China Concerns Ease Slightly, But Is it Too Soon for the Market to Exhale?

The risk-on pattern that dominated Wall Street ahead of Thanksgiving faces fresh challenges this week from China, the Fed, and a host of economic data. While China concerns appeared to ease a bit this morning as the country saw fewer new cases and loosened some restrictions, it’s too soon to say for sure if this ends the protests.

Much also depends on what Fed Chairman Jerome Powell says in his speech Wednesday and whether the jobs report Friday shows any sign of cooling in the labor market. However, when it comes to China or events in Ukraine, U.S. investors and even the Fed are powerless to do much more than watch.

That’s why the caution that crept in Monday may not fully dissipate right away even if these near-term China concerns ease appreciably and U.S. data feeds notions of a less hawkish Fed. Keep an eye on the CBOE Volatility Index, which was fairly tame yesterday even as it rebounded from multi-month lows. A flirtation with 25 would suggest the recent rally is flagging and might even summon comparisons to last summer’s market enthusiasm that so quickly blew away.

Defensive sectors outperformed growth yesterday, though every sector finished lower. A couple of hawkish speeches from Fed officials didn’t help, either.

On the positive side, stocks with exposure to China including Apple Inc (NASDAQ:AAPL), Walt Disney Company (NYSE:DIS), Caterpillar Inc (NYSE:CAT), and NVIDIA (NASDAQ:NVDA) perked up a bit early Tuesday, though none gained too much ground. These shares were under pressure Monday.

Morning Rush

• The 10-year Treasury yield fell 3 basis points to just under 3.67%, near last week’s low.
• The U.S. Dollar Index fell slightly to 106.4.
• Cboe Volatility Index (VIX) futures eased toward 22.
• WTI Crude rose 2% to $78.89.

The S&P 500 could test technical support near 3,940 if it falls much further. The 100-day moving average of 3,918 is not far below that, and the psychological 3,900 level could be another test. Looking up, the 200-day moving average rests at 4,054, but last week’s intraday high of 4,034 may be a resistance point.

Data Dive

For the second early morning in a row, investors don’t have much data to pore over. The numbers outage ends shortly after today’s opening bell with the November Consumer Confidence report.

• As we noted yesterday, consensus from Briefing.com is for a consumer confidence headline figure right on the 100.0 mark. That would be a slight retreat from 102.5 in October but still up solidly from summer lows. One thing to watch is one-year inflation expectations, which were 7% last month, up from 6.8% in September. Any change here could help pinpoint how much price pressure consumers feel.   
• Things pick up with November’s Chicago PMI report on Wednesday morning. Though the report has a manufacturing component, it also surveys non-manufacturing firms. This means it offers a broad look at economic health in the nation’s third-largest metropolis. The patient hasn’t been so hale and hearty lately, and analysts expect tomorrow’s 10:45 a.m. ET report to show more of the same. The consensus headline estimate is 47.5, up slightly from 45.2 in October but still below 50, which could be welcomed if you’re a Fed official looking for signs of slowing economic growth.
• And on that topic, nothing tells the full story of economic growth like the Gross Domestic Product (GDP). The government’s second estimate for Q3 GDP is due before the open Wednesday. Consensus is for growth of 2.7%, equal to the first estimate. A higher-than-expected estimate might drive ideas that the economy isn’t cooling down as quickly as the Fed would like. A lower number might also cause hand wringing among investors who could worry that it indicates a pending recession.
• Soon after tomorrow’s open, we’ll also get the government’s Job Openings and Labor Turnover Survey, better known as the JOLTS Survey. Last time out, job openings of 10.7 million remained well above normal but were down slightly from summer peaks. Bullish investors would probably like to see this number continue falling to loosen up the tight labor market. When more workers compete for fewer jobs, that tends to keep wage pressure from boiling over and contributing to rising prices.

Looking back at Monday’s data, there wasn’t a lot to glean other than the November Dallas Fed Manufacturing Index results. It ticked up to -14.4 versus analysts’ average estimate of -21 and October’s -19.4, but new orders, shipments, hours worked, and delivery times all fell deeper into contractionary territory, Charles Schwab’s Managing Director and Chief Investment Strategist Liz Ann Sonders pointed out. She added that the report’s employment category fell to its lowest since July 2020. Last week, the Richmond Fed Manufacturing Index also saw a November decline.

Wednesday’s Q3 earnings calendar brings a couple of big tech names as it moves toward the end of the season. Synopsis (SNPS) and Salesforce (NYSE:CRM) are expected to report that afternoon.

Thinking Cap

WTI Crude (/CL) rallied off 11-month lows yesterday amid rumors that OPEC and its allies would use next week’s meeting to trim production again. Futures rallied above $79 per barrel at times overnight after sinking below $74 early Monday.

This isn’t the first time that rumors about potential production cuts just happened to spread following a retreat in prices. We saw the same thing late September, the last time /CL dipped below $80 per barrel. Back then, /CL quickly rallied to $90 and above as OPEC and allies cut production by 2 million barrels per day.

U.S. supplies remain low, so the cartel does probably have the upper hand here in pushing up prices when it doesn’t like what it sees in the market. It can either jawbone or actually cut production. The next meeting is December 4, and it wouldn’t be surprising to see /CL prices look volatile between now and then.