Rising Rates Creating Headwinds for Stock Market

There isn’t any shortage of news on the newswire. Corporate earnings results have come in fast and furious since yesterday’s close, but the earnings results carrying the most market-moving weight come after today’s close. That is when Apple (AAPL) and Amazon.com (AMZN) report.

In the meantime, there is a little bit of “analysis paralysis” hitting the market, as new developments like the Fitch Ratings downgrade of U.S. debt, a disappointing outlook from Qualcomm (QCOM), this morning’s 25-basis points rate hike by the Bank of England to 5.25%, the 10-yr note yield clearing 4.10%, and another batch of pleasing economic data are all out there for consideration.

That isn’t everything either. There is still the nagging notion that the stock market is due for a pullback after its big run, which is perhaps the key sentiment overhang at the moment.

Currently, the S&P 500 futures are down 16 points and are trading 0.4% below fair value the Nasdaq 100 futures are down 99 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are down 76 points and are trading 0.4% below fair value.

Those indications suggest the cash market will start today’s session on a modestly lower note, not so much because there is a major pickup in selling interest but more so because there is a subsidence of buying interest.

There is some finger pointing at the 10-yr note yield, which is at 4.16%, up another eight basis points from yesterday’s settlement and up 19 basis points for the week. The trend there is less of a friend to the stock market, as it is creating a competitive headwind for stocks, along with yields for shorter-dated securities that are north of 5.40%, and stirring some valuation angst for the more highly-valued growth stocks.

This morning’s data created a spin of sorts for Treasury investors. The good economic news is that initial jobless claims remained well below recession-like levels and Q2 productivity sported a healthy 3-handle while unit labor costs sported an inflation-pleasing 1-handle.

Briefly, initial jobless claims for the week ending July 29 increased by 6,000 to 227,000 (Briefing.com consensus 225,000). Continuing jobless claims for the week ending July 22 increased by 21,000 to 1.700 million.

The key takeaway from the report is that initial claims — a leading indicator — are not leading anyone to think yet that the labor market is cracking under the weight of the Fed’s prior rate hikes, which is important because a strong labor market is key to a more upbeat economic outlook.

The same can be said for productivity gains and there were gains in the second quarter. Productivity increased 3.7% (Briefing.com consensus 1.7%), with output up 2.4% and hours worked down 1.3%. Unit labor costs, meanwhile, were up 1.6% (Briefing.com consensus 2.7%), reflecting a 5.5% increase in hourly compensation and a 3.7% increase in productivity.

The key takeaway from the report is that the pickup in productivity and the deceleration in unit labor costs is a good combination for the soft-landing view.

The latter point notwithstanding, the equity futures market hasn’t been energized by this thinking, cognizant that the soft-landing view has been an important driver of the equity rally already this year. 

Now, the market is fixed on the thinking that rising rates — and maybe even a continued increase in the Fed’s policy rate — are going to get in the way of further multiple expansion. Accordingly, some of the bravado witnessed in the runup this year, particularly for the Nasdaq and market-cap weighted S&P 500, has been tempered for the time being. 

—

Originally Posted August 3, 2023 – Rising rates creating headwinds for stock market