Whispers, Warnings, and Wild Cards

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch," and Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

When earnings season gets rolling, meeting or topping consensus estimates might not be enough to support shares, especially in the tech sector. That's where the "whisper numbers" among market participants may shape trading more than any widely shared views from Wall Street firms. These "whisper" numbers come from the buy side, among participants who actively trade and don't publish estimates. Still, these whisper numbers project hopes and hype. "The expectations bar is being set much higher than the consensus sell-side estimates, and that sometimes can come into play in terms of what the stock does," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, or SCFR, in her most recent On Investing podcast. "So that's something I'm going to keep a close eye on." Sonders also said the margin story is big this quarter, especially with memory stocks posting huge margins. One possible rub for those firms is that their customers are likely paying the higher price, which ultimately can lead to competition and possible loss of market share.

Treasuries were another wild card this week, with the 10-year yield moving above 4.6% early in the week for the first time since late May. The remainder of the week, however, it dipped back to the 4.55% area. There weren't any major auctions this week, but worries about a weak Japanese yen are one of many potential pressures on bonds, including from overseas. The Bank of Japan (BOJ) meets at the end of the month and could be under pressure to take measures to protect the currency. If it does, it could raise yields there, perhaps sparking more competition in the bond market and hurting U.S. Treasuries, which move the opposite way of yields. One measure of relief came last week as several large U.S. Treasury auctions saw solid demand. "Treasury auctions generally went well last week," said Collin Martin, head of fixed income research and strategy at SCFR. "That's a good sign given all the supply we have seen lately. The large supply of both Treasuries and corporate bonds, along with some large initial public offerings on the calendar, means there's a lot of competition for capital."

Bitcoin closed above its 50-day moving average for the first time since May 31 on Tuesday. That's encouraging for the bulls, as is the softer-than-expected inflation data released this week and the U.S. dollar's reversal to a one-month low, said Jim Ferraioli, director of digital currencies research and strategy at SCFR. He noted that the active investor cost basis—the average price paid on secondary markets—has slipped to $76,000 from $78,000, meaning traders have been buying the dip. But of course, it's what happens if prices keep rising that will determine whether the bulls are really taking control. A rally to the 200-day moving average in May was met with selling by many who bought during last year's cycle top and were eager to exit at a higher price after a months-long downturn. The 100- and 200-day averages are now key resistance levels, Ferraioli said.

President Trump's declaration last week that the ceasefire is "over" after Iran's attacks on shipping, and the subsequent escalation of tensions shifted attention back to an arena companies can't control. Unless this flare-up is brief, earnings calls in coming weeks may again focus on the potential impact of higher oil and yields. Taking a broad view, S&P 500^® Index earnings growth is expected to be strong in the second quarter, with FactSet pegging it at almost 24% annually. However, that includes more than 60% projected annual growth for the info tech sector, meaning concentration of earnings growth in the largest names remains a risk. Six of 11 S&P 500 sectors are expected to report earnings growth of less than 10%—more evidence of market bifurcation. Also, strong earnings can put more pressure on the Treasury market, where yields climbed early this week to near recent highs, raising concerns about the cost of borrowing.

Restaurants soon report earnings, grappling with rising beef costs. A pound of ground beef costs $6.75, according to the Bureau of Labor Statistics, a record high. Factors include general inflation, labor shortages, drought, and cattle disease, noted the Chicago Tribune. The number of U.S. beef cows is the lowest since 1961, and last year's calf "crop" dropped to lows last seen in the 1940s. This means it could take a while for supplies to recuperate, keeping prices up. A long drought in the western U.S. that reduced food and water supplies for the herd forced ranchers to cull, the Tribune said. Disease outbreaks like the screwworm earlier this year blocked cattle imports from Mexico. And fewer young people are entering the ranching business, sending labor costs up. Expensive beef also could send competing meat prices higher. All this means restaurants and grocery stores might face margin trouble, forced to either eat rising costs or pass them along to customers. McDonald's (MCD) and Wendy's (WEN) report in early August. Shares of both fell recently.