The S&P 500 could break with the removal of a strong dollar

(Tuesday Market Open) Equity index futures were slightly lower ahead of the opening bell as walmart WMT and Home deposit HD beat earnings estimates, but moved in different directions during the premarket session.

Market potential movers

walmart (WMT) rose more than 3% ahead of the opening bell after reporting better-than-expected earnings and revenue. The company had inventory issues and reported inventory was still 26% higher year over year. These higher inventories have prompted the retailer to offer products at even deeper discounts.

WMT warned investors in late July that earnings would be lower due to its inventory levels and lower demand, which lowered its share price. However, as of yesterday, WMT had recouped those losses.

Walmart also offered insight into consumer strength. While overall spending remains on track, the retailer said consumers are using credit cards more than debit cards at checkout, while focusing more on food than clothes.

Home deposit (HD) beat both high and low numbers, but fell more than 2% in premarket trading. The home improvement store saw 3% fewer customer transactions last quarter, which appears to have disappointed investors. However, the company reaffirmed its earnings forecast.

Beyond earnings information, Allied Financial ALLY rose 7% in premarket trading after reports that Warren Buffett Berkshire Hathaway (NYSE:BRK-A) tripled its position to $1 billion in late June in the online auto and home lender. Berkshire also increased its holdings by World Paramount PARA, western oil OXY, Chevron CLCand Apple AAPL.

Speaking of Apple (AAPL), the company is pushing workers to return to the office at least three days a week in an attempt to increase productivity. This could be a much more complicated question as many workers have chosen to sell their homes and move away from company offices during the pandemic.

The latest reports on building permits and housing starts provided fresh data on the slowdown in the housing market. Housing starts fell 9.6% in July while building permits fell 1.3%. However, the number of building permits was higher than expected. The reports only underscore the trend that the housing market may be heading for a pullback.

One of the concerns about the weakening new home market is that it could lead to the loss of well-paying construction jobs, which could push up the unemployment rate while forcing workers into lower-paying jobs. .

The S&P 500® Index (SPX) is running into resistance around the 4,300 level, which could lead to some consolidation in stocks as weaker economic news continues to roll in. This morning, Germany’s ZEW Economic Sentiment Report was lower than expected in August, reflecting institutional investor and analyst negativity. The news from Germany comes on top of weaker economic data from China on Monday that prompted China to lower key interest rates. That said, the German DAX increased by 0.26% overnight and the Shanghai composite closed up 0.05%.

Market Minutes Review

After a shaky start, stocks were able to close higher on Monday with the S&P 500® Index (SPX), Dow Jones Industrial Average ($DJI), and the Nasdaq ($COMP) closing up 0.40%, 0.46% and 0.57% respectively. The major indices were able to overcome disappointing news from manufacturing and housing and weaker than expected data from China.

The NY Empire State Manufacturing Index print was -31.30, a significantly more negative reading than the August projection of 5.5. It is the lowest reading since May 2020 and the fifth time in the past eight months the report has been negative.

Housing took it on the chin with a weaker-than-expected August NAHB Housing Market Index reading that also helped pull down housing inventories. DR Horton DHI lost 1.13%, Pulte MPS was down 1.2%, and Lennar LEN fell 10.22% at Monday’s close as PHLX Housing Sector Index (HGX) ended down 0.30%.

As housing inventories fell, homebuyers may have received some good news. The 10-year Treasury yield (TNX), which correlates with mortgage rates, fell six basis points on Monday to 2.79%.

Perhaps the biggest news at the start of the market day was the People’s Bank of China’s key interest rate cut on increasingly weak economic data. The move raised concerns about a weakening global economy and the possibility of lower demand for energy products. WTI Crude Oil Futures fell 2.7% to settle at $89.35 a barrel, while natural gas futures fell 1.1% and unleaded gasoline futures down 2.5%.

CHART OF THE DAY: END OF RELATIONSHIP. The US dollar index ($DXY—candlesticks) and the S&P500 (SPX – pink) were inversely correlated for much of 2022, as shown by the correlation line (red) remaining below zero for much of the last 12 months. However, over the past month, the dollar has lost relative strength (green) in favor of the SPX. Additionally, the greenback has rallied the past two trading sessions while the SPX has continued to climb. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three things to watch out for

MEMBERS ONLY: The market and members of the Federal Open Market Committee seem to be on different pages when it comes to the likely path of interest rates. The CME tool FedWatch, which uses the futures market to predict changes in the federal funds rate, still forecasts a 50 basis point hike in September and 25 basis point hikes in November and December. Next, FedWatch calculates rate cuts in July 2023.

However, since the last rate hike in July, we have seen Fed members speak more hawkishly. St. Louis Fed President James Bullard said he favors a “frontloading” strategy, sticking to bigger hikes and keeping rates higher for longer to stop inflation. San Francisco Fed President Mary Daly said the Fed was “nowhere near done” raising rates. Cleveland Fed Chair Loretta Mester recently said she would need “hard evidence” of a significant slowdown in inflation before changing her mind on increases while Cleveland Fed Chair Chicago’s Charles Evans said he would be fine with 75 basis points in September while last week Minneapolis Fed Chairman Neel Kashkari said he believes the Fed still has a ” long way” to go. Finally, former New York Fed Chairman Bill Dudley wrote a Bloomberg op-ed calling the market forecast for rate moderation “wishful thinking.”

No one can predict the future, but tomorrow’s release of July’s FOMC meeting minutes will at least reveal the past. Investors will see if the Fed was as hawkish at its last meeting as it was in public.

BYE ? The Inflation Reduction Act has passed the Senate and House and is expected to be signed by President Joe Biden later this week. A controversial provision of the bill was a 1% taxation on stock buyback programs. Bloomberg reported that the new tax could prompt companies to increase share buybacks in the second half of the year ahead of new tax kicks next year. If true, the buying could help push stock prices higher over the next four and a half months.

However, according to an article by the morning star, the new tax could also discourage the use of share buyback programs from next year. These programs have been popular with businesses and investors, but the change in tax laws could encourage companies to focus on their dividends instead.

ALL TEA IN CHINA: Five Chinese state-owned companies are delisting from the New York Stock Exchange by the end of the month. Last Friday, Life insurance in China (CFL), PetroChina (PTR), Petroleum and Chemicals in China (NPS), China Aluminum Company (ACH), and Sinopec Shanghai Petrochemical (SHI) issued separate statements announcing their intentions.

While each company cited “weak U.S. revenue” and “high administrative burden and costs” as reasons for their departures, the announcement comes after the five companies were flagged by the Securities and United States Exchange Commission (SEC) for failing to meet US auditing standards.

This may just be the tip of the iceberg, as the SEC has also identified more than 150 companies on a list that includes Ali Baba BABA, J.D.and Baidu BIDU. Chinese companies trading overseas are required by Chinese law to keep their audit documents in mainland China where foreign agencies cannot access them.

Notable Calendar Items

August 17: Cisco Retail Sales, FOMC Minutes and Revenue CSCOLowe’s DOWNAnalog devices ADIand Target TGT

August 18: Philadelphia Fed Manufacturing Index, Existing Home Sales and Estee Lauder Earnings ELApplied materials AMATNetEase NTESand Ross stores ROST

August 19: Deere Earnings OFFoot Locker Floridaand loop BKE

August 22: Palo Alto Networks Earnings PANW

August 23: Intuit New Home Sales and Earnings INTUMedtronic MTDAdvanced auto parts AAPDick Sporting Goods SDKsand Toll Brothers TOL

TD Ameritrade® Commentary for educational purposes only. SIPC member.

Image from Shutterstock

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