Market Update -September 16

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Tuesday's session started with a positive bias under the surface despite a mixed performance at the index level. The S&P 500 and Nasdaq were in negative territory early on, albeit with somewhat modest losses. That weakness had them both below their 50-day moving averages. At the same time, the Dow Jones Industrial Average and Russell 2000 were trading up and market breadth was positive.

The early underperformance seen in the S&P 500 and Nasdaq was largely driven by softness in the mega cap space and a big decline in Oracle (ORCL) following its earnings report and relatively disappointing guidance.

A mid-day push higher saw the S&P 500 briefly climb past its 50-day moving average, but it was unable to maintain that posture, which invited increased selling activity in the afternoon trade. The major indices spent most of the afternoon in a steady decline. The Dow Jones Industrial Average finished with a fractional loss while the S&P 500 and Nasdaq Composite closed near their worst levels of the day.

Apple (AAPL) was weak in front of its closely-watched product event and pulled back following a slate of announcements that featured the introduction of the iPhone 15.

Rising oil prices, which hit their highest level since last November, were another overhang for the market.

Tuesday's economic data was limited to the August NFIB Small Business Optimism index, which declined to 91.3 from 91.9.

Wednesday's trade was lackluster with the major indices registering only modest gains or losses. The A-D line favored decliners, but there wasn't a lot of conviction overall. The major indices followed the direction of the mega cap stocks, which drove some choppy action in the morning and later in the afternoon.

The key takeaway from Wednesday morning's CPI report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.

The Treasury market saw some knee-jerk selling in response to the data. Things quickly calmed down, though, which was supportive for the stock market. The 2-yr note yield jumped to 5.07% after the data, but finished at 4.99%, one basis point lower from Tuesday's settlement. The 10-yr note yield, which hit 4.34% following the data, fell two basis points from Tuesday to 4.25%.

Airline stocks were a notable weak spot in the market after Spirit Airlines (SAVE), Frontier Group (ULCC), and American Airlines (AAL) warned about their Q3 outlooks due in part to rising fuel costs. The U.S. Global Jets ETF (JETS) fell 2.7%.

Reviewing Wednesday's economic data:

• Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (Briefing.com consensus 0.2%). On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
  • The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
• The weekly MBA Mortgage Index was down 0.8% after decreasing 2.9% a week ago. The Refinance Index was down 5.4% while the Purchase Index was up 1.3%.
• The August Treasury Budget showed a surprising surplus of $89.2 billion compared to a deficit of $219.6 bln in the same period a year ago. The surplus in August resulted from receipts ($283.1 billion) exceeding outlays ($193.9 billion). The Treasury Budget data is not seasonally adjusted so the August 2023 surplus cannot be compared to the July 2023 deficit of $220.8 billion.
  • The key takeaway from the report is that outlays included impacts from the $319 billion Debt Relief Reversal downward modification to the DOE's Federal Direct Student Loans program. August typically shows a budget deficit (68 times out of 69 fiscal years) since there are no major tax due dates.
• Weekly crude oil inventories increased by 3.954 mln barrels after decreasing by 6.307 mln barrels a week ago.

Stocks had a strong showing on Thursday after a quiet start to the week in terms of market-moving events. The major indices all closed near their best levels of the session with decent gains. The S&P 500, which closed above 4,500, and the Nasdaq Composite climbed past their 50-day moving averages.

Thursday's positive bias was driven by a couple of factors. There was a speculative buzz in the air surrounding the Arm Holdings (ARM) IPO, which opened for trading at $56.10. There was also some central bank news and economic data that comported with a more hopeful economic outlook.

Specifically:

• The ECB raised its three, key interest rates by another 25 basis points, but hinted that it might be done raising rates, thereby opening the door to claims that today's move was a "dovish hike."
• The PBOC said the required reserve ratio will be cut by 25 basis points, effective September 15, for all banks that don't currently have a 5% reserve ratio.
• August retail sales (+0.6%) were stronger than expected.
• The August PPI report produced an in-line core reading and some palatable year-over-year increases of 1.6% for total PPI and 2.2% for core-PPI, respectively.
• Initial jobless claims for the week ending September 9 were just 220,000, which is a level associated with a tight labor market that is supportive of continued consumer spending.

The relatively calm response to the data from Treasuries was another factor supporting stocks.

Reviewing Thursday's economic data:

• Weekly Initial Claims 220K (Briefing.com consensus 226K); Prior was revised to 217K from 216K; Weekly Continuing Claims 1.688 mln; Prior was revised to 1.684 mln from 1.679 mln
• The key takeaway from the report is the same: the low level of initial claims -- a leading indicator -- is reflective of a fairly tight labor market, which is the basis for why consumer spending continues to hold up in the face of inflation pressures and rising rates.
• August PPI 0.7% (Briefing.com consensus 0.4%); Prior 0.3%; August Core PPI 0.2% (Briefing.com consensus 0.2%); Prior was revised to 0.4% from 0.3%
  • The key takeaway from the report is that 80% of the rise in final demand prices was attributed to a 2.0% jump in the index for final demand goods, which was driven by a 10.5% increase in prices fir final demand energy. That understanding softens the blow of the headline surprise for the index for final demand; however, until energy prices back down, concerns about rising inflation expectations and the Fed holding higher for longer will persist.
• August Retail Sales 0.6% (Briefing.com consensus 0.2%); Prior was revised to 0.5% from 0.7%; August Retail Sales ex-auto 0.6% (Briefing.com consensus 0.4%); Prior was revised to 0.7% from 1.0%
  • The key takeaway from the report is that gasoline station sales (+5.2%) had a big impact on the overall increase in retail sales. Excluding gasoline stations, retail sales were up a more modest 0.2%, which is suggestive of a consumer that is softening but not breaking.
• July Business Inventories 0.0% (Briefing.com consensus 0.1%); Prior was revised to -0.1% from 0.0%

The stock market registered sizable declines on this quarterly options and futures expiration day. The S&P 500, Nasdaq, and Russell 2000 gave back all their gains for the week while the Dow Jones Industrial Average narrowed its weekly gain to a modest 0.2%. The major indices all closed near their worst levels of the session, which had the S&P 500 and Nasdaq below their 50-day moving averages.

Many stocks participated in downside moves, but mega caps and growth stocks had an outsized influence on index performance.

Weak semiconductor stocks also weighed heavily on index performance. That weakness followed Arm's (ARM) successful IPO yesterday and a Reuters report that Taiwan Semiconductor Manufacturing Co. (TSM) is delaying chip equipment shipments.

Rising market rates and oil prices contributed to the negative bias.

Adobe (ADBE) was a top laggard after it underwhelmed with its fiscal Q4 guidance.

Notably, General Motors (GM) and Stellantis (STLA) registered gains despite failing to reach a deal with the UAW, which resulted in targeted strikes at three manufacturing plants (one for each of the automakers). Ford (F) for its part logged a small decline.

Reviewing Friday's economic data:

• August Import Prices 0.5%; Prior was revised to 0.1% from 0.4%
• August Import Prices ex-oil -0.1%; Prior was revised to -0.1% from 0.0%
• August Export Prices 1.3%; Prior was revised to 0.5% from 0.7%
• August Export Prices ex-ag. 1.7%; Prior 0.6%
• September Empire State Manufacturing 1.9 (Briefing.com consensus -10.0); Prior -19.0
• August Industrial Production 0.4% (Briefing.com consensus 0.2%); Prior was revised to 0.7% from 1.0%; August Capacity Utilization 79.7% (Briefing.com consensus 79.3%); Prior was revised to 79.5% from 79.3%
  • The key takeaway from the report is that motor vehicle assemblies were weak in front of what is now a UAW strike, so the outlook for industrial production in September will be constrained by an expected disruption to auto manufacturing capabilities as a result of the strike.
• September Univ. of Michigan Consumer Sentiment - Prelim 67.7 (Briefing.com consensus 69.4); Prior 69.5
  • The key takeaway from the report is that consumers' inflation expectations came down. That is something the Fed will like to see, but one is left to wonder if those expectations will remain in check if gas prices continue to increase.