Opening Market Update

Fed Chairman Powell to Speak This Afternoon

April 16, 2024 Joe Mazzola
Rate cut hopes seemingly retreat daily, so Wall Street will closely monitor Powell's comments. Volatility hit levels last seen in October as the world waits for Israeli response.

(Tuesday market open) A year ago, excitement stirred on Wall Street about a possible Federal Reserve rate "pause" following 13 months of steady hikes. The pause arrived after a final hike last July. It's lasted far longer than anyone likely expected and appears to have plenty of gas in the tank.

Wall Street braces today for Fed Chairman Jerome Powell's early afternoon comments as rate cut hopes retreat almost daily amid resilient economic data and stubborn inflation. U.S. Treasury yields flirt with last fall's two-decade peaks, and geopolitics remain a potentially combustible element in the mix.

Until Israel's response to Iran's attack becomes clear, investors might stay cautious. Volatility remains at levels last seen in October as major indexes wavered and then found some early footing following yesterday's sharp declines. Early gains might be fleeting, however. An Israeli official told NBC News last night that a response could be "imminent."

Three days of dramatic losses in the last four pushed the S&P 500® index (SPX) to a close below its 50-day moving average Monday for the first time since early November, a sign of technical weakness with potential spillover today. Lack of any late buying interest yesterday suggests that "buy the dip" sentiment may be fading. The SPX is now within shouting distance of its first 5% drop from highs since last October.

So-called "mega caps" briefly showed up with ladders and hoses last Thursday, but their failure to follow through on Friday and Monday didn't help matters. Even if mega caps march back, recent selling appeared to puncture the healthy trend that saw cyclical and small-cap stocks gathering steam through much of Q1. That's what often happens when investors get enthusiastic about rate cuts, which tend to help such stocks. Now, both soldiers and generals seem to be tiring.

"Fed officials have already begun dialing back expectations for rate cuts, and this supports the case that the Fed should hold at its peak for the time being," said Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.  "We revised our outlook to just two cuts this year."

Futures based on the SPX climbed 0.22% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) rose 0.14%. Futures based on the Dow Jones Industrial Average® ($DJI) jumped 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) inched up slightly to 4.63%.
  • The U.S. Dollar Index ($DXY) fell marginally to 106.08.
  • The CBOE Volatility Index® (VIX) is down from yesterday's five-month high above 19, trading at 18.5.
  • WTI Crude Oil (/CL) dropped 0.5% to $84.94 per barrel.
  • Bitcoin (BTC) eased 0.2% to $63,195.

Just in

Housing starts fell 14.7% in March, a large miss for a metric that's used to help compile the crucial U.S. Leading Economic Index (LEI) from the Conference Board. The LEI rose in February for the first time in two years, and the next update is due Thursday.

Housing starts at an annualized 1.321 million were well below the consensus of 1.485 million and hit a seven-month low, while building permits also sagged and missed consensus views. Rising mortgage rates, even before this month's sharp increase, might be hurting housing. Shares of home builders Lennar (LEN) and D.R. Horton (DHI) fell after the data and have been under pressure for weeks.

Industrial Production and Capacity Utilization is another report to watch today, followed by the Fed's Beige Book tomorrow.

Stocks in spotlight

Big bank results stayed on page one this morning with reports from Bank of America (BAC) and Morgan Stanley (MS) to wrap up the opening innings of financial earnings season. Morgan Stanley shares popped more than 2% on results that easily beat Wall Street's consensus expectations following beats last week and earlier this week by JPMorgan Chase (JPM), Goldman Sachs (GS), and Wells Fargo (WC).

Though investors didn't seem particularly enthralled by what they heard from JPMorgan Chase last Friday, generally results show the industry had a solid Q1. Morgan Stanley's results, with better-than-expected revenue in areas like wealth management and investment banking, were pretty typical for the season so far.  

A solid U.S. economy tends to help big banks, and earnings from Bank of America fit the mold by beating expectations despite some challenges, including a $700 million payment to the Federal Deposit Insurance Corp. (FDIC) related to last year's regional bank failures that ate into profit. Wealth management had a solid quarter and so did equities trading, but fixed income, currencies, and commodity trading revenues fell.

Net interest income (NII), which is the money banks make lending minus what they pay to customers, fell from a year ago for Bank of America and remain a focus for all the big banks as lofty interest rates keep banks' costs high in terms of paying for deposits. JPMorgan Chase's guidance for lower-than-expected NII helped push shares of that stock down 6% last Friday, but Bank of America traded roughly flat early today.

Regional bank earnings accelerate as the week advances. Smaller financial institutions often feel the heat first when rates rise and credit conditions tighten, factors that can quickly hurt small businesses that depend on those banks for credit. Regional bank stocks have spent most of 2024 slowly retreating from their Q4 rally that took place when the rate picture looked cheerier.

Financial firms reporting this week outside the biggest names include Northern Trust (NTRS), PNC (PNC), First Horizon (FHN), Fifth Third (FITB), and a handful of others. As signs recently emerged of credit conditions tightening, these institution's updates on credit quality, loan demand, loan loss provisions, and credit availability could help investors better understand the broader economy.

"We have indeed seen conditions tighten: Payroll growth for cyclical sectors has eased meaningfully, bank lending growth is nearly flat, the housing market has already gone through its hard landing, capex already went through its slowdown, and consumer delinquencies are rising," said Kevin Gordon, director and senior investment strategist at Schwab.

United Airlines (UAL) is due to report this afternoon following friendly tidings from Delta (DAL) last week. However, as points out, UAL has much more exposure than Delta does to issues at Boeing (BA), and UAL shares descended Monday. Alaska Air (ALK) is due to report later this week. The rising cost of jet fuel and Middle East tensions weighed on airline stocks yesterday.

Stocks on the move:

  • UnitedHealth Group (UNH) shares soared 7.6% in premarket trading after the health insurance and services company topped quarterly earnings per share (EPS) and revenue expectations despite a recent hack into a payments tool operated by a subsidiary that caused trouble across the industry, according to Barron's. That attack is still likely to affect full-year net earnings, UnitedHealth said, but it maintained its earnings outlook for 2024. The company continues to struggle with Medicare funding reductions.
  • Johnson & Johnson (JNJ) fell slightly ahead of the open after reporting better-than-expected EPS and revenue that met Wall Street's expectations. Guidance was also as analysts had expected. The company still faces fall-out from litigation related to its talc products.

What to watch

China check: The overnight hours brought a host of Chinese data, including quarterly GDP growth, industrial production, unemployment, and home prices. GDP was a bright spot, rising 5.3% year over year in Q1 to beat the average 5% analyst estimate, according to Trading Economics. Growth in fixed investment also beat expectations, but industrial output and retail sales came up short. Joblessness remained elevated, all signs that China's government might have to conduct more stimulus.

Domestic on tap: Yesterday's hot March Retail Sales report became the latest in a long list of strong data and played into rising estimates for Q1 gross domestic product (GDP). The Atlanta Fed's GDPNow indicator rose to 2.8% on Monday from the prior 2.4%. The first official government estimate of Q1 GDP is due next week.

The U.S. Dollar Index remains above 106 this morning, up nearly 4% in the last month to levels last seen in early November. An elevated dollar can indicate investors seeking perceived "safety" in the greenback during troubled times, though no investment is truly safe. It also can hurt overseas economies by making U.S. goods more expensive, not a positive development for U.S. multinational firms.

Talking technicals: The 50-day moving average that the SPX closed below for the first time since November 2 on Monday is 5,114. Technical support could rest near the psychological 5,000 area, and below that near 4,800, a region near the early 2022 high that the index struggled to push above late last year before breaking through in Q1. Interestingly, a 5% decline from the 5,254 closing high would put the SPX right around 5,000.

Eye on the Fed

Early today, futures traders saw 98% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 22%, rising to roughly 48% for the late-July meeting. Probabilities are around 75% for at least one rate cut by September.

Roll on: Are "rolling recessions" turning into a "rolling recovery" for the U.S. economy? Check the latest Schwab Market Perspective for ideas on why this might be the case.

Thinking cap

Ideas to mull as you trade or invest 

Monday in review: The SPX fell more than 1% Monday, finishing nearly 4% below the record March 28 closing high of 5,254. Every S&P sector lost ground, with no real pattern of investors embracing so-called defensive areas. Major U.S. indexes typically suffer several 5% or worse drops a year and haven’t had one since last October. If you're worried about things getting even worse, there've been 10 corrections of 10% to 19.9% in the SPX since 1990, averaging about 14.4% and taking four months to go from peak to trough, according to research firm CFRA. These corrections typically spread pain around all sectors, though there's no reason to necessarily expect another one soon with the economy resilient and earnings growth expected. That said, analysts appear to be taking some firepower out of their Q1 earnings expectations, which research firm FactSet now pegs growing just 0.9%, down from its previous 3.4% estimate. This reflects negative earnings surprises and downward revisions to EPS estimates, FactSet said.

Yen and dollar dance: The Japanese yen is still on the front burner, sitting at a 34-year low. "The Bank of Japan (BoJ) is moving at a very gradual pace, hiking by 10 basis points in March, and could hike by another 10 bps later this year," said Michelle Gibley, director of international research at the Schwab Center for Financial Research. Still, the yield on the 2-year Japanese government bond remains below 30 basis points, versus the U.S. 2-year yield of above 4.9%. That helps keep the dollar elevated, a headwind for U.S. stocks. And if the BoJ does move to strengthen the yen, it could steer more money into Japanese bonds, putting pressure on U.S. Treasuries and sending the needle upward on Treasury yields here. "The spread to U.S. Treasury yields remains wide, keeping downward pressure on the yen and upward pressure on the U.S. dollar," Gibley said. "Japan’s Ministry of Finance has threatened currency market intervention, but BoJ Governor Ueda said last week they won’t change policy for exchange rate reasons."


April 17: Expected earnings from Abbott Labs (ABT), ASML (ASML), Travelers (TVR), U.S. Bancorp (USB), and Alcoa (AA).

April 18: March Existing Home Sales, March Leading Economic Indicators, and expected earnings from Alaska Air (ALK), Marsh McLennan (MMC), and Netflix (NFLX).

April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).

April 22: Expected earnings from Verizon (VZ) and Nucor (NUE).

April 23: March New Home Sales and expected earnings from Freeport-McMoRan (FCX), Halliburton (HAL), Lockheed Martin (LMT), Kimberly-Clark (KMB), PepsiCo (PEP), Philip Morris (PM), Tesla (TSLA), Texas Instruments (TXN), and Visa (V).