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BoE Looks To Raise Rates To Fight Inflation, Stock Futures Point To Weaker Open

By JJ KinahanMarket OverviewOct 18, 2021 09:47AM ET
BoE Looks To Raise Rates To Fight Inflation, Stock Futures Point To Weaker Open
By JJ Kinahan   |  Oct 18, 2021 09:47AM ET
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Stocks appear to be pausing as rates start to rise. Before the U.S. markets opened, short-term U.S. Treasury yields were rising. The five-year yields rose to their highest levels in 20 months per Reuters. The rise appears to be driven by hedge funds increasing their bearish positions on two- and five-year Treasuries while increasing their bullish positions on the 10-year Treasuries.

The Financial Times reported that Bank of England governor Andrew Bailey warned that the BoE may have to start raising rates to curb inflation. While he gave no indication when rate hikes could happen, the English bond markets appear to be pricing in a hike in early 2022.

Crude oil is testing the $83 level as it looks to add to its streak of eight straight weeks of gains. The commodity ended last week 3% higher. Rising oil price may pull interest rates even higher.

Looking at the stock market news, online real estate company Zillow Group (NASDAQ:ZG) is trading 6.1% lower in premarket trading. The company told Bloomberg that it won’t purchase homes for the rest of the year because it’s “beyond operational capacity.” In the previous few years, the company moved beyond reporting housing prices and started buying and selling or “flipping” homes. The company claimed “overwhelming” demand is prompting the stoppage.

In other negative news, Walt Disney Company (NYSE:DIS) fell 1.74% in premarket trading after Barclays cut its rating on the stock. Barclays analyst cited significant slowing as the reason for the downgrade.

French biotech company Valneva (NASDAQ:VALN) shot up 39% before the open on its claim that their COVID-19 vaccine candidate outperformed AstraZeneca’s (NASDAQ:AZN) in its Phase 3 study. Meanwhile, Moderna (NASDAQ:MRNA) is trading lower after the FDA delayed a decision to make their vaccine available to adolescents.

In earnings news, State Street (NYSE:STT) picked up where some of the other Financial stocks left off last week, by announcing better than expected earnings and revenue. Grocery chain Albertsons (NYSE:ACI) rose 5% in premarket trading after beating analysts’ estimates on revenue and earnings. The company also increased its dividend by two cents per share. Industrials stock Sandvik (OTC:SDVKY) also beat analysts’ estimates on both top and bottom line numbers. Sandvik is up more than 2% before the open.

Retailing The Story

On Friday, the September U.S. Retail Sales report was much stronger than expected. However, the stock futures reaction to the number was muted. On the other hand, the bond market did react, and the 10-year Treasury Yield rallied more than 2.8%. Stronger sales are a good sign for economic growth, but part of the gains can be attributed to inflation. The report focuses on nominal numbers and didn’t adjust for inflation, so using the report as a measure of demand is a little distorted.

Many economists would like to see weaker retail sales and a consumer shift to services. Weaker retail sales could alleviate some of the pressure on cramped supply chain and labor shortages. Stores could then restock their shelves, and manufacturers could replenish their inventories. A more fluid supply chain could provide a clearer picture on what inflation is transitory and what is more permanent.

Either way, inflation continues to be an important factor driving the markets, which is one reason that Energy, Materials, and Financials sectors have performed so well. These groups may continue to do well if supply chains, worker shortages, and energy crises in Europe and China fester.

Chart Of The Day

Upside down. The S&P 500 (SPX—candlesticks) appears to have completed the final shoulder of an inverse head and shoulders pattern. The pattern is considered by technical analysts to be bullish.

SPX Inverse Head and Shoulders
SPX Inverse Head and Shoulders

Data source: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Head Over Heels

I’m not much of a technical analyst, and I don’t even try to play one when I’m on TV. What I do have are friends that like to analyze charts, and some see an inverse head and shoulders forming in the S&P 500 (SPX). With a little imagination you can see it in the chart.

The first shoulder formed near the end of September. Then the head formed around the first of October with the lower low. The last shoulder just recently completed when a higher low formed on Oct. 13, and the price broke the 4450 “neckline” a couple of days later. Many technicians will use the distance from the bottom of the head to the neckline and then add that number to the neckline to create a short-term price target.

There are a couple of issues with this and with every pattern. First, not every pattern breakout works. The security doesn’t always reach its target, or it just consolidates. In this specific case, the SPX must clear resistance at the 4530 level before it can reach its target.

Also, price patterns are open to interpretation. You could ask several technicians about a pattern and likely get several answers on where to draw the lines or set the target. But many people find value in these patterns when trying to project future growth.

Personally, I just feel bad for the guy hanging upside down.

Industrial Strength

One sector that keeps hanging around is Industrials. The strength in the Energy and Materials sectors means more drilling, mining, and hauling of natural resources. That is hard work that is easier and faster when done with heavy equipment. The Industrial Select Sector SPDR® Fund (NYSE:XLI) has rallied more than 5.6% off its September low and is gaining in relative strength against the S&P 500.

On next week’s earnings calendar, some of the larger industrial stocks that are scheduled to report include Sandvik, Vinci (OTC:VCISY), and Atlas Copco (ATLCY). You may not recognize these names because each of these are based outside of the U.S. Industrial stocks that may have more name recognition include Caterpillar (NYSE:CAT), which is scheduled to report Oct. 28; Terex (NYSE:TEX), which reports Oct.29, and Deere (NYSE:DE), which reports Nov. 24.

Keep On Trucking

The Dow Jones Transports (DJT) traded above the 15,000 level to reach June 2021 prices. The group appears to have rallied on better-than-expected earnings from JB Hunt (NASDAQ:JBHT) last Friday. Hunt rallied to a new 52-week high after climbing more than 10% on the day.

A convoy of trucking stocks fell in behind Hunt including Old Dominion Freight (NASDAQ:ODFL), PAM Transportation (NASDAQ:PTSI), SAIA (NASDAQ:SAIA), Daseke (NASDAQ:DSKE), and Covenant Logistics Group (NASDAQ:CVLG). It wasn’t just trucking that benefited from Hunt’s success—railroads like CSX (NASDAQ:CSX), GATX (NYSE:GATX), Kansas City Southern (NYSE:KSU), Norfolk Southern (NYSE:NSC), and Union Pacific (NYSE:UNP) all rallied on the day.

As earning season progresses and the focus moves on from the Financials, the companies that can help solve the supply chain issues will likely attract more attention. As Charles Dow observed many years ago, a strong Transportation sector is usually a sign of strong economy.

BoE Looks To Raise Rates To Fight Inflation, Stock Futures Point To Weaker Open

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BoE Looks To Raise Rates To Fight Inflation, Stock Futures Point To Weaker Open

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