Focus Remains On Rates As Fed’s Powell Prepares To Speak

Key Takeaways:

• Nasdaq on track to post third-straight losing week for first time since September
• Fed Chairman Powell to speak at midday in conference on U.S. economy
• Gearing up for payrolls data tomorrow, jobless claims hit 745,000, up a bit from last week

The “tug of war” between investors and the Fed continues, with the Tech sector taking the brunt of the blow. Major indices are in the red again this morning with the Nasdaq (COMP) on pace to post its third-straight losing week for the first time in about six months.

Rising Treasury yields remain the elephant in the room. The 10-year yield recently traded at 1.46%, slightly below yesterday’s highs but still up more than 50 basis points from the start of the year. Investors seem to be struggling with the 1.45% level. Fed Chairman Jerome Powell has downplayed inflation worries and continues advocating dovish monetary policy, but those yields suggest investors aren’t completely convinced.

Fed’s Powell on Tap Today

Powell is scheduled to speak as part of a “discussion” on the U.S. economy at 12:05 p.m. ET today. This is part of a “jobs summit” sponsored by The Wall Street Journal. It seems pretty unlikely he’ll say anything new or unique, but when Powell speaks, it’s worth monitoring. Especially with so much focus now on the yield picture. Powell has said rising yields are a sign of the economy recovering, which they certainly can be.

Sentiment remains tepid. The SPX hasn’t been able to hold onto gains for more than a day or two, and failed to re-test its all-time high on the latest leg up. When you keep seeing lower highs, that can tell you something, and it’s not a pleasant story. It doesn’t help today that European and Asian stocks took a beating. News reports of rising virus cases in Europe are another worry.

Initial jobless claims of 745,000 this morning were up just slightly from the week before and basically in line with expectations. It seems unlikely that they’d move the needle too much for stocks, especially with tomorrow’s payrolls report ahead and mattering more (see below).

Wednesday delivered the second-straight ugly close for the S&P 500 Index (SPX) and the Nasdaq (COMP). It was especially bad for COMP, which fell below psychological support at 13,000 in the final hour of the session as Tech stocks took it on the chin again.

The SPX closed Wednesday just a tick above its 50-day moving average of 3817 (see chart below), setting up an interesting start for today. Will the SPX manage to hold that level or fall below? The 50-day has been a key support point for weeks.

One thing to remember: The “buy the dip” mentality has taken hold every time it looks like this market is going to crack. In football, if you’re running a sweep and it keeps working, you keep running it until it doesn’t. Investors seem to be following that same playbook. We’re near the bottom of the recent range for the SPX, so today’s a good test of whether the same play will work on third and long, so to speak.

Tech Still on Mat, but Don’t Count it Out

Rising yields spook a lot of investors, especially in sectors like Tech where valuations tend to be high. It implies a tougher path to the kind of earnings growth that could ultimately justify those high valuations, and that’s one reason we’ve seen reassessment and profit-taking across Tech lately. This could also be happening because the end of the quarter is approaching, along with “quadruple witching” on March 19. We often see the big funds adjust around this time, so what’s going on doesn’t seem particularly surprising considering the time of year.

Could a “Tech check” turn into a “Tech wreck?” Some people are already using the “W” word. It’s a bit early to push the panic button, even if things seem rough right now. We’ve just witnessed the worst two-day slip for the COMP in six months, but people were writing Tech’s obituary then, too, and look how the sector came roaring back from November through January. No one’s gotten rich betting against Tech lately. Sentiment seems to be against the sector, but that can flip on a dime, as we’ve seen before.

From a technical perspective, the late January low of 12,985 in COMP could be a level to watch. The COMP, which is heavily weighted toward Tech, finished just a few points above that on Wednesday.

The CMP is now under its 50-day moving average, but it did hold 13,000 last week. We’ll see if it can claw back above that before this week ends, but with semiconductors falling 2.5% by late Wednesday, it’s a hard job. The chip dip was despite Micron (MU) raising its expected earnings per share and revenue outlook. Nvidia (NVDA), Qualcomm (QCOM) and Marvell (MRVL) got hammered. This is also happening even with an industry-wide chip shortage.

There were plenty of stocks that did well yesterday, like Citigroup (C) , United (UAL), Wynn Resorts (WYNN), American Express (AXP), and Boeing (BA). Darden Restaurants (DRI) fell Wednesday, but it’s been another “reopening” company that’s been on a roll. Don’t lose track of strong performance from Financials and Energy, because they can reflect reopening optimism just as much as airlines and restaurants. Also, a strong Financial sector often gives a boost to the broader market.

Financials have already come a long way, partly due to rising yields. Still, they could continue to be prime beneficiaries if rates keep rising. Besides that, they’ve done a fantastic job considering everything going against them, including increasing fees and finding other areas where they can charge and bring in more revenue.

OPEC Meets with Hopes for Higher Output Fading

Crude did a quick 180 yesterday and today, charging back above $62 after falling below $60 earlier in the week. Airline stocks and other “reopening” companies generally performed nicely Wednesday, but $60 is typically the level where you start seeing airline executives worry about crude prices cutting into profitability (already under pressure from Covid). Last year, things got about as bad as you can imagine for aviation, but at least Covid kept fuel prices low. This year, passenger traffic is up but still nowhere near normal, and now airlines have to pay more for fuel.

Which brings us to today’s OPEC meeting. The OPEC+ group (OPEC plus Russia) is considering keeping their collective oil production cuts in April, according to Reuters. This report could be helping prop crude prices going into the OPEC gathering, especially when you consider that just a few days ago, there was talk OPEC+ might increase production.

OPEC and its non-OPEC allies led by Russia are keeping around seven million barrels per day off the market to help the market rebalance and prop up prices after the pandemic shock to demand. OPEC’s top producer and the world’s top exporter, Saudi Arabia, is also cutting one million barrels per day in February and March on top of its quota, according to trade site oilprice.com. 

Payrolls—What to Watch: Everyone tends to focus on the headline number with monthly payrolls, but you can observe a lot just by watching, as baseball great Yogi Berra once said. That’s why tomorrow’s February payrolls data deserves more than a quick glance. It would be great to see a turnaround from January’s downbeat numbers in key sectors like transportation and warehousing, construction, and manufacturing. All of those fell in January, with construction and manufacturing seeing their first losses in eight months.

Unfortunately, it’s possible the terrible weather in Texas might have hurt job growth in some of those industries last month, and that may get picked up by the report. Retail also took a step back in January, and so did Leisure and Hospitality. Any bounce in these categories would be from pretty low levels due to lockdowns, but welcome from the perspective of any reopening they might signal. It was positive to see the manufacturing work week tick up in January. If we get more of that in February, it could tell you something about demand for big-ticket items.

As far as market reaction, keep in mind that we’re now at the point where many “good news” items get treated as bad news by the stock market. A big gain in jobs (analysts predict a 200,000 jump) might get read as feeding an overheated economy, with a corresponding rise in Treasury yields that spooks stocks. Also, the report is almost certainly getting a close look from the Fed, and may be something they discuss at their meeting later this month.

Tech as in Wreck? The market doesn’t actually need a rallying Tech sector to make gains. Sure, it helps a lot, considering mega-cap Tech stocks like Microsoft (MSFT) and Apple (AAPL) both have big weightings in the S&P 500 Index (SPX). The chip market has been influential, too. Tech was the leading sector three of the last four years, and the one year in that stretch where Tech struck out (2018), the SPX also finished lower.

Still, if you go back to 2012 and 2013 (yeah, it’s been a while), Tech got outpaced by the SPX, and both years saw strong SPX gains led by sectors like Financials and Consumer Discretionary. Interestingly, that was also an era where the…