Chips Hurt by China Export Fears, Banks Await Stress Tests, Micron to Report

Morning rush

• The 10-year Treasury note yield (TNX) inched lower, to 3.74%.
• The ($DXY) climbed to 102.72.
• Cboe Volatility Index® () futures were steady at 13.72.
• WTI (/CL) traded lower, at $67.81 per barrel.

A batch of solid U.S. economic data yesterday helped lift bond yields, but the dollar index didn’t find traction and remained stuck in the middle of its long-term range of 100–105.

Eye on the Fed

Futures trading indicates a 74% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.

Fed Chairman Jerome Powell takes part in a European Central Bank (ECB) policy panel discussion in Portugal this morning featuring several central bank leaders, so stay tuned for any possible headlines from that. Powell addressed Congress last week, so it seems unlikely he’d depart from the script so soon after that.

What to Watch

• Dive into data: New Home Sales, Durable Goods, and Consumer Confidence from the Conference Board yesterday all exceeded analysts’ expectations, painting a cheerier picture of the economy and possibly injecting some optimism into stocks as well.
• One caveat: The Consumer Confidence report’s “expectations” tab remained in recession territory, though it improved substantially in June from May.
• Price check: This Friday features the May reading on Personal Consumption Expenditures (PCE) prices, the inflation metric most closely watched by the Fed. The last PCE update—for April—showed an annual increase of 4.4% in the overall rate and 4.7% in the core rate, which excludes food and energy prices. For May, monthly headline PCE prices are seen up just 0.1%, according to Briefing.com, but the more important core reading is expected to rise 0.3%. Both rose 0.4% in April. Analysts predict a year-over-year increase for core of 4.7%, unchanged from April and implying that “sticky” inflation remains an issue.
• GDP update: While inflation worries persist, recession fears continue to haunt Wall Street. Tomorrow’s third and final Gross Domestic Product (GDP) estimate from the U.S. government, due out before the open, is a backward-looking number. For what it’s worth, analysts expect no change from the previous 1.3% estimate, according to Briefing.com. Arguably of more importance is what economists expect for Q2 GDP. We won’t get the government’s first estimate until late July, but most analysts expect little change from Q1, penciling in roughly 1% growth. The Atlanta Fed’s “GDPNow” tool is a bit more optimistic at 1.9%. Neither would represent sizzling growth, but the numbers don’t indicate a recession straight ahead, either.
• Jobs in focus: One possible recession indicator is weekly Initial Jobless Claims. The next update is due early Thursday. The last few weekly reports showed elevated numbers near 260,000, but it would likely take an average of 300,000 or more to indicate an economic downturn. Consensus for tomorrow is 266,000, which would be the highest this year. The coming earnings season could give investors better insight into the labor market if companies discuss the issue on their calls or coordinate layoff announcements with earnings results.

Stocks in the Spotlight

Semiconductor giant Micron (NASDAQ:) will report earnings this afternoon, followed by Nike (NYSE:) tomorrow afternoon to wrap up the preholiday earnings calendar.

Earlier this year, China effectively banned purchases of memory chips from Micron, drawing U.S. protest. Micron is the biggest U.S. maker of memory chips used in devices like laptops and mobile phones. Micron’s wrestled for some time with weak laptop and smartphone demand, driving concerns about swollen inventories.

Nike is in a very different business from Micron, but also dealing with inventory issues. The company’s last earnings report easily beat analysts’ estimates, but margins came under pressure as inventories rose 16% year-over year. The company’s supply situation will likely come under scrutiny when it reports tomorrow. Disappointing earnings and guidance from Foot Locker (NYSE:) in late May cast shadows ahead of Nike’s report. As a reminder, Nike and Foot Locker have a partnership, and Foot Locker said it was dealing with a “constrained supply” of Nike products.

Talking technicals: The S&P 500® Index (SPX) snapped back nicely on Tuesday after Monday’s test of technical support near the 4,325 level. The SPX fell to 4,328 on Monday, and that’s where buyers apparently stepped in. The 4,325 mark is significant because it signals an important Fibonacci retracement point from the January 2022 high to the October 2022 low. The test and then bounce off that level looks bullish from a chart perspective.

CHART OF THE DAY: NARROW PATH. The 10-year Treasury note yield (TNX—candlesticks) is in an interesting position, squeezed between its 200-day moving average of just above 3.68% and a trend line from this year’s high that forms an area of resistance near 3.8% (which is about where the TNX has recently topped out). The next few days could be interesting to see which way things go ,because there’s not much room to move and stay within the current range.

Thinking cap

Ideas to mull as you trade or invest

Valuations—another take: Besides lack of breadth, the knock on this market is high valuations. The SPX has a forward price-earnings (P/E) ratio of close to 19, according to FactSet—well above the 10-year average near 17. The counterpoint to those worries, one analyst argued this week on CNBC, is that the SPX’s P/E builds in the P/E ratios of the so-called Magnificent 7 mega-cap tech stocks, which spun heads this year amid the AI frenzy. This means the SPX’s P/E may be elevated because of just a handful of members. Subtracting internet-related prices and earnings from the SPX gets you a P/E closer to 16, not far from the historic average and perhaps implying plenty of cheaper stocks out there. If you follow this line of thinking, you might want to check your portfolio and see how closely it reflects those heavyweight tech stocks, as your exposure might have grown thanks to their remarkable rally.

Earnings watch: Valuations naturally hinge from earnings. The jam-packed Q2 earnings season is just ahead, meaning it’s important to monitor evolving trends in analysts’ Q2 earnings estimates. S&P 500 earnings are seen declining 6.5% in Q2—worse than the 4.7% decline predicted by analysts three months ago, according to FactSet. That’s a negative trend indicating slipping expectations after analysts looked over Q1 earnings and guidance and watched economic data roll in. Watch for revisions in coming weeks to see which way the trend moves as earnings approach. There were no adjustments in the latest FactSet estimate. Actual earnings results have a long track record of outpacing analysts’ preseason estimates, which was certainly the case in Q1. Meaning valuations could get some support on the “E” denominator in coming weeks if historic trends hold.

Sold! Slightly under the radar this week have been some auctions from the U.S. Treasury Department. Yesterday’s 5-year Treasury note auction met weaker demand than what Briefing.com called a “stellar” 2-year note auction on Monday. Strong demand for short-term notes could signal less fears of rate hikes and perhaps some trepidation about the economy. Yields rose Tuesday after the disappointing 5-year note auction demand.

Calendar

June 29: Q1 Gross Domestic Product (third estimate), May Pending Home Sales, and expected earnings from Nike (NKE), McCormick (NYSE:), and Rite Aid (NYSE:)

June 30: May Personal Consumption Expenditures (PCE) prices, May Personal Income and Personal Spending, and Final June University of Michigan Consumer Sentiment

July 3: June Chicago PMI, June ISM Manufacturing Index, and May Construction Spending, and markets close early ahead of the holiday.

July 4: Independence Day holiday, no U.S. trading.

July 5: May Factory Orders

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.

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