Key Takeaways

Focus remains on 10-year yield as it ticks up following sharp drop last week

Several Fed speakers on this week’s calendar, including two appearances by Powell

Earnings calendar crowded with consumer-oriented names including hotels, casinos, Disney

(Monday market open) The best week of 2023 could be a tough act to follow considering the lack of obvious earnings and data catalysts on tap as Wall Street opens Monday.

Instead, investors will likely remain laser-focused on the benchmark 10-year Treasury note yield, which provided much of last week’s firepower by falling under 4.6% after recently touching 16-year highs of 5%. Weaker U.S. economic data, especially Friday’s soft October Nonfarm Payrolls report, raised hopes for an end to rate hikes, driving yields down to their lowest level in weeks.

Any yield gains over the next few days might take some wind out of Wall Street’s sails. The 10-year yield rose back above 4.6% early Monday and bears watching, as does today’s Federal Reserve Senior Loan Officer Opinion Survey (SLOOS), due out at 2 p.m. ET, which provides a glance into bank lending and business and household demand for loans.

“Bond markets will be focused on SLOOS to see how much lending conditions have tightened—assuming they continued to tighten,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

Almost everything seemed to work across sectors and asset classes last week. Small-caps, mid-caps, large-caps, and fixed income all rose, with the S&P 500® Index (SPX) adding nearly 6% to finish Friday at two-week highs above its 50-day simple moving average (SMA) of 4,347.

That said, Treasury yields remain high, and much of last week’s data implied economic softening. This could renew talk about recession. Federal Reserve Chairman Jerome Powell said last week that the Fed doesn’t see strong likelihood of an economic downturn, but not all economists agree.

Major U.S. indexes climbed overnight ahead of a crowded week of Fed speakers. This includes two public appearances for Powell, who delivers opening remarks at a conference on Wednesday morning and participates in a policy panel discussion Thursday afternoon. As always, stock and Treasury markets could be sensitive to his comments as well as those from other Fed policymakers. They include Fed Governor Lisa Cook, who gives a speech this morning on financial stability.

One question is whether this week’s Fed speakers might tamp some of the enthusiasm generated by what many analysts saw as somewhat dovish comments from Powell last week. “While Powell’s voice is the most important, we’ll hear thoughts from other officials this week that might provide a different perspective,” Schwab’s Martin says.

Morning rush

The 10-year Treasury note yield (TNX) climbed 4 basis points to 4.56%.The U.S. Dollar Index ($DXY) fell to 105, near one-month lows.Cboe Volatility Index® (VIX) futures ticked up to 15.4 after falling under 15 on Friday and remain near one-month lows.WTI Crude Oil (/CL) rose 1.3% to $81.58 per barrel after Saudi Arabia said Sunday it’s sticking to production cuts in December.

Stocks in spotlight

Week in review: While nearly everything rose last week, some looked more equal than others, so to speak. Real estate, which was down double-digits year-over-year as mortgage rates climbed and the commercial office space sector flagged, led S&P 500 sectors with a nearly 9% gain, helped by falling yields. The semiconductor sector, also sensitive to yields, had its best week since June. Consumer discretionary, which tends to do well when the economy strengthens, also rose sharply, lifted in part by a fierce rally in home-building company shares.

Entering the week, more than 40% of S&P 500 stocks trade above their 200-day moving averages, compared with 25% a week ago. That suggests the rally lifted most boats, though the percentage remains relatively low considering it’s been 13 months since the October 2022 bear market bottom.

Walt Disney (DIS) dominates this week’s earnings, reporting after Wednesday’s close. Shares remain down sharply from summer peaks. More on Disney tomorrow, but investors might be focused on the company’s streaming business and cost cuts.

Uber (UBER) is expected to report Tuesday before the open. Recent signs of strength in demand for travel, restaurants, casinos, concerts, and sporting events all seem positive, and shares flirted last week with their 2023 highs. The stock has more than doubled year-to-date.

MGM Resorts (MGM), Wynn Resorts (WYNN), and Occidental Petroleum (OXY) are among other companies expected to report this week. With Disney, Uber, and those resorts on tap, consumer demand for entertainment is squarely in the spotlight. Airlines already reported strong travel demand in Q3 but expressed caution for Q4. This week may provide a sense of whether those same dynamics are playing out among casinos and hotels.

Earnings scorecard: Through the end of last week, 82% of S&P 500 companies reported earnings per share results above Wall Street’s Q3 estimates, FactSet says. The 10-year average is 74%. Analysts now expect Q3 S&P 500 earnings growth of 3.7%, up from 2.6% a week ago. Eight of 11 sectors are reporting year-over-year earnings growth with about 80% of earnings season done. With slumping earnings from large energy firms subtracted, overall S&P 500 earnings so far in Q3 would be up more than 8% year-over-year, according to FactSet.

What to watch

The week ahead: Monday brings two Treasury bill auctions, with 3-month and 6-month Treasuries available. Results could help set the tone for yields, which rose after recent auctions showed waning demand for new U.S. debt. A 10-year note auction occurs Wednesday.

We’re coming off a stretch where data reinforced ideas that the Fed’s long fight to slow U.S. economic growth might be paying dividends. Last week’s Institute for Supply Management (ISM) Manufacturing data and Friday’s Nonfarm Payrolls report were obvious examples, but even the Job Openings and Labor Turnover Survey (JOLTS) report played a part. While openings remained elevated, the “quit rate” returned to levels last seen before the pandemic, suggesting people don’t see as much chance to hop to higher paying positions.

Still, as Richmond Fed President Tom Barkin reminded CNBC viewers Friday, two inflation reports and another jobs report precede the Fed’s next meeting in mid-December, so it’s too soon to say inflation has definitively turned the corner. He declined to speculate when the Fed might consider trimming rates.

Eye on the Fed

Early today, futures trading pegged chances at 90% of the FOMC holding its benchmark funds rate at the current 5.25% to 5.50% target range following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 86%.   The market doesn’t build in firm chances of a rate cut until next summer.

Talking technicals: The SPX is now just below 4,400, where sellers stepped in during mid-October. “Whether that occurs again or not remains to be seen,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

CHART OF THE DAY: SIGNS OF LIFE. After lagging the broader S&P 500 Index (SPX—purple line) for many weeks, the small-cap Russell 2000 (RUT—candlesticks) Index picked up some ground late last week as Treasury yields fell. This can be particularly bullish for smaller companies more dependent on borrowing for their growth. Data sources: S&P Dow Jones Indices, FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Need a loan? The Fed’s Senior Loan Officer Opinion Survey (SLOOS) returns focus to lending conditions around the economy, which have become more restrictive. Banks are tightening their lending standards and charging higher rates (spreads), while demand is down. “We’ll probably see that conditions remain restrictive,” says Kevin Gordon, senior investment strategist at Schwab. “Much like Fed Chairman Jerome Powell said last week, the tightening in credit conditions is the goal of the Fed right now, so even if we start to see some easing at the margin in SLOOS, more important is the fact that financial conditions will stay in restrictive territory.”

Victory forestalled: While Treasury yields are down, they’re still high enough to potentially jam economic activity. And much of last week’s data implied slowing growth that ultimately could hurt Wall Street. In other words, it’s too early to declare victory. Credit card interest rates are above 20% and mortgage rates hover above 7.5%. “Borrowing costs remain high, so issuers who need to refinance debt are still in a jam,” says Schwab’s Collin Martin. “And the soft economic data—slow jobs growth, disappointing ISM indexes—aren’t good for economic growth, which isn’t good for corporate revenues.” October jobs growth of 150,000 was the lowest since June. However, it didn’t include 33,000 manufacturing jobs likely returning now that the autoworkers’ strike appears over.

Cap context: With a market capitalization of $2.76 trillion, Apple (AAPL) swings a lot of weight in the SPX. Microsoft (MSFT) is sneaking up on Apple in terms of market cap at $2.62 trillion. This may sound like a distinction without much difference for the average investor, but market caps do matter in tallying how major indexes move. The SPX is market-cap-weighted, meaning the biggest stocks exert far more influence. Many years ago, Exxon Mobil (XOM) and General Electric (GE) were among the top five in market cap, giving the energy and industrial sectors more weight. While info tech still forms nearly 30% of the SPX’s market cap, recent upstarts like Tesla (TSLA) and Nvidia (NVDA) can mean different sectors or sub-sectors gain influence. Nvidia, a semiconductor chipmaker, is now the only company in the top 10 with a primary focus on chips. If Apple loses ground to Microsoft, cloud computing and software might gain slightly more influence over phones and laptops.

Calendar

Nov. 7: September Consumer Credit and September Trade Balance, and expected earnings from D.R. Horton (DHI), Uber (UBER), Zimmer Biomet (ZBH), eBay (EBAY), and Rivian (RIVN).

Nov. 8: September Wholesale Inventories and expected earnings from Biogen (BIIB) and Walt Disney (DIS).

Nov. 9: Expected earnings from Illumina (ILMN) and Becton Dickinson (BDX).

Nov. 10: University of Michigan Preliminary November Consumer Sentiment.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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