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Market is going up but so is the 10-year yield
7 October 2024
Market is going up but so is the 10-year yield***
Advancing shares outnumbered declining ones by three-to-one this week through midday Friday, and seven of 11 S&Psectors trade with 80% or more of their components above their 50-day moving averages. This wide breadth indicates the cyclical trade into sectors beyond mega caps remains intact and markets aren’t moving toward defensive trades at the equity level.
On a technical basis, the SPXheld it’s ground this week above the prior all-time closing high from July despite geopolitical uncertainty . The uptrend remains intact, and the bulls still appear to be in control.
Less bullish note, the SPX now trades at a nearly 22 price-to-earnings (P/E) ratio, historically high. This might damper investor enthusiasm for now, though solid earnings growth could help ease valuations.
Unfortunately for anyone banking on improved earnings growth, analysts keep backing up the truck. The average third quarter S&P 500 earnings per share estimate slipped to 4.2% today from 4.6% a week ago, according to research firm FactSet. That’s down from 7.8% at the end of June.
The FED is easing, and the path of least resistance is intact. The S&P 500 is less than 1% below all-time highs, following September’s strong Nonfarm Payrolls report.
Federal Reserve Chair Jerome Powell said, the U.S. economy is in solid shape and the Federal Reserve intends to keep it that way, Consumer household debt is very high. If the economy performs as expected, that would mean a total of 50 basis points of cuts for the remainder of this year, Powell said.
Stronger-than-expected September jobs data by the Bureau of Labor Statistics on Friday added fuel to arguments in favor of a soft landing, inflation closing in on the Federal Reserve’s 2% target. A gain of 254,000 nonfarm jobs last month paired with easing unemployment, it signals that the labor market remains on solid footing. And should help reduce calls for another big rate cut. Fed officials, however, will also have a couple more inflation readings to review before the meeting, as well as weekly jobless claims data and consumer spending updates. All of that could shift the economic outlook in the coming weeks.
The market now expects 25-basis-point interest rate cuts at the Fed’s November and December meetings following September’s 50-basis-point cut. That would equal 100 basis points, or 1 percentage point, worth of rate cuts before year-end. measured, methodical rate cuts. The U.S. economy is based on services, and we want consumers to stay robust as the Fed brings borrowing costs down.
Friday’s jump in the 10-year Treasury yield on the jobs report. Home loans loosely follow the 10-year and rates on a 30-year fixed jumped Friday morning to 6.53%, according to Mortgage News Daily.
While the port strike ended, labor strikes have become more common, which likely translates into higher wages (wage gains from Fridays nonfarm payrolls report were +0.4% vs. +0.3% expected. For now, inflation data has been trending toward the Fed’s target.
Analysts are saying this is Goldilocks scenario for the markets. Others are saying we might see some upside for inflation, crude prices are up 10% due to Middle East tensions. Wage inflation can play a role. The election can be a risk. But good news is good news. The positive forces should propel the market higher.
Any money manager that’s been bearish this year is behind the index if they were in cash and now, they have to jump in. Who wants to sell now and have tax gains. Nine months into the year and we’re up 20%. plus, money that comes out of the declining money-market funds and expiring U.S. government bonds should make its way into equities,
NOTE: The commodities futures trader report last week shows that large speculators and leveraged funds have the largest net short position in the 10 year treasury futures. they see long term interest rate going up.
Why aren’t small caps rallying? Small caps and value trade together and value started to outperform growth, perhaps small caps will play catch up. typically, you see small caps outperform a year after the first cut.
Next week we’ve got several potential market moving catalysts, highlighted by monthly Inflation data: The September consumer price index (CPI) report is out Thursday. Economists are expecting a 2.2% year-over-year increase at the headline level, and a 3.1% year-over-year increase at the core level, which strips out volatile food and energy prices. watch the CPI’s shelter index, which has been a key underlying source of overall inflation. slowing of year-over-year price increases in shelter would be welcome.September producer price index (PPI) is out Friday. While the Fed is more concerned about consumer prices, the PPI is still important because if wholesale prices go up more than expected it might mean higher retail prices down the line as companies look to protect their margins. These inflation numbers will certainly figure into the Fed’s calculations concerning future rate cuts.
We also have the Robotaxi event for Tesla and Advanced Micro Devices holds an important artificial intelligence event.
Look out for next Friday’s big bank earnings reports (JPM, WFC, BK).
FactSet is currently forecasting Q3 earnings growth for the S&P 500 to be up a healthy 4.6%, down from the 7.8% at the start of the quarter.
Sectors worth watching; tech, cyclical, Housing, cybersecurity, aviation, power & grid.
Summary: The intermediate technicals are bullish, but near-term price action has been choppy to sideways over the past few weeks. Geopolitical risk remains high, and the Fed may not be as accommodative as previously expected, the stronger than expected U.S. economic data appears to be the primary driver of the near-term direction for stocks, and that direction is higher for now. any upside surprises in the CPI report may cause for a correction. Earnings should help navigate market direction.
The outlook contained in this article are of opinion only and do not guarantee any profits. Futures trading is risky and suitable for everyone.
Daily Levels for October 4, 2024
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* This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts here in contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgement in trading. #Equities, #Consolidation phase, #Interest rates, #Precious metals, #Gold, #Silver, #US Dollar, #Crude oil prices, #HurricaneHelene, #Middle East tensions, #Chinese stimulus, #Redbook US Retail Sales, #Case Schiller US Metro-Area Home Prices, #Richmond Fed Manufacturing Index, #Service Sector Index, #Consumer Confidence, #New Home Sales, #Micron Technology