Key Takeaways

Bank of Japan (BoJ) keeps rates unchanged, as analysts had expected

FedEx earnings due out tonight as focus remains on cost cuts, market share

Volume could become thinner as week advances, but Friday’s PCE data loom

(Tuesday market open) The S&P 500® index (SPX) opens Tuesday on the cusp of a big round number. It peaked near 4,800 in early 2022 and is within shouting distance again, but fresh catalysts are a bit scarce so far today beyond a housing report and a fresh dose of central bank news.

The Bank of Japan (BoJ) kept rates unchanged, as analysts had expected, in its meeting Tuesday. Policy makers didn’t imply any plans to quickly end the bank’s negative interest rate policy, which could be a relief for U.S. Treasuries. If rates rise in Japan, that country’s debt could compete more with U.S. debt and potentially prop up U.S. yields.

Speaking of rates, be on the lookout for Federal Reserve speakers this week. Atlanta Fed President Raphael Bostic is on the calendar today and is known as one of the more dovish policy makers there. He told Reuters last week he expects two rate cuts in 2024 and a soft landing for the economy.

The market now widely sees the Fed lowering rates, possibly as soon as March, and expects as many as six cuts for the full year. Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research, said investors may want to tap the brakes on those expectations, noting that inflation remains above the Fed’s 2% long-term target. Market expectations for five to six rate cuts next year “are too aggressive,” he said.

On the data front, U.S. November housing starts jumped to the highest level since May at a seasonally adjusted 1.56 million, well above expectations (see more below).

The broader market continued climbing Monday toward all-time highs amid more optimism about a possible “soft landing” for the economy and rate cuts. Energy shares climbed behind a rally in WTI Crude Oil futures (/CL), which jumped 1.7% to end at a two-week high amid concern over supply disruptions following attacks on ships in the Red Sea. Communication services and consumer staples were also firm. Financials gave back some of last week’s sharp gains, with the KBW Bank Index (BKX) down nearly 1%.

“The current relief rally for equities has looked quite strong under the hood—not surprising given heavily beaten-down segments that struggled this year are leading—which has unsurprisingly brought the bears off the sidelines,” said Kevin Gordon, senior investment strategist at Schwab. “This stealthy rotation under the surface can likely continue as we head into 2024, but given the almost (and oddly) euphoric reaction to the Fed’s December decision, it wouldn’t be surprising to see a short-term pullback given sentiment has gotten quite frothy.”

As a reminder, volume typically thins the final two weeks of the year as people head out of town. The resulting lighter trading can sometimes mean more dramatic daily moves in both individual stocks and major indexes, something to consider if you plan to actively trade this week. That said, volume was above average at the New York Stock Exchange (NYSE) on Monday.

Morning rush

The 10-year U.S. Treasury Yield (TNX) fell 5 basis points to 3.90%.The U.S. Dollar Index ($DXY) fell to 102.36, not far above recent lows.Cboe Volatility Index® futures were near the flat line at 12.47.WTI Crude Oil (/CL) slipped 0.3% to $72.26 per barrel.

Just in

The U.S. housing market continues to look strong, judging from today’s November housing starts and building permits data. The starts level of 1.56 million on a seasonally adjusted annual basis was up sharply from a revised 1.359 million in October and bolstered by demand for new single-family homes, while permits of 1.46 million actually fell slightly from October’s 1.498 million.

Starts are often considered the more important of the two data points because they represent shovels in the ground, so to speak. Starts were already climbing in late summer and fall as existing home supplies remained tight due to people staying put as interest rates rose. The question for home building companies is whether this firm demand for new homes can stick around now if falling mortgage rates start to loosen up existing home supplies. If permits slide in coming reports, that could be a good canary in the coal mine for the new homes market.Permits, by the way, are a component of the Conference Board’s Leading Economic Index®, an update of which is headed our way later this week.

What to watch

Everything this week builds up to Friday’s November Personal Consumption Expenditures (PCE) prices report. It’s the Fed’s favored inflation indicator and has retreated most of 2023. In October, PCE was flat month over month while core PCE, stripping out energy and food, was up 0.2% month over month and 3.5% year over year. That was an improvement in annual core PCE growth from 3.7% in September.

Improving year-over-year core data could reinforce the idea that the Fed’s more dovish stance is backed by the numbers. Analysts expect monthly core PCE prices to rise 0.2%, the same as in October, according to Trading Economics. They see annual core PCE rising 3.4%, down from 3.5% in October.

Personal Spending is also due Friday and comes after last week’s firm November Retail Sales data. Personal spending growth showed signs of easing in October under pressure from high interest rates. The question is whether this changed as borrowing costs fell in November.

Don’t overlook the Conference Board’s Index of Leading Economic Indicators (LEI) on Thursday morning after the open, either. This report is often seen as a recession barometer, and it’s been flashing red constantly for well over a year. Analysts expect another negative reading for November of –0.3%, according to Briefing.com.

Other data to watch this week include November Existing Home Sales on Wednesday and Thursday’s third and final estimate of U.S. Q3 Gross Domestic Product (GDP) growth. This is a backward-looking number, but analysts might be sharpening their pencils to update Q4 GDP estimates following solid Retail Sales data. The Atlanta Fed’s GDPNow tool shows Q4 growth at a seasonally adjusted annual rate of 2.6%, up from the previous 1.2%.

Stocks in spotlight

FedEx (FDX) reports earnings today after the close. Cost cutting remains in focus, as well as market share in its battle versus United Parcel Service (UPS). Last time out, in September, shares popped on earnings that far surpassed Wall Street analysts’ expectations. However, its guidance wasn’t as powerful as some analysts and investors had hoped.

Other key earnings this week include Micron Technology (MU) on Wednesday and Nike (NKE) on Thursday.

Micron’s results tomorrow could be a good opportunity for investors to get the latest word on how tensions between Beijing and Washington might be affecting Micron’s business. Back in September, Micron referred in its press release to a “weakened near-term supply-demand environment” and said it was taking steps to reduce its supply growth.

Looking ahead to the start of Q4 earnings season in January, research firm FactSet’s 2.4% expectation for Q4 EPS growth is down from its September 30 estimate of 8.1%. The downturn came as many companies guided for weaker results when they reported Q3 earnings. Q3 was the first quarter in a year to see overall earnings rise instead of fall from a year earlier.

Eye on the Fed

Early today, futures trading pegged chances at 90% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the FOMC’s January 30–31 meeting, according to the CME FedWatch Tool. The market prices in a 75% chance the funds rate will be a quarter point lower after the Fed’s March meeting.

CHART OF THE DAY: FINANCIAL FRENZY: The S&P Financial Select Sector Index (IXM-candlesticks) sagged most of this year thanks to worries about rising Treasury yields, including the 10-year note yield (TNX-purple line). That’s changed dramatically. Data sources: S&P Dow Jones Indices, Cboe. 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

Christmas windows: Seasonally, this is a time associated with “tax-loss harvesting,” in which many investors unload losing shares before the new year to include those losses in their 2023 tax returns and offset taxes associated with any winning trades. That could bring more pressure on some of the year’s struggling sectors like health care, energy, utilities, and staples. Also, we may see signs of “window dressing,” when fund managers extract poor-performing stocks and replace them with shinier ones as the quarter ebbs. This could generate tailwinds for tech and communication services stocks this week and next. Those two sectors are each up more than 50% this year, an astonishing performance following a dismal 2022. Over the last six months, however, financials has replaced info tech in the top two, behind communications services. For those hoping that the rally will broaden, this is an excellent sign. It’s often said that the market can’t have much of a rally without financials participating, and until recently the sector hadn’t recovered all the way from its October 2022 low.

How’s my credit? Lending conditions continue to improve around the U.S. economy after 2023’s spring credit crisis and bank failures. Recently, corporate credit spreads, or the premium of corporate yields to Treasury yields, slipped to very narrow levels that imply relatively easy lending conditions. This doesn’t necessarily directly help financials stocks, but for any banks that have bonds (specifically long-term Treasuries, or mortgage-backed securities) on their balance sheets, the drop in yields means their values have risen a lot lately. “The surge in yields is what crushed financials earlier this year, so the drop in yields helps them,” said Schwab’s Martin.

Bond brooding: As the market builds in high hopes of rate cuts in 2024 and the Fed projects a more dovish outlook, hopes grow that many companies facing refinancing in the coming years may not be in as much trouble as some investors had thought. That potentially works in favor of small-cap companies, which tend to be more reliant on financing, and also helps the real estate sector as it grapples with a soft commercial office space market. Energy is another sector highly dependent on borrowing to finance new projects and infrastructure. As an investor, however, there’s growing reinvestment risk in the bond market, meaning any short-term Treasuries bought now that expire in the next year might see yields drop over the course of that time, making them less lucrative to reinvest in when they expire. “We believe the peak in Treasury yields is behind us, and reinvestment risk is becoming much more real now that rate cuts are on the horizon,” Martin said.

Calendar

Dec. 20: November Existing Home Sales and expected earnings from Micron (MU) and General Mills (GIS).

Dec 21: Q3 GDP third estimate, Conference Board Leading Economic Indicators, and expected earnings from Nike (NKE).

Dec. 22: November Durable Goods, November Durable Orders, November PCE prices, November Personal Income, November Personal Spending, November New Home Sales, December University of Michigan Consumer Sentiment-Final.

Dec. 25: Markets closed for Christmas.

Dec. 26: December consumer confidence.

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

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.