Market Update - October 14

The stock market opened on a lower note as investors reacted to news that Israel declared war on Hamas after a surprise attack launched by Hamas over the weekend. Stocks rallied in the afternoon trade, however, to finish the session near their highs of the day, albeit on light volume that reflected the uncertainty associated with the Israel-Hamas war.

Some flight to safety action seen in Treasury futures, which traded on Monday while the Treasury market was closed for Columbus Day, was cited as a catalyst for the afternoon rally. Other support factors included the dollar giving back its early gains and the stock market's overall resilience to selling efforts.

That resilience likely triggered some short-covering activity and invited additional buying on the belief that stocks are due for a bounce from an oversold condition. 

Oil prices traded higher in response to the Israel-Hamas conflict, which some fear could turn into a wider regional conflict.

There was no U.S. economic data of note on Monday.

The stock market closed with gains, bolstered by lower market rates, lower oil prices, and a weaker dollar. Those factors rose to the forefront in the absence of worst-case scenarios unfolding in the Israel-Hamas conflict.

The major indices spent most of the morning rising steadily, but dipped from their highs around 1:00 p.m. ET. That move coincided with Apple (AAPL) and Microsoft (MSFT) taking a turn lower and a $46 billion 3-yr note auction that was met with some relatively soft demand.

The 2-yr note yield settled seven basis points lower at 4.99% and the 10-yr note yield fell 12 basis points to 4.66%. These moves were partially a safe-haven bid related to the Israel-Hamas conflict, but they were also being fueled by a technical rebound from an oversold position. Gains in the Treasury market were also supported by assumptions that the jump in long-term rates has effectively tightened financial conditions enough to leave the Fed inclined to keep its policy rate on hold at the October 31-November 1 FOMC meeting.

Many stocks participated in Tuesday's rally, as evidenced by a 0.8% gain in the Invesco S&P 500 Equal Weight ETF (RSP). The market-cap weighted S&P 500 closed with a 0.5% gain.

Tuesday's economic data featured the September NFIB Small Business Optimism survey, which fell to 90.8 from 91.3 in August, and the August Wholesale Inventories report, which reflected a 0.1% decline (Briefing.com consensus -0.1%) following a revised 0.3% decline in July (from -0.2%).

The stock market started, and finished, this session on a positive note. Around 1:45 p.m. ET, however, the three major indices were all in negative territory before bouncing off their session lows. The S&P 500 and Nasdaq Composite closed near their best levels of the day, bolstered by their mega cap components.

Notably, stocks were moving lower mid-morning despite a drop in long-term rates, which has been supportive for stocks of late. The 10-yr note yield declined seven basis points to 4.59% and the 2-yr note yield rose one basis point to 5.00%.

Some participants attributed the downside moves to lingering nervousness related to reports that Iran-backed Hezbollah made some provocative moves in the north. Israel, however, said those reports were a "false alarm," according to Bloomberg.

Other factors cited as a possible catalyst for the mid-morning slide were hesitation ahead of the September Consumer Price Index tomorrow at 8:30 a.m. ET following this morning's hotter-than-expected Producer Price Index, and tax-related selling in front of the October 16 deadline.

Many stocks recovered in the afternoon trade, riding the coattails of the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) ended the day 0.9% higher after being up just 0.1% at its worst level. The Invesco S&P 500 Equal Weight ETF (RSP), which had been down 0.5% at its low, finished the session up 0.2%.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index rose 0.6% following last week's 6.0% decline
• The Producer Price Index for September was up 0.5% month-over-month (Briefing.com consensus 0.3%) following a 0.7% increase in August. The Producer Price Index, excluding food and energy, rose 0.3% month-over-month (Briefing.com consensus 0.2%) following a 0.2% increase in August. On a year-over-year basis, PPI was up 2.2%, versus 1.6% in August, and core PPI was up 2.7%, versus 2.2% in August.
  • The key takeaway from the report is that it marked an interruption in the disinflation seen in producer prices, which will keep market participants worried about pass-through effects to the consumer and rates staying higher for longer because inflation is staying higher for longer than the Fed would like.

The stock market closed with losses. Rising market rates in response to this morning's data, and some relatively disappointing bond auction data, led to an underlying negative bias throughout the session. Early strength from the mega cap space, though, had the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average trading up 0.3%, 0.4%, and 0.2%, respectively, at their highs of the day.

Some mega caps rolled over as another wave of selling hit the Treasury market coinciding with the completion of Thursday's $20 billion 30-yr bond auction, which met dismal demand. The 2-yr note yield, which hit 4.97% in front of the CPI data, rose six basis points to 5.06%, and the 10-yr note yield, which hit 4.53% in front of the CPI data, climbed 12 basis points to 4.71%.

There was also lingering geopolitical uncertainty hanging over the market, along with a strengthening dollar. The U.S. Dollar Index rose 0.7% to 106.58.

The market-cap weighted S&P 500 fell 0.6% while the Invesco S&P 500 Equal Weight ETF (RSP) dropped 1.3%.

Reviewing Thursday's economic data:

• Total CPI increased 0.4% month-over-month in September (Briefing.com consensus 0.3%) and core CPI, which excludes food and energy, rose 0.3% (Briefing.com consensus 0.3%). More than half of the increase in total CPI was driven by a 0.6% increase in the index for shelter.
• On a year-over-year basis, total CPI was unchanged at 3.7% while core CPI dropped to 4.1% from 4.3% for the 12 months ended in August.
  • The key takeaway from the report is that the headline numbers belie some otherwise encouraging inflation readings below the surface. To wit: the all items index less shelter was up just 2.0% year-over-year and the services index less rent of shelter was up 2.8% year-over-year.
• Initial jobless claims for the week ending October 7 were unchanged at 209,000 (Briefing.com consensus 214,000) while continuing jobless claims for the week ending September 30 increased by 30,000 to 1.702 million.
  • The key takeaway from the report is that the low level of initial claims -- a leading indicator -- remains consistent with a tight labor market that continues to work in the economy's favor.

The major indices finished the day mixed, but the complexion under the surface was more negative for the broader market. Relative weakness in the mega cap space had a disproportionate impact on the S&P 500 and Nasdaq Composite, but many stocks registered declines.

Geopolitical uncertainty weighed on sentiment ahead of the weekend following the news that Israel warned 1.1 million residents in the northern Gaza Strip to evacuate within 24 hours. At the same time, Iran's foreign minister has noted that Israel's continued siege of Gaza "will face reactions in other areas."

That news fueled some safe-haven buying in Treasuries, but rates moved off their lows after the preliminary University of Michigan Consumer Sentiment Survey showed a pickup in year ahead inflation expectations to 3.8% from 3.2% and long run inflation expectations to 3.0% from 2.8%.

The geopolitical angst offset what was some otherwise good news on the earnings front. Dow components UnitedHealth (UNH) and JPMorgan Chase (JPM) were standout winners, along with Wells Fargo (WFC), following their better-than-expected earnings and/or guidance.

Reviewing Friday's economic data:

• September Export Prices 0.7%; Prior was revised to 1.1% from 1.3%
• September Export Prices ex-ag. 1.0%; Prior was revised to 1.5% from 1.7%
• September Import Prices 0.1%; Prior was revised to 0.6% from 0.5%
• September Import Price ex-oil -0.2%; Prior was revised to -0.2% from -0.1%
• October Univ. of Michigan Consumer Sentiment - Prelim 63.0 (Briefing.com consensus 67.5); Prior 68.1
  • The key takeaway from the report is that high prices and inflation expectations were the primary weight on consumer sentiment. How that translates into actual spending remains to be seen, but consumers' perspective on inflation is a reason why the Fed is going to stay with high rates for longer