Good morning contrarians!
Yesterday saw a reversal, with stocks selling off late and finishing significantly lower on the day. The Nasdaq dropped 3%, with the S&P 500 declining by 2%. The catalyst appears to have been the latest consumer sentiment survey, which came in at a 16-month low and well below economist estimates (so much for this survey not moving markets, as was attested to yesterday in this space. That concept is now out the window).
Stocks are now down two straight days after rallying last week. The Nasdaq has just about given up last week’s gains and the S&P is not far behind. Energy was the lone bright spot yesterday, which was in all likelihood due to China’s loosening of Covid restrictions.
State of Play
As of 0630 this morning, stocks are resuming their drop. The Nasdaq is off 0.3% with Dow Industrials and S&P down a little less. Cruise lines are the major losers so far in the pre-market, with Carnival (CCL) down 8%. That’s not a Covid trade this time but due to economic fears, specifically with the consumer. Concerns are that the drop in consumer confidence could make recession a self-fulfilling prophecy, according to Yahoo Finance (kind of weird logic on that one. Consumer confidence usually doesn’t drop out of the clear blue but more due to specific reasons like, I don’t know, higher prices?).
Cryptos are getting dumped again, with bitcoin down 5% to drop below $21,000. Commodities are flat, with WTI crude sitting at $112/barrel. Bonds are seeing a few bids with the 2-year yield down 2 basis points to 3.10% and the 10-year down 4bps to 3.17% (yields move inversely to prices).
Central Banker Summit
Fed chair Jerome Powell speaks at 0900 at the ECB Forum on Central Banking in Portugal. This event has actually been going on all week and this panel is the final act. Powell’s counterparts at the European Central Bank and Bank of England (that would be Christine Lagarde and Andrew Bailey, respectively) are on the panel as well so it’s kind of hard to see how anything substantive will come from it.
Earnings
We’re due to hear from General Mills (GIS), McCormick (MKC), Bed, Bath & Beyond (BBBY), and Paychex (PAYX) before the open at 0930. So two pretty major consumer staples, a retailer, and one company linked to employment. Could be telling how these companies performed last quarter and more importantly how they see things in the immediate and medium-term future.
Economic Data
Seeing how it’s Wednesday, we get MBA Mortgage Applications at 0700. Last week these actually rose 4.2% week-over-week — their second straight week of gains. As we saw from pending home sales this week, the real estate market in the U.S. may not be dead yet. This is not good news for investors hoping for a less aggressive Fed in the second half of they year.
Other economic data releases include another reading of first quarter GDP and real consumer spending at 0830, crude oil inventories at 1030, and China manufacturing PMIs (much) later tonight at 2130.
The Bottom Line©
There’s quite a bit in the way of potential catalysts today: Earnings, mortgage applications, and Powell could all move markets and that’s all before the open at 0930. Either way, the tone for the day should be set early.
Last week’s rally is looking more and more like a bear market bounce than a turn-around in sentiment. The same issues we’ve been harping on for weeks — inflation and the Fed — continue to hang around. The conventional wisdom that the Fed needs to engineer a recession to rein in inflation appears to be winning out again. (Remember, don’t fight the Fed. You’ll lose).
That could reverse tomorrow if Personal Consumption Expenditures show anything in the way of cooling. And of course, earnings or potentially economic data could bring positive surprises to boost investors’ moods before then. As for Powell, he’s speaking on a panel which is typically not the setting to unveil major policy initiatives. And even if it were, the last time he threw markets a bone (the short-lived “promise” of no rate hikes above 50bps) the rally reversed after a day.
Sentiment Sinks: Daily Contrarian, June 29