material weakness in either headline will rekindle worries about a hard-landing while data that is much better than expected would raise Fed rate hike expectations. So, a “Goldilocks” release will be important for both stock and bond markets to stabilize today.

New Home Sales (E: 702K) will also be released at 10:00 a.m. ET but should have a limited impact on markets.

From there, focus will turn to earnings with NVDA reporting after the close (Earnings Estimate: $2.18, Revenue Estimate: $11.09B). Investors have very high hopes for NVDA’s quarterly performance as well as their forward guidance, so any meaningful disappointment is likely to weigh heavily on the stock, the tech complex, and the markets more broadly in after hours trade.

Tom Essaye Quoted in Business Insider on August 22nd, 2023

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Wall Street is declaring victory too early — the US is still headed for a recession

Tom Essaye, the founder of Sevens Report Research, which counts some of the biggest institutions on Wall Street among its clients, said while inflation on a year-over-year basis has come down significantly, the cumulative price increases we’ve seen since the start of the pandemic will eventually force consumers to cut back on spending.

“People get very excited about CPI and say, ‘Hey, CPI went up only 0.1% over the past month and it’s only up 3% over the past year,'” Essaye said. “Well, think about that in practical terms. If I go to buy my kids a bag of Skittles, in 2019 it cost $0.75. Now it costs $1.50. Am I supposed to get excited because next year it costs $1.55?”

Click here to read the full article.

What Is “R Star” and Why Is It Important?

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What’s in Today’s Report:

  • What is “R*” and Why Is It Important?
  • Palo Alto Shares Rip Higher by 15%, Sparking Tech Rally – Chart

Stock futures are higher this morning with mega-cap tech shares extending this week’s strong advance following news that SoftBank’s Arm semiconductor unit has filed for the largest U.S. IPO in 2 years after the close yesterday while traders await NVDA earnings tomorrow.

Overseas, the PBOC set the strongest yuan fixing on record overnight which has helped the currency stabilize and that is contributing to risk-on money flows this morning.

There were no other market moving headlines overnight and no notable economic reports were released.

Looking into today’s session, there is one economic report due out in the U.S. this morning: Existing Home Sales (E: 4.160 million) but it is unlikely to impact markets with traders primarily focused on tech so far this week.

There are two Fed speakers today: Barkin (7:15 a.m. ET) and Goolsbee (2:30 p.m. ET) and their commentary could move markets as markets look ahead to Fed Chair Powell’s remarks from Jackson Hole on Friday. Anything that sparks a further rise in Treasury yields could pour cold water on this week’s tech rally which is basically entirely responsible for the week-to-date gains in the broader equity markets.

How to Explain the Current Pullback to Clients & Prospects

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What’s in Today’s Report:

  • How to Explain the Current Pullback to Clients & Prospects
  • Weekly Market Preview:  Will Treasury Yields Stabilize? (That’s the Key to Ending This Pullback)
  • Weekly Economic Cheat Sheet:  Important Growth Updates and Powell Speech on Friday

Futures are modestly higher thanks to more evidence of global disinflation and despite another round of underwhelming Chinese stimulus.

German PPI declined -6.0% y/y vs. (E) -5.1% y/y and that’s serving as a reminder that inflation is still falling globally.

In China, officials cut the Loan Prime Rate less than expected (-10 bps vs. (E) -15 bps) and while that will provide stimulus, it’s not alleviating concerns that the Chinese economy will be a headwind on global growth.

Today there are no economic reports and no Fed speakers (the Jackson Hole Fed conference is this week, so speakers will increase throughout the week culminating with Powell on Friday).  As such, Treasury yields will remain a short-term influence on stocks.  Yields and futures are higher this morning but if yields extend the rally throughout the day, don’t be surprised if stocks give back these early gains.

Another Reason Treasury Yields Are Rising

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What’s in Today’s Report:

  • Another Reason Treasury Yields Are Rising

Futures are modestly lower on more negative real estate news from China while Japanese inflation was hotter than expected.

Chinese real estate firm Evergrande filed for bankruptcy overnight, increasing concerns about the Chinese property market specifically and economy more broadly.

Economically, Japanese CPI was in-line (up 3.3% y/y) but services inflation rose to 2%, a 30 year high, and that’s increasing expectations the BOJ may get more hawkish (and that would put more upward pressure on global bond yields, which would increase the headwind on stocks).

Today there are no notable economic reports nor any Fed speakers so focus will remain on Treasury yields, and the market needs stability in yields for stocks to bounce back.  A sudden drop in yields on growth concerns (which is what we’re seeing this morning) or a sharp rally in yields (on inflation concerns) will only further pressure stocks, so the sooner yields can “calm down” and trade little changed, the better for stocks.

Pullback or Something More?

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What’s in Today’s Report:

  • Pullback or Something More?
  • EIA Analysis and Oil Market Update

Futures are slightly higher on better than expected CSCO earnings amidst an otherwise quiet night.

Earnings this week have been solid and that continued with CSCO results overnight (stock up about 3% pre-market) and that’s driving the bounce in futures.

Earlier this week HD, TGT and TJX all posted solid results and the earnings reinforced the $240 2024 S&P 500 earnings expectation (which helps with market valuation).

Today focus will be on economic data and the key reports are:  Jobless Claims (E: 240K), Philly Fed Manufacturing Index  (E: -10) and Leading Indicators (E: -0.4%).

Markets need Goldilocks economic data to stop rising Treasury yields while at the same time further downplaying hard landing worries.  If the data is “Too Hot” yields will rise and stocks will likely fall, while conversely, a sudden drop in activity will increase worries about a hard landing (and likely pressure stocks).  Numbers close to expectations are what investors need to help support stocks.

Tom Essaye Quoted in Barron’s on August 15th, 2023

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Stocks Could Be Sandbagged by Rising Treasury Yields

“That’s why rising Treasury yields are a problem for stocks, because investors will rotate out of riskier equities and into less-risky bonds because the additional return in stocks isn’t worth the volatility,” argues Essaye, who believes that while the current environment makes the historical 4% risk premium unlikely, a “fair” number for 2023 is “definitely higher than 1%!”

Click here to read the full article.