Key Takeaways

Crude oil futures fall on news Angola is leaving OPEC related to drilling limits  

Consumer confidence appears to be on the rise according to one report, but Michigan sentiment could spawn doubts.  

Warner Bros. Discovery shares move on reported merger talks with Paramount Global

(Thursday market open) Employment, manufacturing, and Gross Domestic Product (GDP) numbers provide particular insights into the strength of the economy.

The third and final version of Q3 GDP was released this morning. Originally, the GDP forecast was 4.9%, but the actual number was 5.2%. This morning the number was revised back to the projected 4.9%, which is a pretty big revision for the third iteration. GDP core inflation was revised to 2% from 2.3% adding to a string of favorable inflation data.   

Weekly Initial Jobless Claims ticked higher to 205,000 from 203,000. Continuing claims remained below the key psychological level of 1.9 million, coming in at 1.865 million.

Finally, the Philadelphia Fed manufacturing survey reported a –10.5, which is well below the forecasted –3 and making 11 of the last 12 months negative. A negative number reflects worsening manufacturing conditions. Unfortunately, the index has only had seven positive months since 2022.

Crude oil futures fell in early trading on the announcement that Angola would be leaving OPEC so it would no longer be under OPEC drilling limits.

Stocks will look to bounce back today after the Dow Jones Industrial Average® ($DJI) tumbled from its all-time high on Wednesday, ending its five-day win streak in response to optimism that the Federal Reserve was on the verge of a “pivot” toward interest rate cuts. 

Wednesday’s declines shouldn’t be viewed as a surprise, according to Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, considering technical indicators conveyed a market that was growing increasingly “overbought” and due for a pullback.

“A mean-reverting, countertrend move can happen at any time, and it doesn’t necessarily need a catalyst,” Nathan explained, noting that for the S&P 500®, the Relative Strength Index (RSI)—a measure of overbought or oversold conditions—just hit 82, its highest reading since September 2020.

Morning rush

The 10-year U.S. Treasury Yield (TNX) fell three basis points to 3.84%.The U.S. Dollar Index ($DXY) slipped 0.35% to 102.5.Cboe Volatility Index futures (/VX) ticked 0.32% lower.WTI Crude Oil (/CL) dropped $1.40 to $72.82 per barrel.

What to watch

Redfin (RDFN) reported good news for renters last month. The median rent price fell 2.1% year over year to $1,967 per month. This was the largest decline in three years. Shelter costs have continued to grow at a higher-than-normal pace despite the recent slowing. So, falling rents should help the overall inflation picture.

The Russell 2000® (RUT) small-cap index was outperforming on Wednesday, continuing its break above a key price level. Investors have been looking for increased market breadth because stock gains have relied heavily on the “magnificent seven” for gains. However, the index turned with the rest of the market that sold off in the afternoon session. The NYSE ended the day with decliners outpacing advancers at a rate of 3 to 1. The Nasdaq saw decliners outnumber advancers at about 2 to 1.

Tomorrow’s another big news day with Durable goods orders, Personal Consumption Expenditures (PCE) price index, University of Michigan Consumer Sentiment Index, and  New Home Sales reports. The latter two will come after the open. Yesterday, the Conference Board said its Consumer Confidence Index® for December rose to 110.7 from a downwardly revised 101.0 in November, its highest level since July and well above analysts’ expectations for a reading closer to 104.0, based on a Briefing.com consensus.

“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” Conference Board Chief Economist Dana Peterson said in a statement.

Nathan said business conditions “seem to be improving” as interest rates and gasoline prices decline. “I think we’re at a point with the economic data where ‘good news is good news’ again,” he added, “because it appears the Fed’s outlook favors the bulls, and evidence that the economy is still resilient will support the soft-landing thesis, as well as higher earnings growth.”

Investors are hoping for the Michigan report to build upon the positive consumer vibes.

The Fed’s preferred inflation indicator, the PCE price index, is forecasted to be lower than last month’s reading. Last week’s Consumer Price Index (CPI) showed the rate of inflation slowing. Overall, PCE is expected to rise 0.1% in November from October, while its core rate, which excludes food and energy prices, is expected to rise 0.2%, based on consensus figures from Briefing.com. In October, overall PCE was up 0.2% month over month and up 3.5% year over year, slowing from the 3.7% increase in September. 

Stocks in spotlight

Micron Technology (MU) reported earnings after Wednesday’s close, which included a smaller-than-expected loss. The stock rose 4.8% in after-hours trading but was up more than 6% ahead of Thursday’s market open.

B2B service providers Cintas (CTAS) and Paychex (PAYX) both reported earnings this morning before the open. Cintas topped earnings and revenue estimates prompting a premarket rally of 3.49%. Paychex beat earnings but fell short on revenues leading to a 2.05% selloff ahead of the opening bell.  

CarMax (KMX) shot higher before the market open after beating earnings estimates and announcing that it has resumed its stock buyback plans.

Other key earnings this week include Nike (NKE) after today’s close.

Warner Bros. Discovery (WBD) rose 1.5% in premarket trading on reports that the company is in merger talks with Paramount Global (PARA). The deal could make it easier for the companies to compete with the likes of Netflix (NFLX) and Apple (AAPL) but critics of the deal are concerned with the high amount of debt both parties bring to the merger.

Eye on the Fed

Early today, futures trading pegged chances at 89.7% 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 70.6% chance the funds rate will be a quarter point lower after the Fed’s March meeting.

CHART OF THE DAY: HO, HO, HO. The Russell 2000 (RUT—candlesticks) is trying to hang on to a break above an important level of resistance. The index is demonstrating relative strength, which suggest a Santa rally could be underway. The Santa rally usually takes place between Christmas and the New Year. If the index holds the line, Santa could be doubling up on another market phenomenon known as the January effect—the tendency for small-cap stocks to outperform the market in January. However, the January effect has been less consistent in recent years and, like all market phenomena, past performance isn’t a guarantee of future results. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Calendar 

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

Dec. 25: Markets closed for Christmas.

Dec. 26: December consumer confidence.

Dec. 27: No major data or earnings.

Dec 28: Pending home sales.

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.