Before The Bell
Stocks have been under pressure this week due to concerns about higher inflation. Though stock market futures started slightly positively yesterday, rebounding after a weak day of trading during the regular session, an early economic release about November wholesale prices showed a 9.6% increase year over year. This prompted selling across a wide array of equities, as worries grew about inflation and how its continued rise would affect interest-rate policy from the U.S. Federal Reserve. The indices fell quickly in the first portion of trading, trended sideways through the afternoon, and finally recovered a bit in the session's final hour, as stocks benefitted from the passing of a Senate bill to raise the debt limit by $2.5 billion, which reduces the likelihood of a government shutdown. Overall, the S&P 500 closed off 35 points, The Dow Jones Industrial Average was lower by 107 points, and the NASDAQ fell 176 points. Today, investors will be looking for direction from the latest Federal Reserve policy decision, expected this afternoon.
The futures market remained slightly in the green during the night, ahead of several important economic reports. One such showed November retail sales up .3%, a weaker-than-expected number, but at the same time, the Empire Index of 31.9 showed a stronger manufacturing environment. Overall, the futures market moved little in the wake these reports, remaining near breakeven levels, suggesting a lackluster start to the trading day.
Further economic news is expected later in the morning, with the Home Builders Index report due at 10:00 AM EST. The main attraction, though, is the Federal Reserve Open Market Committee meeting later today. The Fed will be releasing its interest rate policy update at 2:00 PM EST. Though no changes are expected at today's meeting, the market will be looking to glean any insights on further tapering of bond purchases and when the Fed will start hiking interest rates. Traders currently are placing greater than 50% odds that the first rate hike will occur by May 2022, but recent strong inflation data suggests that forecast may change once Fed Reserve Chairman Powell speaks at the press conference after the meeting. Overall, this will likely be the biggest factor in determining how stocks perform today.
Meantime, market breadth was rather negative yesterday as decliners outpaced advancers by a 2.4-to-1.0 ratio. Financial stocks were among the best performers, aided by a positive change in interest rates, while technology issues performed the worst.
In commodity news, oil prices declined yesterday alongside the broader stock market, as traders placed bets that supply growth will exceed demand. Meanwhile, U.S. Treasury bond yields were higher across the board, though long-term rates were higher than those with shorter terms. This usually is a positive sign for financial companies' earnings, as they borrow at short-term rates and lend long. Finally, the VIX Volatility Index rose yesterday as demand for options protection increased. A rising VIX usually signals higher expectations for future volatility and a potentially negative stock price action.
Looking ahead, several economic reports are slated for release tomorrow. These include building permits, housing starts, the Philadelphia Fed Manufacturing Index, and industrial production. These reports should show how well housing and the broader economy are faring. Meantime, Friday should be quiet, with no major releases on the docket. Earnings reports will be light over the rest of the week, suggesting that all eyes will be on the Fed later today as the key driver of stock market action for the rest of the week.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
