Markets Recover Cautiously on Tesla, Semi Optimism: Oct. 24, 2024

Stocks and Treasurys are dead cat bouncing today in response to optimistic corporate earnings reports from Tesla and UPS. The modest comeback follows three consecutive sessions of losses and is being aided by subdued unemployment claims as well as better-than-projected new home sales and flash PMIs. Worse-than-estimated PMIs from the eurozone are also supportive, bolstering expectations of a hastier walk down the ECB’s monetary policy stairs. Meanwhile, the Fed’s Beige Book released yesterday depicted tall levels of uncertainty within the business community that are impacting capital expenditure and hiring plans. The hesitation is also on display when analyzing stateside Fed easing anticipations, with a November pause now being considered by IBKR Forecast Traders while Fed Funds Futures price out the possibility further down the line.

Source: ForecastEx

A Strong Morning for Earnings Reports

Equities received a tailwind from EV manufacturer Tesla (TSLA) reporting strong earnings and a surprise beat on guidance, with CEO Elon Musk pointing to 20% to 30% vehicle sales growth next year. UPS also helped to lift sentiment, with the manufacturing bellwether reporting rising transaction levels amidst expense discipline. CEO Carol Tome appeared to be content with the shipping company’s revenue growth trajectory, and she is shifting her focus to earnings quality and geographical strategy. Helping to stabilize the technology and semiconductor space were results from Lam Research (LRCX) and SK Hynix (HSXCL), with profits that beat expectations while sustaining AI enthusiasm.

US Services Spending Accelerates

Economic activity accelerated this month as consumer spending on services remained buoyant. The manufacturing segment was just the opposite, however, with conditions continuing to worsen as traditional purchasers are hampered by the pressures of lofty borrowing costs, elevated prices and reduced credit availability. The political uncertainty of the election is also weighing heavily, as businesses think twice before investing in heavy machines and equipment. Outlays related to employment are also tempered—headcounts are declining as firms wait until after November 5 to possibly replace job leavers, generally speaking. Meanwhile, inflation developments were mostly positive as companies have dropped selling prices in efforts to grow revenues while remaining pressured by high compensation costs.

Manufacturing Hasn’t Expanded Since June

The Flash Purchasing Managers’ Indices (PMI) from S&P Global hit 55.3 and 47.8 in services and manufacturing, higher than the 55 and 47.5 expected as well as the 55.2 and 47.3 reported last month. October marked the fourth consecutive month in which manufacturing was below the expansion-contraction threshold of 50. The goods producing sector is also suffering from the rate head-fake that occurred after the Fed’s 50 basis-point (bps) reduction. The manufacturing industry anticipated a tailwind from the Fed action, similar to real estate professionals who planned for a surge in transaction volumes but received pain instead.

Less Firing Amidst Reduced Hiring

Initial unemployment claims continued to decline during the week ended Oct. 19, illustrating that the labor market remains on solid footing. For the seven-day period, 227,000 individuals filed for benefits, missing expectations of 243,000 and declining significantly from the previous period’s 242,000. Conversely, continuing claims, which represent people who are already receiving assistance, point to workers having a harder time with returning to the workforce. For the week ended Oct. 12, the tally climbed from 1.869 million to 1.897 million and exceeded the analyst consensus expectation for 1.880 million. Meanwhile, four-week moving averages for initial and continuing claims, which are less volatile than data for shorter periods, climbed from 236,500 to 238,500 and from 1.843 million to 1.860 million, respectively.

Dip in Financing Costs Boost Home Sales

September new home sales jumped from a seasonally adjusted annual rate of 709,000 to 738,000 month over month (m/m), substantially above the 719,000 median analyst forecast and up 4.1% as shoppers rushed to take advantage of a short-lived decline in mortgage rates. According to the Commerce Department’s Census Bureau, it was the highest volume of closings in almost 18 months. While flows were flat in the West and declined 2.5% in the Midwest, they expanded 21.7% and 5.8% in the Northeast and South, respectively. The overall increase in key exchanges had little or no impact on prices with homes commanding a median payment of $426,000, which was unchanged from August. The average sales price declined slightly m/m to $501,000. At the same time, inventory increased to 470,000, or the equivalent of 7.6 months of sales, up from 468,000 in August.

Eurozone Doldrums Continue

The eurozone economy continued to languish this month with Flash PMIs for both manufacturing and services arriving beneath expectations. The pace of the manufacturing slowdown eased slightly with the PMI climbing from 45.0 in September to 45.9, which exceeded the 45.1 estimate. It was the highest reading since May, when the index hit 47.3. The services Flash PMI, however, depicted a modest deceleration with the benchmark declining from 51.4 to 51.2 m/m and missing the 51.5 analyst consensus forecast. Overall output was reduced in response to new orders shrinking for the fifth consecutive month. With less demand, businesses reduced employment by the largest amount in almost four years and confidence sunk to the lowest level in 11 months. On a positive note, input price gains advanced at the slowest pace since November 2020 and the rate of output sticker increases was the mildest in 44 months.  

Pre-Market Rally Fades

Stocks are struggling to hold on to gains with most benchmarks already shifting from green to red following strong pre-market buying. Similar to folks in the economic arena, investors appear hesitant to add exposure due to significant uncertainty on the horizon. Tesla shares are up 16% and serving to boost the Nasdaq 100, which is up 0.5%. All the other major stateside benchmarks are adding to losses from yesterday, however, with the Dow Jones Industrial, Russell 2000 and S&P 500 down 0.5%, 0.1% and 0.1%. Sector breadth is deeply negative, as consumer discretionary and real estate are the session’s only gainers, sporting upside of 2.7% and 0.3%. Leading the downside are materials, industrials and utilities, which are losing 1.3%, 0.7% and 0.4%. Treasurys are taking a break from their losing streak, with yields on the 2- and 10-year maturities softening 4 bps each to 4.05% and 4.21%. The dollar is taking its cue from lighter borrowing costs with its gauge down 23 bps as the greenback depreciates versus the euro, pound sterling, yen and yuan. The US currency is appreciating against the franc and Aussie and Canadian tenders though. Commodities are tilted bearishly with crude oil, silver and copper lower by 1.5%, 0.4% and 0.1% while gold and lumber each gain 0.6%. WTI crude is trading at $69.86 as ample supplies stateside and a lack of escalation in geopolitical tension curb price increases. 

Tough Market Conditions Are Likely

Back-loaded seasonal weakness appears to be gripping the market right before the election, as IBKR Forecast Trader investors continue to believe in a shift in the party that wins the White House. Additionally, our market participants continue to think that the GOP has the Senate in the bag while the House has turned from a low probability to a coin-flip. Meanwhile, equity investors are left trying to quantify the headwinds to the technology sector if the Republicans sweep Washington as November 5 rapidly approaches. But the Trump trades haven’t been working either, which points to general hesitation and profit-taking in this market. I’m still expecting a weak period for stocks due to the pattern of events, price action and the option expiration cycle, which are eerily similar to the downturn that commenced in July.  

Source: ForecastEx

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