Market Dealing with a Big Problem

The equity market has the biggest problem this morning — literally. Its most heavily-weighted stock — Apple (AAPL) — is down another 3.7% in pre-market trading.

We say “another,” because AAPL dropped 3.6% yesterday on a Wall Street Journal report that China is banning iPhone use for officials at central government agencies while working. After the close, Bloomberg reported that China is aiming to broaden that ban to state and federal agencies, saying some agencies are telling employees they can’t even bring their phone to work.

News of these restrictions goes beyond the iPhone, however. The worry for the market is that, if China purposely chooses to make business difficult for a company like Apple, which has a good and important working relationship in China, then it can do so for a lot of other U.S. companies doing business in China. Interestingly, these restrictions come at a time when The Wall Street Journal reports that Huawei has introduced a new smartphone to compete with Apple.

For now, Apple investors are understandably worried, knowing that Apple derives about 18% of its revenue from China, according to FactSet. The weakness in Apple, which has a position in the S&P 500, Nasdaq 100, and Dow Jones Industrial Average, is apparent in the futures trade.

Currently, the S&P 500 futures are down 35 points and are trading 0.8% below fair value, the Nasdaq 100 futures are down 199 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 100 points and are trading 0.3% below fair value.

Rising interest rates are another headwind. They were lower in overnight action following a trade balance report from China that was better than expected but still signaling weakness. Exports declined 8.8% year-over-year and imports declined 7.3% year-over-year.

Rates, however, shot northward following the initial jobless claims and revised Q2 Productivity reports.

Initial jobless claims for the week ending September 2 decreased by 13,000 to 216,000 (Briefing.com consensus 233,000). Continuing jobless claims for the week ending August 26 decreased by 40,000 to 1.679 million.

The key takeaway from the report is that initial claims — a leading indicator — were at their lowest level since February. That is really good news — economically speaking — but it is also news — monetary policy speaking — that will likely keep the Fed in a restrictive policy position for longer.

The revised Q2 productivity report featured a downward revision in productivity to 3.5% (Briefing.com consensus 3.7%) from the preliminary estimate of 3.7% and an upward revision in unit labor costs to 2.2% (Briefing.com consensus 1.6%) from the preliminary estimate of 1.6%.

The key takeaway from the report is that unit labor costs weren’t as low as previously reported, so they look disappointing at the headline level; however, they still fit the bill of disinflation given that unit labor costs were up 2.5% a year ago.

The 2-yr note yield, at 4.99% just before the releases, jumped to 5.04% in their wake. The 10-yr note yield, at 4.28% just before the releases, hit 4.31% in their wake. Those moves led to further weakness in the equity futures market, with participants anticipating more weakness for growth stocks sporting premium valuations.

Today’s open, then, will have a downward tilt. After that, the behavior of Apple and interest rates will be calling the directional shots.

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Originally Posted September 7, 2023 – Market dealing with a big problem