After a whipsawing week, stocks could continue to trade with volatile swings as investors assess new information on trade and the strength of the economy.
There are, however, some pretty important economic reports spread across the week, with CPI inflation data Tuesday, and a load of key reports Thursday, including retail sales, PCE inflation data, industrial production, and regional Fed surveys.
But it is the behavior of the markets investors will be watching. It will be important to see how stocks react to variables like the level of Treasury yields and the Chinese currency, which could be a bellwether for trade talks should the Chinese central bank allow it to lose much more value.
Investors will also be watching to see what signal the stock market send after it ended the week with a slight loss despite outsized moves in both directions.
Traders work on the floor at the New York Stock Exchange, August 5, 2019.
Brendan McDermid | Reuters
Sam Stovall, chief investment strategist at CFRA, said he believes the worst is over and stocks could trade at their highs again by the end of the month.
“I think what we went through was a retest of the May pullback and it ended up being successful,” he said. Stovall said he has been watching the sub industries of the S&P 1500, and as of July 12, 91% were above their 50-day moving average, an unusually high number.
But as of last Monday, when stocks were cratering, just 10% were above their 50-day moving average.
“That to me was an indication of a washout,” Stovall said. He added that it was also a rapid move to the 5% decline level from the peak, indicating the market could make a quick comeback.
“We are probably coming out of this pullback, and we’ll probably get there quickly. History says we’ll get there by the end of the month, meaning by the end of the month we’ll probably close with a new all-time high,” he said.
Despite small losses on Friday, stocks regained most of the steep losses from earlier in the week. The S&P 500 and Nasdaq Composite were down just 0.2% week to date while the Dow had lost 0.5%. After Monday’s close, the Dow and S&p 500 had plunged around 3% while the Nasdaq had lost 3.5%.
But in the bond market, investors may continue to see the lowest yields in years. In the past week, Treasury yields moved lower in a dramatic global slide amid concerns about global growth and as the world’s central banks have been cutting interest rates.
“Trade tensions have unambiguously caused global growth to slow down, U.S. growth to slow and caused inflation to decelerate. That’s quite clear. That’s all the White House,” said Ward McCarthy, chief financial economist at Jefferies.
Treasury yields went on a wild ride in the past week, with the 10-year dipping as low as 1.59% from as high as 2.08% the week earlier.
“We’re in the crazy time of the summer … when volumes are thin, moves tend to be exaggerated. That’s probably what we should expect,” McCarthy said.
Stocks reacted negatively to the move in yields and also to a drop in the Chinese yuan, before a former red line level of 7 per dollar. Bond yields, in terms of basis points, last moved this fast tight after President Donald Trump was elected.
“As this things accelerate, the [bond] market has been dealing with known unknowns, and now you’re starting to see people worrying about unknown unknowns. We’re in dangerous territory,” said McCarthy. “There’ s a widespread perception that there’s a race to the bottom going on here in yields, and it’s not necessarily the U.S. that’s driving this. It’s the fact we’re the high yielding market.”
As rates also fall on foreign sovereign debt, U.S. Treasurys, with a higher yield, look more attractive and lure in buyers. Rates move opposite price, so yields move lower when prices turn higher.
As for the Chinese currency, the market was surprised when China failed to defend it, allowing it to sink below 7 to the dollar. The move was seen as a reaction to the latest round of tariffs Trump threatened to impose on China Sept. 1.
“It’s really hard to make any kind of definitive material decision about what’s going on in China because there’s no verifiable data to work with,” said Steve Massocca, managing director at Wedbush Securities. “If the Chinese really have the capability to keep this from blowing up, they’re not going to let this blow up.”
As for economic data, McCarthy said the CPI and retail sales data will be particularly important. “I think retail sales will be solid. Everything we see on the household side is good. CPI headline could be feisty. Gasoline prices will boost it by more than a tenth,” he said.
Week ahead Calendar
Earnings: Barrick Gold, Sysco, Tencent Music, Bloom Energy
2 p.m. Federal budget
Earnings: Advance Auto Parts, Adaptive Biotech, Change Healthcare, RealReal, Tilray, Elanco Animal Health, Best Inc, JD.com
6:00 a.m. NFIB survey
8:30 a.m. CPI
Earnings: Cisco, Macy’s, Embraer, Canopy Growth, Tencent, Agilent, Luckin Coffee, Performance Food, NetApp
8:30 a.m. Import prices
Earnings: Walmart, Nvidia, Applied Materials, Alibaba, Tapestry, J.C. Penney, Canadian Solar, ZTO Express
8:30 a.m. Jobless claims
8:30 a.m. Retail sales
8:30 a.m. Productivity and costs
8:30 a .m. Empire state manufacturing
8:30 a.m. Philadelphia Fed Survey
9:15 a.m. Industrial production
10:00 a.m. Business inventories
10:00 a.m. NAHB survey
4:00 p.m. TIC data Friday
8:30 a.m. Housing starts
8:30 a.m. Business Leaders’ survey
10:00 a.m. Consumer sentiment