Opening Market Update

Stocks Sag as Yields Climb Ahead of Inflation Data

May 29, 2024 Joe Mazzola
The tech-led rally is threatened by rising Treasury yields ahead of Friday's inflation data. Weak demand at a Treasury auction and solid consumer confidence pushed yields higher.

Published as of: May 29, 2024, 9:10 a.m. ET 

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(Wednesday market open) Climbing Treasury yields ahead of key inflation data sent major U.S. indexes to sharp overnight losses early Wednesday, threatening the tech-led rally that's lifted stocks so far this month. A plunge in airline shares after American Airlines (AAL) cut guidance late Tuesday added to the early misery on Wall Street.

There's a heaping plate of data right around the corner, though today's schedule looks relatively light. Gross domestic product (GDP) and Personal Consumption Expenditure (PCE) prices Thursday and Friday, respectively, could factor into the Federal Reserve's updated rate projections due June 12. Judging by the market's move this morning, with the benchmark 10-year U.S. Treasury note yield knocking at the door of 4.6% and volatility on the rise, investors are anxious about what the numbers might say.

"Friday's PCE report will be the most important release this week," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. Overall and core PCE rates are both expected to rise by 0.3% month over month, Martin noted. The core rate excludes food and energy prices. PCE is the Fed's preferred inflation measure.

"With inflation the key concern among policymakers and the markets these days, an upside PCE surprise would likely pull yields higher, but we don't expect that to happen," Martin said. There are several factors that can pull down inflation and, according to Martin, the disinflationary trend should continue. "We believe inflation is sticky and not stuck, but a slower pace of disinflation could end up resulting in fewer rate cuts down the road," he said.

Yesterday saw Treasury yields climb back into the driver's seat. They pushed stocks down late in the session after disappointing results from a U.S. Treasury 5-year note auction sent yields to nearly four-week highs ahead of a seven-year auction today. The market feels skittish ahead of the coming data, and U.S. Consumer Confidence data released yesterday reinforced ideas that the economy remains vigorous. That reading likely added to pressure on Treasuries.

Futures based on the S&P 500® index (SPX) slid 0.6% shortly before the close of overnight trading, while Nasdaq-100® (NDX) futures sagged 0.7%. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.6%.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.  

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.  

Morning rush

  • The 10-year U.S. Treasury yield (TNX) climbed two basis points to 4.56%, the highest level since May 2.
  • The U.S. Dollar Index ($DXY) steadied at 104.68.
  • The Cboe Volatility Index® (VIX) jumped to 13.91, a two-week high.
  • WTI Crude Oil (/CL) climbed 0.7% to $80.41 per barrel after trading below $80 for most of May, with OPEC expected to maintain production cuts at its meeting this Sunday.
  • Bitcoin (BTC) fell 0.6% to $67,901.

Data this week and beyond ultimately could have a big impact on Treasury yields.

Stocks in spotlight

At least a half dozen major retailers are expected to report results this week, including Costco Wholesale (COST) and Kohl's (KSS), as first-quarter earnings season winds down. As retailers report, debate swirls about consumer credit and demand, with recent data showing a mild uptick in some types of credit card delinquencies and April retail sales looking sluggish.

Costco and Kohl's join several other retailers Thursday, including Best Buy (BBY), Dollar General (DG), Foot Locker (FL), Gap (GPS), and Nordstrom (JWN). Earnings from apparel retailer VF Corp. (VFC), owner of North Face, disappointed last week and raised concerns heading into earnings from some of its competitors. Meanwhile, Dollar General and Costco might draw tailwinds from what appears to be a trend toward eating at home and shoppers seeking bargains. See more on food prices below.

Stocks on the move:

  • American Airlines plunged nearly 9% in premarket trading after the company cut its second quarter guidance to a range of $1 to $1.15 from the previous $1.15 to $1.45 per share. This partly reflects an expected slide in adjusted operating margin, the company said in a filing with the U.S. Securities and Exchange Commission. It didn't explain why it cut its outlook.
  • Other airline stocks including Delta (DAL) and United (UAL) also lost altitude in the early hours Wednesday following American's slide. However, United issued a statement saying it isn't changing its guidance. Demand has been strong for airline seats, with the Memorial Day weekend setting volume records at U.S. airports, according to government data.
  • Marathon Oil (MRO) shares rose 8% after ConocoPhillips (COP) announced plans to buy the company in a $17.1 billion all-stock transaction. In a press release, ConocoPhillips said the deal would be "immediately accretive" to earnings and cash flows," and that there's "significant synergy potential." The acquisition, if it clears regulatory review, would give ConocoPhillips more access to crude in the lower 48 U.S. states.
  • Chewy (CHWY) jumped 6.8% ahead of the open following solid first-quarter earnings that beat expectations and despite below-consensus Q2 guidance. Its guidance for the full year remained unchanged. The pet product and supply company also announced a share repurchase program.

What to watch

Reports later this week include the U.S. government's second GDP estimate Thursday and the Fed's favored inflation metric, PCE prices, on Friday. The initial estimate for GDP growth, released in late April, was a weaker-than-expected 1.6% annual rate, less than half the 3.4% jump posted in the fourth quarter of 2023.

Analysts expect tomorrow's updated Q1 GDP to fall to a seasonally adjusted annual rate of 1.3%. More importantly from a rate perspective, the GDP price deflator that measures prices across the entire economy, rose to 3.1% in the first estimate, keeping inflation fears front and center. Consensus is for that number to remain unchanged in tomorrow's second estimate. But any downward or upward move would likely be seized on by the markets.

March PCE rose 0.3% from February in both the overall and core rates, matching analyst expectations. The core rate excludes food and energy prices, which tend to be volatile.

Compared to year-earlier levels, PCE climbed 2.7% overall and was up 2.8% in the core rate, both slightly above what analysts expected. Both readings remained above the Fed's 2% long-term inflation target, reinforcing the likelihood the Fed won't be lowering its benchmark rate any time soon.

Looking ahead to the data, analysts expect PCE prices to rise 0.3% in April, according to Briefing.com. Core PCE is also seen up 0.3%.

Additional data this week includes the Fed's Beige Book of economic conditions around the country, scheduled this afternoon. This could provide insight into what's helping shape Fed decisions. Manufacturing data in the form of the Fed's Richmond Manufacturing Index is another touchpoint soon after the open.

Tomorrow's Weekly Initial Jobless Claims are expected to be 219,000, up from 215,000 the prior week and not changed much from the recent range.

Tuesday in review: Semiconductor shares extended a recent rally Tuesday behind further strength in chip giant Nvidia (NVDA), helping lift the Nasdaq Composite® ($COMP) to a record and its first close above 17,000. Nvidia added 7.1% and hit a record high for the third trading day in a row, helped in part by Tesla (TSLA) CEO Elon Musk announcing plans for an AI startup and indicating the chip supplier would be Nvidia, according to Investor's Business Daily.

Financial shares were among Tuesday's weakest performers, reflecting ideas that elevated interest rates could burden bank margins. The KBW Regional Bank Index (KRX) sank to its lowest close since April 30. Biotechnology and health care sectors were also under pressure.

Stocks came under pressure late Tuesday after weaker-than-expected demand for the Treasury's 5-year note auction pushed yields up. The 10-year Treasury note yield (TNX) climbed near 4.55%, its highest level in nearly four weeks. The jump in yields came amid uncertainty ahead of Friday's PCE inflation report, and appeared to hurt small-cap stocks more than large caps.

Eye on the Fed

Early today, futures traders pegged 99% chances the benchmark funds rate will be unchanged after the Federal Open Market Committee's (FOMC) June 11–12 meeting, based on the CME FedWatch Tool. Odds of a July rate cut stand at 10%, while chances of a September cut have fallen below 50% and recently stood at 45%. The market builds in very slim chances of a rate hike by September.

Thinking cap

Ideas to mull as you trade or invest

Salesforce ahead: Before the retail earnings onslaught, Dow member Salesforce (CRM) is scheduled to report results later today. Last time out, the cloud software maker beat Wall Street's estimates, expanded its buyback program, and guided for better-than-expected performance. As its stock symbol makes clear, Salesforce products support customer-relationship management (CRM), so the strong jobs market and heavy capital spending by many large companies might be helpful factors. One thing to consider listening for on Salesforce's call is any new hints of the company's appetite for acquisitions. Its proposed $10 billion purchase of data software provider Informatica (INFA) fizzled out last month, but that doesn't necessarily mean the company doesn't still contemplate add-ons. Its last major purchase was of Slack in 2020.

The cost of labor: All eyes next week will likely be on the June 7 Nonfarm Payrolls report for May, which could be integral in helping investors determine if April's job market cooldown was a blip or the start of a trend. Before that, however, be prepared for a report next Thursday on labor productivity and unit labor costs that might get some attention of its own. The government's first estimate of Q1 unit labor costs, issued earlier this month, surged a surprising 4.7% and triggered new inflation concerns. The rise in cost mainly reflected wage inflation in the manufacturing sector, according to the Bureau of Labor Statistics (BLS). Rising labor costs can narrow corporate margins, ultimately hurting earnings. That said, the initial report showed growing productivity, which can help blunt the inflationary impact of rising wages.

Earnings season nostalgia: Tomorrow will feel like turning the calendar page back a month to the middle of earnings season as investors brace for a slew of reports. Much of this will be in the retail sector, putting consumer discretionary and consumer staple stocks in focus and perhaps creating volatility for those sectors. One key area to watch is food, with Costco, Dollar General, and Hormel Foods (HRL) providing the latest updates on what consumers are putting in their pantries and whether they're on the hunt for bargains. Earlier tidings from Walmart (WMT) and Target (TGT) suggest that's the case. The question is how much pricing flexibility these companies have. Target cut prices for thousands of items this month in a sign that inflation might be driving away shoppers. Watch to see if any of tomorrow's companies mention the impact of inflation. The April Producer Price Index (PPI) noted a 0.7% drop in food costs on the wholesale level, perhaps giving companies more room to hold sales.

Calendar

May 30: Q1 GDP second estimate, April Pending Home Sales, and expected earnings from Best Buy (BBY), Foot Locker (FL), Dollar General (DG), Costco (COST), and Dell (DELL).

May 31: April PCE prices, April Personal income and spending.

June 3: May ISM manufacturing index, April construction spending.

June 4: April factory orders, expected Q1 earnings from Bath & Body Works (BBWI).

June 5: ISM Non-Manufacturing Index for May, ADP® National Employment Report, and expected earnings from Dollar Tree (DLTR) and Campbell Soup (CPB).