Wall Street on Pace for Losing Week, Taking Cue From Soft Markets Overseas

(Friday market open) Despite rebounding yesterday, Wall Street retreated early Friday in premarket trading. Worries about rising interest rates, along with softness in Asian and European markets following another round of poor manufacturing data, have the market on pace for a losing week. Still, major indexes remain near recent 14-month highs.

Yesterday’s gains in mega-cap tech stocks lifted the Nasdaq 100® (NDX), but other major indexes had a lackluster day. Small-cap names in the Russell 2000® (RUT) haven’t had a good week, quashing hopes raised by last week’s rally that positive spirits might be spreading beyond the largest stocks on the market. Mega-caps were lower this morning in premarket trading.

European data released overnight showed persistent softness in the manufacturing industry as interest rates keep rising, and all the major European stock markets are down substantially this week. The losses there likely played a role in Wall Street’s struggles over recent days. Asian markets also had a rough time the last few sessions and are down sharply from a week ago.

• The United States 10-Year Treasury note yield (TNX) fell 5 basis points to 3.74%.
• The U.S. Dollar Index ($DXY) jumped to 102.96, a one-week high.
• The Cboe Volatility Index® (VIX) futures edged higher to 13.32 but remain near three-year lows.
• WTI Crude Oil (/CL) fell to $68.66 per barrel, down around $15 over the last two months.

Crude oil is on pace for a negative week after falling 4% yesterday to below $70 per barrel. The drop partly reflected worries about U.S. demand should the economy weaken. However, crude hasn’t shown much propensity to stay below $70 for long, possibly due to hedging by transport companies and efforts by the U.S. government to refill the Strategic Petroleum Reserve (SPR) at relatively low costs.

Futures trading points to 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. In remarks made to the Senate banking panel yesterday, Federal Reserve Chairman Jerome Powell reiterated that two more interest rate hikes may be necessary this year to lower inflation.

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Last year, most of the world’s central banks marched in lockstep to tighten lending conditions, but things have changed drastically. The Fed recently paused rate hikes while central banks in Europe, the U.K., and Canada all raised rates. Japan has been holding steady, and China is lowering borrowing costs. All of which speaks to economic conditions varying across the globe, perhaps creating a more complex trading environment for fixed income investors.

China’s recent decision to drop rates for mortgages and corporate loans is probably the surprise of the bunch, as many economists had expected China to recover more quickly from last year’s shutdown. Anyone expecting the slight decline in Chinese rates to jumpstart the economy may be too optimistic, one analyst told The New York Times this week, adding that the central bank’s reduction will only “gradually” seep through the system.

Ho Hum Homes: May Existing Home Sales came in yesterday at a seasonally adjusted 4.3 million, roughly in line with analysts’ expectations. That sets the stage for another burst of housing data next week, starting with May New Home Sales on Tuesday. The tally could be solid considering the strength seen in last week’s Housing Starts and Building Permits report. New home sales have been trending upward this year after last year’s steep drop, albeit at generally lower prices.

Un-Freaky Friday? Fridays tend to be busy data days, but not this week. Today’s calendar is surprisingly light. The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) report due out shortly after the open might get more attention than usual simply because there’s not much else to look at from a numbers standpoint.

Washing windows: Next week is the final one of the second quarter and may include some “window dressing.” That’s when major fund managers tend to exit losing positions and buy stocks with better track records to “window dress” the quarter for clients. It could mean more volatility in coming days, but there’s no guarantee.

Week ahead: The coming days are a bit busier than usual from a data standpoint. Next week includes May Durable Goods, the government’s final estimate for Q1 Gross Domestic Product (GDP) growth, and June Consumer Confidence. The most crucial report before the end of the quarter is next Friday’s May reading on Personal Consumption Expenditure (PCE) prices, the inflation metric most closely followed by the Fed.

Paring down: Ford (F) plans a new round of layoffs for U.S. salaried workers, the Wall Street Journal reported late yesterday. It’s unclear how many jobs will be affected. Last August, Ford laid off 3,000 U.S. employees and contract workers, and it has been reducing its European workforce since. The company says it’s working to get costs in line as it transitions to electric vehicles.

Bank check: Next Wednesday is when the Fed is expected to release results of its latest “stress tests” on the nation’s largest banks (see more below).

Talking technicals: This week’s pullback in the S&P 500® Index (SPX) hasn’t brought it within range of any key moving averages. The SPX has been trading well above those for weeks, and remains above the summer 2022 peak and Fibonacci retracement level of 4,325 that had formed resistance for some time. The 50-day moving average (MA) is way below current levels at just under 4,200, which happens to be another important resistance level that marked the top of a long-term trading range between 3,800 and 4,200. Support could now potentially be near those old resistance levels of 4,325 and 4,200.