With Debt Talks Delayed and Retail Earnings Ahead, Markets Set for a Quiet Open

(Friday market open) With today’s planned high-level debt ceiling negotiations pushed back to next week and few major earnings or data updates on the way, it feels like a quiet spring Friday shaping up on Wall Street. Stock indexes edged higher in overnight trading as regional bank stocks recovered some of Thursday’s losses.

Wall Street seems sanguine about the debt ceiling, perhaps because the country has never defaulted and there’s still a three-week window during which a deal could be struck. Also, the deadline might get pushed back weeks or even months depending on the flow of tax receipts in May. It’s unclear if the talks between President Biden and congressional leaders being postponed represents progress or a roadblock, though media reports suggest it could mean some traction developing.

Still, it’s hard to see the market getting much traction with this overhang. A welcome easing of inflation data the last two days didn’t appear to give stocks much of a lift, even as traders built in a nearly 100% chance of a pause in rate hikes next month. Recession and debt ceiling fears might be outweighing pause hopes, with the inflation data accompanied by a big jump in fresh jobless claims.

Banks also remain in the spotlight, keeping the market jumpy. Financial companies were among the weakest performers Thursday, with the KBW Regional Bank Index dropping for a fourth straight day and ending near a two-and-a-half-year low.

Stocks are on pace for a mixed week. The S&P 500 index (SPX) is down fractionally but the Nasdaq 100® (NDX) is up more than 1%.

Morning rush

• The 10 Year Treasury Yield (TNX) inched up 2 basis points to 3.42%.
• The U.S. Dollar Index ($DXY) edged higher to 102.19.
• The Cboe Volatility Index® (VIX) futures dipped to 16.64 and are now near their weekly low.
• WTI Crude Oil (/CL) fell to $71.13 per barrel.

Stocks in the Spotlight

Shopping carts ready: Next week delivers a comprehensive update on consumer spending. It kicks off Tuesday morning with April Retail Sales data and expected earnings from Home Depot (NYSE:HD) (HD). That’s followed later in the week by quarterly results from Target (NYSE:TGT) (TGT) and Walmart (NYSE:WMT) (WMT), both of which gave conservative guidance earlier this year. Will their outcomes exceed analysts’ relatively mild expectations? Both HD and Lowe’s (LOW) received analyst price target cuts this week.

Lot check: Retail sales were on the light side in March, but that partly reflected low energy prices that kept gasoline sales down (the report isn’t adjusted for inflation). The consensus for April is a 0.7% rise sequentially in overall retail sales and a 0.5% bump in retail sales excluding automobiles, says Trading Economics.

If numbers are weaker than expected, it could intensify ideas that a recession is brewing, especially considering sequential drops in retail sales recorded in both February and March. Consumer spending forms about 70% of the U.S. economy, so if people sense that their wallets are getting lighter, that can show up in Retail Sales data.

Higher charges: Tesla (NASDAQ:TSLA) (TSLA) raised vehicle prices in the United States following price cuts earlier this year that led to worries about the company’s margins. Shares popped in premarket trading, also supported by yesterday’s announcement that Twitter will get a new CEO.

Eye on the Fed

The probability of a June rate pause stands at 85%, down from around 90% yesterday, according to the CME FedWatch Tool.

Be ready early Monday for remarks from Atlanta Fed President Raphael Bostic. Several weeks ago, Bostic disappointed investors by saying rates could stay high “for quite some time.” He also hinted that the Fed’s May hike could be the last for a while. “One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target,” he told CNBC then.

One question is whether this week’s inflation reports reinforced his views about pausing. But the market still builds in hopes of rate cuts later this year, and no one at the Fed embraces that.

What to Watch

Titans dominate: We’ve returned to conditions seen earlier this year where a few heavyweight tech stocks are flexing their muscles, keeping major indexes elevated even as hundreds of featherweights struggle to stay in the ring. The S&P 500® index (SPX) is on pace for its second week in a row of declines but would be far worse off without the power of the mega-cap techs, which dominated yesterday’s list of gainers. This type of performance raises concerns about market “breadth,” and whether any skid in the tech sector might push the major indexes up against the ropes.

The SPX is roughly flat over the last three months, but the equal-weight SPX (SPXEW), which weighs all stocks equally without factoring in market capitalization, is down 7%. The number of stocks hitting 52-week highs so far this week on both the New York Stock Exchange and the Nasdaq is outpaced by stocks hitting 52-week lows, according to data from FactSet and Dow Jones.

FactSet, by the way, typically delivers updated earnings projections on Fridays, so stay tuned. We’re almost finished with Q1 earnings, and they’ve generally outpaced analysts’ expectations. Still, earnings per share are down from a year ago for the second straight quarter.

Reading the room: The preliminary May University of Michigan Consumer Sentiment reading is due out shortly. Consensus is for a 62.9 headline figure, Briefing.com said, down from 63.5 in April and from above 110 in the 2017–2019 period. Check the report’s year-ahead inflation expectations, which held steady at 4.6% in April’s final report. Five-year inflation expectations rose to 3% in April’s final reading from 2.9% in the preliminary. Further gains in May could signal inflation getting “stickier,” which the Fed wants to avoid.

Taxing matter: There’s no scheduled date, but it’s possible next week could feature Treasury Secretary Janet Yellen updating Congress on the debt ceiling. The Treasury is sorting tax receipts from last month, and if they’re bigger than expected, the June 1 date might get pushed back. No guarantee, though.

Schwab’s snapshot: Check out the latest Market Snapshot from Schwab chief investment strategist Liz Ann Sonders. She discusses the labor market, including how to interpret the recent rise in jobless claims. This particular data point, Liz Ann says, is a “heads up” indicator that can move in advance of broader economic trends.

SPXEW Daily Chart

CHART OF THE DAY: WEIGH-IN: The S&P 500 Equal Weight index (SPXEW—candlesticks) has been outpaced the last three months by the actual S&P 500 (SPX—purple line), mainly because the SPX weights stocks based on their market-caps, giving mega-cap tech stocks more influence on the overall index. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Could OPEC surprise again? OPEC’s last production cut—a surprise in late March—was designed to prop energy profits for the cartel. It worked for about two weeks before prices sank amid weak demand and bountiful production from the United States and Russia. The next OPEC meeting isn’t until early June, but could OPEC tighten the taps again before then? Don’t rule it out. Still, OPEC’s cuts might not hurt consumers much at the pump considering U.S. summer gasoline demand is expected to average 6% below the prepandemic norm, according to industry trade site Oilprice.com. Diesel demand, often a recession indicator, is already slowing. WTI Crude Oil futures (/CL) fell below $71 per barrel intraday Thursday for the first time in nearly a week. However, recent declines below $70 met buying interest, in part because the U.S. government has used lower prices to purchase crude for the depleted Strategic Petroleum Reserve (SPR). Crude in storage there recently fell to October 1983 levels.

Transports lose steam: Cheap crude isn’t such hot news for energy stocks, which got scorched Thursday and remain the coolest S&P sector of 2023, down nearly 10%. The Energy Select Sector Index (IXE) is now close to testing its March low, which also represented the weakest levels for energy stocks since last October. The Dow Jones Transportation Average ($DJT) can benefit from lower crude, as cheap oil reduces costs for trucking, airline, delivery, and shipping companies. But the $DJT is down 13% from its February peaks. These stocks tend to be hypersensitive to the economic winds, and recent data suggest a softening labor market, slowing inflation, and possibly slower economic growth. Transportation stocks—including major airlines— remain up from last fall’s lows, but their path from here could be a useful barometer for anyone tracking chances of a recession.

PPI relief: The Producer Price Index (PPI) increase of just 2.3% from a year ago in April was the lowest gain since early 2021. Producer prices can sometimes hint at future consumer prices, since they reflect what businesses pay for goods before putting them on shelves. However, the PPI and Consumer Price Index (CPI) aren’t as sensitive as the Fed’s preferred inflation gauge (the Personal Consumption Expenditures Price Index, or PCE), and that data, due out May 26, will also likely factor into the Fed’s thinking. So will wage data in the May jobs report due early next month.

Calendar

May 15: May Empire State Manufacturing

May 16: April Retail Sales and expected earnings from Home Depot (HD).

May 17: April Housing Starts and Building Permits, and expected earnings from Target (TGT).

May 18: April Existing Home Sales and Leading Economic Indicators, and expected earnings from Walmart (WMT).

May 19: Expected earnings from Deere (NYSE:DE) and Foot Locker (NYSE:FL).

May 22: No major earnings or data expected.

May 23: April New Home Sales and expected earnings from AutoZone (NYSE:AZO), and Dick’s Sporting Goods (DKS).

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.