If you didn’t get your fill of Federal Reserve last week, you’re going to love the next few days.
First comes Fed Chairman Jerome Powell’s semi-annual testimony to the House Financial Services Committee tomorrow morning, but he’s only the tip of the central bank iceberg. Two Fed governors also have nomination hearings in Congress, and more Fed speeches are coming later this week. Stocks slipped early Tuesday as investors geared for the Fed barrage.
The Federal Open Market Committee (FOMC) voted unanimously last Wednesday to leave rates unchanged, but several FOMC officials penciled in peak projected rates above 6% on their “dot plots,” implying at least two more hikes this year. There’s no way to know which policymakers were most hawkish, but St. Louis Fed President James Bullard has a reputation of supporting rate increases, and he spoke earlier today. Cleveland Fed President Loretta Mester, who has also beaten the drum on inflation this year, speaks twice this week.
More Fed remarks are on tap Thursday from Fed Governors Michelle Bowman and Chris Waller, though these are opening remarks, not full speeches. Powell moves on to the Senate for another morning of testimony Thursday. It’s unlikely he’ll reveal many surprises, but testimony to Congress can sometimes force the Fed chairman to address topics the press doesn’t ask about. As always, investors should stay on their toes for possible volatility when the Fed chairman is live, so to speak.
We’re coming off a week when the major indexes reached 14-month highs on strong economic data and hopes the Fed might be approaching the end of its rate hike cycle. The S&P 500 (SPX) was up 2.6% for the week, the benchmark’s strongest week since March, while the tech-heavy Nasdaq Composite (COMPX) index and blue-chip Dow Jones Industrial Average (DJIA) were up 3.2% and 1.2%, respectively. Still, the biggest companies, particularly in technology, continued to account for the lion’s share of market gains, while smaller companies lagged.
That said, there are signs of the rally broadening. The S&P 500 Equal-Weight Index S&P 500 Equal Weighted has gained ground on the SPX in recent weeks. The SPXEW weighs all members of the index equally, instead of by market cap, and can be a useful indicator of how all 500 stocks are doing, not just the top dogs.
Morning Rush
- The 10-year Treasury note yield (TNX) rose 4 basis points to 3.76%.
- The U.S. Dollar Index (DXY) climbed to 102.43 but remains near one-month lows.
- The Cboe Volatility Index (VIX) futures rose to 14.36.
- Crude Oil WTI Futures (CL) inched up to $71.83 per barrel.
Just in
The data focus turns squarely toward housing now, starting with today’s May Housing Starts and Building Permits report. Shelter has played a nagging and persistent role in pushing up inflation for more than a year, and it’s partly because of a national home shortage.
From this morning’s data, it appears builders are quickly addressing the lack of housing. Housing starts jumped to 1.631 million in May on a seasonally adjusted basis, well above analysts’ expectations, which had been for starts to rise to 1.4 million from April’s 1.34 million. Permits climbed to 1.491 million in May, up from 1.417 million in April.
A few green shoots have popped up in housing after a tough year where would-be buyers struggled with high prices, rising mortgage rates, and not enough supply. Home builders recently reported demand improving as buyers adjust to elevated borrowing costs. April new home sales rose nearly 12% from a year earlier.
China returned to the headlines after the People’s Bank of China cut two key lending rates on mortgages and business loans early today. Analysts had expected the move, which appears to be a reaction to recent slowness in the country’s pandemic reopening. Crude oil prices found support on ideas that Beijing’s stimulus could increase demand for the commodity, while the dollar bounced. Share prices in China slipped, however.
Eye on the Fed
Futures trading points to a 77% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.
Tomorrow’s testimony from Powell could provide more color on the Fed’s “hawkish pause” decision and might feature some committee members pressing Powell to pinpoint when the Fed will stop hiking rates. The possibility of higher unemployment as rates rise hasn’t played well with some committee members, judging from their comments during past Powell appearances on Capitol Hill.
Despite the pressure, it’s unlikely Powell will offer a timetable—but the latest FOMC “dot-plot” forecasts rates falling below 5% in 2024 and below 4% in 2025. Historically, these aren’t extremely high levels, but Congress, investors, and the business community got comfortable with near-zero rates for much of the 2008-2021 era, and some are still adjusting to the end of “easy money.”
A Bank of England (BoE) meeting will be held Thursday following inflation data from the country on Wednesday. Analysts expect a 25-basis-point hike as Britain continues to battle rising prices.
What to Watch
Last week was a banner one for consumer discretionary stocks. Most of us are probably aware of Tesla Inc's (NASDAQ:TSLA) long recent win streak, but companies like Domino’s Pizza Inc (NYSE:DPZ), Nike (NYSE:NKE), Ford Motor Company (NYSE:F), McDonald’s Corporation (NYSE:MCD), Home Depot (NYSE:HD), and MGM Resorts (NYSE:MGM) also shined. Many of these companies posted multi-month highs or climbed above their 200-day moving averages, Briefing.com noted.
Last earnings season, executives at some well-known retailers cited consumer resilience despite rising prices. From a stock market standpoint, it’s interesting to see names like Home Depot and Target (NYSE:TGT), which have suffered long slumps, showing a little life. It could even be a sign of Wall Street’s rally starting to broaden as investors look for beaten-down companies to jump back into.
Stocks in the Spotlight
Stay tuned after the close for earnings from FedEx (NYSE:FDX). Shares flattened after an early-2023 rally and remain well below their 2021 peak. In its previous quarter, FedEx easily beat analysts’ earnings expectations and raised full-year guidance. The company’s been working to cut costs, so watch for the latest on that effort. That’s especially true for FedEx’s Express segment, where FedEx sees the greatest opportunity for cost reductions.
It also could be instructive to hear how inflation’s affecting demand—if FedEx addresses that. Volumes fell in the low single digits across all segments in FedEx’s fiscal Q3, though the company partly made up for that with higher revenue per shipment, it said in its March earnings presentation. Executives could also face questions about the business impact of a possible strike by United Parcel Service (NYSE:UPS) employees. Members of the union at UPS voted last week to strike if they can’t reach an agreement with the company by July 31, when the current contract expires.
Darden Restaurants (NYSE:DRI), KB Home (NYSE:KBH), and CarMax (NYSE:KMX) are other companies on the radar, as they’re expected to report this week
CHART OF THE DAY: GAP NARROWS. After months of trailing the S&P 500 Index (SPX—candlesticks) by a vast amount, the SPX Equal-weight Index’s (SPXEW—purple line) gap has closed by quite a bit since the end of May. This is evidence of the rally broadening, likely a healthy sign.
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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.