(Monday Market Open) A volatile quarter ended Friday with the “risk-on” dial at 10 as stocks rocketed to six-week highs. Then OPEC shattered the weekend quiet with a surprise production cut, raising questions about the recent rally’s staying power.

Wall Street drew a tailwind last week from easing fears about banks and a relatively benign read on inflation Friday. But OPEC slicing an additional 1 million barrels a day from already reduced output brings a new wrinkle on the pricing side.

While the Federal Reserve focuses mostly on core inflation—which strips out volatile oil prices—it’s a different story for consumers and businesses. Expensive energy can tighten the screws on household budgets and company margins. Higher crude often helps the energy sector, something we saw last year, but sometimes at a cost to other sectors.

If higher energy prices stick around it could ultimately make the Fed’s inflation fight tougher. Treasury yields rose slightly following the OPEC news, and probability of a rate hike in May jumped to nearly 60% this morning, according to the CME FedWatch Tool. It had been below 50% late last week.

Morning rush

  • The Treasury note yield (TNX) rose slightly to 3.5%.
  • The ($DXY) fell slightly to 102.33.
  • The Cboe Volatility Index® () futures jumped to 19.69.
  • WTI (/CL) rose 6.5% to $80.57 per barrel.

Crude has now clawed back all its March losses. It fell from above $80 that month to near $65 at the height of the banking turmoil. The $80 level has been a resistance point for front-month crude futures this year, which peaked at $82.66 in mid-January.

In one sense, more expensive crude could work in favor of the Fed’s plans to slow the economy. When crude prices rise, consumers and businesses often pull back on spending. This is especially tough on cyclical sectors like consumer discretionary. Think airlines, casinos, cruise lines, and delivery firms.

Just In

The big news is OPEC, pushing other weekend developments into the background a bit. One of those was Tesla Inc (NASDAQ:) Q1 vehicle deliveries falling short of Wall Street’s estimates at just under 423,000. The consensus was 430,000, according to research firm FactSet. TSLA shares fell 3% in premarket trading.

To put things in more context, deliveries rose 4% from Q4 and 36% from Q1 2022. However, the company’s production continues to outpace deliveries. The lower-cost Model 3 dominated Q1 deliveries in a quarter then TSLA cut prices to encourage sales. TSLA’s shares rose sharply in Q1 but remain far below record highs.

Before the weekend news avalanche, investors were celebrating a very strong quarter for Wall Street. The index (SPX) rose 7% in Q1, and the ® (NDX) rose more than 20%.

Stocks in Spotlight

Medical companies, especially vaccine makers, could be in the spotlight this week at the World Vaccine Congress in Washington, D.C. Some well-known vaccine makers include Moderna (NASDAQ:), Johnson & Johnson (JNJ), and GlaxoSmithKline (NYSE:). Talk of vaccines brings COVID-19 to mind, and late last month, Walgreens Boots Alliance (NASDAQ:) (WBA) reported a steep year-over-year decline in demand for COVID-19 vaccinations. Another topic of interest could be government oversight amid finger-pointing about the possible delay in approval of vaccines and other therapies due to U.S. regulations.

Last week’s meteoric rally to the highest close since mid-February for the SPX raises questions about how much upward momentum remains. The forward price-earnings ratio (P/E) is back above 18 after hanging out near 17 or below for much of Q1, close to the 10-year average. Every sector gained Friday, but so-called “defensive” ones like utilities and staples brought up the rear, while info tech, consumer discretionary, and real estate gained significant ground. Small-cap stocks, which got slammed earlier in March amid regional banking health fears, had the best day Friday, rising nearly 2%.

On the one hand, the SPX remains nearly 15% below all-time highs reached in January 2022 before the Fed began its rate hike cycle. On the other, many analysts still forecast soft earnings this year, which would potentially lower the “E” portion of the P/E.

If that happens, market participants would either have to tolerate stretched valuations or prices would have to come down to better reflect what’s going on in corporate America. Recent price action suggests investors are comfortable “stretching out,” so to speak, but that also rests partly on ideas of the Fed lowering rates later this year, something Fed speakers haven’t hinted at lately.

In other company news later this week, look for possible headlines from Walmart’s (WMT) investor meeting, which could give a preview of the company’s quarter.

What to Watch

Holiday ahead: We’re starting a shortened week, with major exchanges closed on Good Friday. That could be awkward because it’s not a federal holiday, meaning the March Nonfarm Payrolls report will be released early Friday as normal, but most of us won’t be able to trade the data until Monday (except in the futures market). There’s a potential for increased volatility on Wednesday and Thursday preceding the release. Next Monday’s open could be far more interesting than usual, depending on how the data look. Consensus now is for March jobs growth of 240,000, according to Trading Economics, down from 311,000 in February but still historically high.

Factory gates: The March Institute for Supply Management (ISM) Manufacturing PMI comes on the heels of today’s open at 10 a.m. ET, and it could move the market. Consensus among analysts is for a headline reading of 47.1, down slightly from 47.7 in February, according to Trading Economics. Any level below 50 indicates contraction. February’s reading was the lowest since May 2020 and under expectations.

On the job: Friday’s March jobs report isn’t the only look at the labor market this week. Tomorrow’s Job Openings and Labor Turnover Survey (JOLTS) report is also likely to come under scrutiny for any signs of tightening job demand. It’s been swollen for months, leading to worries that wage pressure could grow as companies compete for workers, ultimately contributing to inflation. Unfortunately (or fortunately if you’re someone seeking work), job openings aren’t expected to budge much in the February JOLTS report due a 10 a.m. ET tomorrow. Analysts expect 10.8 million, basically unchanged from January. But any surprisingly lower reading could potentially play into recent market optimism around inflation, so be ready.

Talking Technicals: The SPX punched through 4,100 Friday for the first time since February 16, back before the banking crisis. The year’s highest close was 4,179 on February 2, before a string of inflation and jobs data raised fears that the economy wasn’t cooling fast enough for the Fed’s liking. The long-term trading range appears to remain between 3,800 and 4,100 after 3,800 held on a test of that level in mid-March. There hasn’t been much buying interest at current levels since last summer, as every rally up to now over 4,100 has stalled out just above it.

Get Ready: Remember to check out Schwab’s Weekly Market Outlook today for Chief Global Investment Strategist Jeffrey Kleintop’s 90-second take on the markets for the week ahead.

RUT Daily Chart

CHART OF THE DAY: FORWARD MARCH! The small-cap (RUT—candlesticks) rebounded late last month after taking it on the chin in mid-March due to its exposure to slumping regional banks. Still, it couldn’t outpace the Nasdaq 100 (NDX—purple line), which had its best quarter since 2020 as tech stocks partied. Data Sources: Russell, Nasdaq.Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Siren song? Friday’s relatively mild inflation data brought new hopes to bullish market participants that the Fed could potentially engineer a “soft landing” for the economy. Not to rain on any parades, but that remains a tough needle to thread. The current inflation rate of 5% is nowhere near the Fed’s long-term 2% target, and banking turmoil isn’t necessarily completely behind. Credit conditions are likely to tighten, meaning if the Fed ultimately does cut rates later this year, it will likely be doing so in response to economic weakness. Analysts widely expect earnings to decline in Q1 before possibly improving later this year. How this all plays out against a market that continues to push the bullish case is going to be fascinating to watch in Q2 and beyond.

Bear tracks: One argument getting traction these days is that companies, investors, and banks are learning to live with higher interest rates, and that worries about an economic slowdown amid tighter credit conditions might be overdone. The same argument notes that with the Fed’s current target range of 4.75% to 5%, we’re not in untrodden territory. Rates were higher in the late 1990s and the economy roared. There’s a counterpoint, however, and it’s the nearly unprecedented speed at which the fed funds rate soared from near zero a year ago to 5% now. The old driver’s ed lesson—“speed kills”—comes to mind. When rates rise so quickly people get cautious, whether it’s banks making loan decisions or companies deciding whether to borrow money so they can add equipment or workers. Rates rising this fast also cause market volatility and can lead to things breaking, with two bank failures last month. All this explains why we’re not necessarily out of the woods on high rates yet, even if the Fed decided tomorrow on a pause. Which it won’t, judging from recent hawkish Fed speeches.

Optimist club: Is there any reason to be positive after a volatile Q1 that ultimately ended with solid gains for major stock indexes but had some analysts fretting about relatively high valuations? Strong recent corporate results raised hopes that this coming earnings period might end up better than negative forecasts suggest. One key is guidance. Will we hear conservative forecasts from companies anticipating tighter credit conditions and perhaps an economic slowdown? The other key in April is coming inflation and jobs data. Market participants grew enthusiastic after Friday’s benign inflation reading, but that’s just one data point. A single snapshot doesn’t mean much if it’s not backed up by more evidence, and slowing inflation, remember, can also reflect a slowing economy.


April 4: February Factory Orders and February Job Openings and Labor Turnover Survey (JOLTS).

April 5: February Trade Balance and March ISM Non-Manufacturing Index. Expected earnings from Conagra (CAG).

April 6: No major data or earnings expected.

April 7: March Nonfarm Payrolls, March Wages, March Unemployment; major exchanges closed for Good Friday.

April 10: February Wholesale Inventories.

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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