In a choppy session of trading yesterday, the indices fell sharply early in the day, recovered over the course of the session, and finished not too far from breakeven levels. Our sense is that traders did not want to make large bets ahead of Federal Reserve Chairman Powell's speech on Friday. Overall, the S&P 500 finished off nine points, and the Dow Jones Industrial Average was down 154 points. The NASDAQ Composite, on the other hand, ended relatively flat. This action juxtaposed Monday's decline, when investors sold off riskier stocks and moved into defensive names. The futures market is suggesting a mixed start to trading today, with the major averages again not too far from the breakeven mark.
Yesterday, market breadth was narrow—favoring decliners over advancers by only a 1.1-to-1.0 ratio. Energy stocks were among the best performers, aided by strong movements in oil prices. REITs were among the weakest performers, hurt by a tumble in new home sales.
In commodity news, oil prices rose yesterday, as traders thought that OPEC would meet to increase supply from a potential Iran deal, but reports said that a supply cut is a possibility. Meanwhile, natural gas prices backed off from a multiyear high, as the Freeport liquefied natural gas terminal stated it plans to start production in November, which could lead to an oversupply within the United States.
Elsewhere, U.S. Treasury Bond yields were mixed, as short-term rates rose and the yields on long-term duration bonds fell. Traders are pricing in a roughly 50/50 chance of either a half- or three-quarter point hike to the short-term benchmark interest rate at the September Federal Open Market Committee (FOMC) meeting. The yield curve remains significantly inverted, which usually portends a recession. The VIX Volatility Index, which measures the magnitude of price movements in the S&P 500, increased slightly, signaling higher demand for options protection.
Several economic reports will likely affect trading in the days ahead. These include initial jobless claims and the first revision to the seasonally adjusted annual second-quarter GDP estimate tomorrow. A significant amount of inflationary data, including core and noncore personal consumption expenditures, will be released before the opening bell on Friday. Additionally, the University of Michigan Consumer Sentiment Index for August is also slated before the trading week is out.
Also on Friday, Federal Reserve Chairman Powell will give his Jackson Hole, Wyoming speech, providing further insight into how the Federal Reserve will determine future interest-rate policy. How dovish or hawkish his statements are will likely drive trading over the weeks ahead.
Several dozen earnings reports will also be released over the coming days, including those from a number of the smaller retailing companies. Of note, Dow-30 component Salesforce, Inc. (CRM) is slated to post its results and outlook after today's closing bell.
In sum, we think all eyes will be on Federal Reserve Chairman Powell’s remarks and any possible changes to the central bank’s future interest-rate policy outlook.
− John E. Seibert III
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
