Wall Street is gearing up for a positive start to Tuesday, driven by optimism surrounding anticipated benign inflation data. This data, which is expected to be released before the market opens, could potentially seal the fate of a rate cut. The producer price inflation report is projected to reveal further easing of price pressures at the wholesale level, potentially signaling that consumer price inflation data will also be tame.
However, a dark cloud is looming over the retail sector as Home Depot, Inc. (HD) issued weak guidance. This could impact other retailers, as many are scheduled to release their earnings over the next few weeks.
Despite these potential headwinds, volatility remains in check. The CBOE Volatility Index (VIX), a gauge of market fear, traded below the 22 level. This suggests that traders are not overly concerned about the potential for a major market correction.
The yen weakened against the dollar, which may help to mitigate fears of additional unwinding of carry trades. Carry trades involve borrowing money in a low-interest-rate currency and investing it in a higher-yielding currency. A weakening yen could potentially make these trades less attractive, thereby reducing the risk of a sudden unwinding of these positions.
Futures markets are also showing signs of a positive start. The Nasdaq 100 is up 0.10%, the S&P 500 is up 0.04%, while the Dow is down 0.22%. The Russell 2000 is down 0.42%.
Looking Back at Monday’s Trading:
U.S. stocks ended Monday’s session on a mixed note, with trading characterized by listlessness following the strong gains recorded in the latter half of last week. Traders were hesitant to make major moves ahead of key retail earnings and the upcoming inflation report.
Nvidia Corp. (NVDA) rallied on positive commentary from sell-side analysts, providing a lift to semiconductor stocks. In the S&P 500, the IT, energy, and utility sectors gained ground, while the remaining eight sectors closed in the red.
Insights from Analysts:
Despite the recent market bounce, LPL Financial Chief Technical Strategist Adam Turnquist cautions that it’s too early to declare a bottom. He notes that bottoming is typically a gradual process, and while the recent bounce is welcome, there’s not enough technical evidence to support the idea that a durable low has been established.
Turnquist highlights several potential catalysts that could lead to a stock market turnaround, including a signal from the Federal Reserve that it will be more aggressive with rate cuts, evidence that the economy remains resilient, particularly in the labor market, and increased stability in currency markets. From a technical analysis standpoint, he sees downside risk to key support levels if the market takes a downturn.
Wharton professor and WisdomTree Chief Economist Jeremy Siegel, meanwhile, expects to see resilience in dividend-paying stocks if the Fed lowers rates and the economy slows. He anticipates that Federal Reserve Chair Jay Powell will signal a rate cut in his speech at the Jackson Hole Economic Symposium later this month.
Upcoming Economic Data:
The Bureau of Labor Statistics will release the producer price inflation report for July at 8:30 a.m. EDT. Economists expect both producer prices and core readings to show a 0.2% month-over-month increase, compared to 0.2% and 0.4% increases in June, respectively. The annual producer price inflation and core inflation rate are expected to come in at 2.3% and 2.7%, respectively, down from 2.6% and 3%.
Federal Open Market Committee member and Atlanta Fed President Raphael Bostic is scheduled to speak at 1:15 p.m. EDT.
Stocks in Focus:
Home Depot fell over 4.5% in premarket trading following its guidance cut, citing economic concerns. Tencent Music Entertainment Group (TME) tumbled over 7% after its earnings announcement, and Sea Limited (SE) pulled back over 3.5%. Paysafe Limited (PSFE) rose about 6%, while Viasat, Inc. (VSAT) slumped about 10% after announcing an offering.
Commodities, Bonds, and Global Equity Markets:
Crude oil futures pulled back after Monday’s 4%+ advance, while gold futures are little changed, just above the $2,500 mark. The 10-year Treasury note yield remained unchanged at 3.909%. Bitcoin (BTC/USD) traded up over 0.50%, above the $58.5K mark.
Asian markets were led higher by Japan, with the Nikkei 225 average ending up 3.45% on Tuesday, returning to levels seen before last Monday’s crash. Conversely, European stocks are exhibiting apprehension as traders react to weak German data and an unexpected fall in U.K. jobless claims.
The upcoming weeks, particularly with the inflation data release and the Fed’s meeting at Jackson Hole, will be crucial in determining whether the Fed understands the current economic climate.
