Inflation, Debt, and Disney: After a Losing Week, Markets Face Critical Leg

Performance in coming days likely hinges on debt ceiling progress, critical U.S. inflation data due out Wednesday and Thursday, and the regional banks, which finished lower last week despite Friday’s turnaround. Wall Street’s rallying mood might fizzle if focus returns to wondering what else can go wrong with the regional banking sector.

Morning Rush

• The rose 3 basis points to 3.48% and is up about 10 basis points from last week’s lows.
• The ($DXY) is at 101.14.
• The Cboe Volatility Index® () futures are lower at 17.51.
• WTI (/CL) jumped to $73.32 per barrel, up about $4 from late last week.

Ironically—considering fears that the country might not pay interest on its debt—investors often gravitate toward U.S. Treasuries when debt ceiling concerns mount. Think of this as a “flight to safety” trade, though no investment—not even U.S. Treasuries—is truly safe. If yields fall sharply at some point between now and the Treasury Department’s June 1 deadline to avoid default, it may reflect investors rushing into Treasuries because of debt ceiling fears.

Stocks in the Spotlight

Earnings stage: The earnings calendar lightens after two jam-packed weeks. Several high-profile companies report in coming days, including PayPal (NASDAQ:) (PYPL) after today’s close and Duke Energy (NYSE:) (DUK), and Under Armour (NYSE:) (UAA) later this week. But the main player is Disney (DIS), which is expected to report Wednesday after the close.

Q1 earnings keep improving from early-season expectations. They’re now expected to fall 2.2% from a year ago, research firm FactSet said Friday—a major improvement from the –6.7% estimate back on March 31. With 85% of S&P companies now having reported, 79% have beaten Wall Street’s earnings estimates and 75% have reported a positive revenue surprise, FactSet said.

Streaming not gentle: Last week’s disappointing results from Paramount Global (PARA) raised questions about the health of others in the streaming industry, including DIS. The streaming business continues to lose money at PARA, and DIS’s Disney+ streaming service lost more than 2 million subscribers in the company’s first fiscal quarter after prices rose. Shares of DIS fell sharply last Thursday after PARA reported. We’ll find out Wednesday if DIS was able to slow subscriber losses in what’s been a very competitive streaming environment.

Tap to pay: PYPL steps to the plate today with shares down sharply from their 2022 highs as the company navigates a tough competitive landscape. Apple Pay might be taking share from PYPL, Barron’s quoted an analyst saying earlier this year. Last time out, PYPL delivered sunny guidance on earnings but warned of weaker e-commerce growth. PYPL didn’t share revenue guidance, noting an “evolving” post-Covid consumer spending environment.

Eye on the Fed

The quiet period around the Federal Open Market Committee (FOMC) meeting is over, so get ready to hear from Fed speakers. St. Louis Fed President James Bullard, a noted hawk, led things off Friday by saying higher rates are likely needed to tame inflation, Bloomberg reports. Fed Governor Christopher Waller speaks Thursday morning. It’s also commencement season, with Fed speakers popping up on the college graduation circuit. Think they’ll drop any rate hints to the new grads?

Investors certainly want hints on rates, but for now they’ll have to check the CME FedWatch Tool. It went from no chance of a June rate hike last Thursday to around a 7% chance Friday after the solid April Nonfarm Payrolls report. The probability early Monday inched up to 12%, but at least for now traders overwhelmingly expect a pause followed by rate cuts later in the summer or early fall.

The economy created 253,000 jobs in April, the government said—well above analysts’ estimates for around 180,000. But the report sliced February and March jobs growth, putting the three-month average at 222,000. This is historically robust but not off the charts, and the revised March gain of just 165,000 suggests labor market weakness. April wage growth of 0.5% beat expectations.

Two-year Treasury yields surged Friday given the relative strength of the April report. The 0.5% rise in wages suggests that inflation may remain stickier for longer, suggest analysts at Schwab. However, yields are still relatively low as markets focus on forward-looking data.

Volatile recent daily moves in shorter-term Treasury note yields likely reflect wariness about the debt ceiling.

What to Watch

Inflation alert: Get ready for April Consumer Price Index (CPI) and Producer Price Index (PPI) data due Wednesday and Thursday, respectively. Expectations on Wall Street are for CPI to rise 0.4% month-over-month and core CPI (which strips out energy and food) to climb 0.3%, according to Trading Economics. That’s up from 0.1% and 0.4% in March. Recent inflation data show signs that progress on prices may be slowing, perhaps giving the Fed more gray hairs.

Jobs report redux: Looking back at Friday’s jobs data, one thing that jumped out was that 0.5% monthly increase in hourly wages—the highest since last July and well above analysts’ expectations for 0.3%. Rising wages can contribute to inflation, which the Fed’s been fighting for over a year with its rate hikes.

Fed officials probably didn’t like seeing wages rise so much, but that’s tempered a bit by the report’s other data. Namely, lower-paying leisure and hospitality jobs growth slowed appreciably in April. If fewer low-paying jobs got created, that potentially pushed the wages component of the jobs report up from the previous month when leisure and hospitality dominated growth. You can smooth out any month-to-month volatility in wages by checking year-over-year data, which showed wages up 4.4%. That’s up just a bit from 4.3% in March.

CHART OF THE DAY: TIGHT SQUEEZE. This one-year chart of the S&P 500 index (SPX—candlesticks) shows how much time it’s spent between its 50-day moving average (blue line) and a band of resistance that runs from last summer’s highs (red line). The question is which line will end up getting taken out – the downside or the upside. 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

Reverse course? Parody newspaper The Onion once ran a joke headline, dated August 1977: “Elvis Dead. Is Elvis Alive?” If The Onion covered the Fed, maybe the headline would be, “Rates Rise. Are Rates Going Down?” The FOMC raised rates 25-basis-points last Wednesday, but the CME’s FedWatch Tool builds in about a 34% chance of a rate cut in July. A rate cut two months after a hike would be virtually unprecedented—the historic average length between the final hike and first cut is nine months, according to research firm CFRA. So why is there a chance at all? One reason could be worries about a recession, though data would have to get very bad very quickly for the Fed to even think about slicing rates two months from now. Another variable is the banking situation, which would have to worsen dramatically for the Fed to reverse course so soon. The Fed said last week that the banking system remains healthy.

‘Ceiling’ on rates? One reason for the high probability of a cut by July might be the debt ceiling battle. Arguably, if the United States defaults in early June—something that’s never happened but is possible if Congress and the administration don’t reach agreement before June 1—the economy might take a major hit, causing the Fed to move quickly to ease credit conditions. Many investors have long hoped for a rate cut, but a cut following a default probably isn’t what they had in mind. Also, Fed Chairman Jerome Powell made it very clear in his press conference last week that raising the debt ceiling is the responsibility of Congress, adding that the Fed can’t bail out the economy if Congress allows a default.

Talking technicals: The S&P 500® index (SPX) enjoyed a nice bounce off its 50-day moving average of just below 4,050 on Friday after probing that area Thursday. The buying surge might reflect technical strength generated by the SPX testing, but not falling below the 50-day level. However, Friday’s rally didn’t send the SPX above technical resistance near 4,150. In fact, that’s been a tough spot for the SPX most of the year. It hasn’t hit 4,200 since last summer and has rarely closed above 4,150 in the last six months. For now, the index remains in its long-term range between roughly 3,700 and 4,200.

Calendar

May 10: April Consumer Price Index (CPI) and core CPI, and expected earnings from Disney (DIS).

May 11: April Producer Price Index (PPI) and core PPI and expected earnings from JD.com (NASDAQ:).

May 12: Preliminary May University of Michigan Consumer Sentiment

May 15: May Empire State Manufacturing.

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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