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Taking a Backseat: Focus Shifts Briefly from Treasury Yields to Mega-Caps as Microsoft, Alphabet Loom - Ticker Tape

Taking a Backseat: Focus Shifts Briefly from Treasury Yields to Mega-Caps as Microsoft, Alphabet Loom

VIDEO: Treasury Shift To Shorter-Term Funding Structure Brings Big Benefits
Schwab Network

The market's unrelenting focus on 16-year highs in Treasury yields could take a back seat this afternoon to earnings from Microsoft and Alphabet as tech reporting season goes into full gear. Meta and Amazon are Wednesday and Thursday. Yields and the dollar slipped early Tuesday.

9:24am ET 10/24/2023 5 min read


5 min read

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Key Takeaways

VIDEO: Rising Treasury Yields Shift Investor Focus from Stocks to Bonds
  • Stocks rebound ahead of earnings this afternoon from Microsoft and Alphabet

  • Pullback in Treasury yields, dollar and crude oil provide slight tailwind early on

  • Earnings from Coca-Cola, GM send shares higher as companies beat Wall Street’s estimates

(Tuesday market open) Treasury yields suddenly find themselves sharing the spotlight.

The next few days will test whether investors can pry their eyes away from yields that recently hovered at the highest levels since the second George W. Bush administration and focus instead on a heaping plate of quarterly earnings, including several from the biggest technology names.

Microsoft (MSFT) and Alphabet (GOOGL) are expected to report results after today’s close, with Facebook parent Meta Platforms (META) following on Wednesday and Amazon (AMZN) on Thursday.

Futures based on the S&P 500® Index (SPX) and the Nasdaq Composite (COMP) were slightly higher this morning, helped by a pullback in the closely watched 10-year Treasury yield to well below 4.9% after it briefly topped 5% on Monday. There’s no single reason why yields pulled back, but it could reflect investor worries after the breach of 5% or media reports that a major hedge fund manager had covered his short position in Treasuries.

U.S. equities remained under pressure Monday, with the SPX posting its fifth-straight daily decline and ending near a five-month low, as another push above 5.0% for the 10-year Treasury yield (TNX) contributed to market shakiness. However, the tech-heavy Nasdaq 100 (NDX) got a slight boost ahead of this week’s earnings data.

Morning rush

VIDEO: US Treasury Yield Curve
  • The 10-year Treasury note yield (TNX) is up 1 basis point at 4.85%.
  • The U.S. Dollar Index ($DXY) was steady at 105.83.
  • Cboe Volatility Index® (VIX) futures pulled back to 19.72.
  • WTI Crude Oil (/CL) eased to $85.70 per barrel.

What to watch

VIDEO: Yield Insights: A Shift In Focus
CME Group

Sold! With Treasuries under the microscope following yesterday’s pullback, attention could turn toward a U.S. auction of $51 billion in two-year Treasury notes scheduled for early this afternoon. These auctions used to be boilerplate stuff that didn’t get much attention from Wall Street. Lately, however, signs of weak demand for the government’s offerings caused yields to spike and translated into pressure on stocks. It’s not necessarily going to be that way today, but if things get volatile around 1 p.m. ET, that might be a reason.

Fresh overnight data from Europe shows manufacturing weakness in the region. Both manufacturing and services PMI remain in contraction in Germany, France, and the U.K.

Tomorrow features U.S. New Home Sales for September, but the weekly data pace picks up Thursday and Friday with the first look at Q3 Gross Domestic Product (GDP) on Thursday and the Personal Consumption Expenditures (PCE) prices report on Friday. The GDP report is widely expected to be firm, and it might be built into the market already. The PCE data is likely to have more of an immediate impact on Wall Street and could influence thinking around the likelihood of the Fed hiking rates again later this year.

Stocks in spotlight

VIDEO: Yield Insights: Focus on Inflation Outlook
CME Group

Several aspects of the big tech earnings this week are sure to be of keen investor interest. Advertising demand and cost savings could be in focus for Meta, shares of which have more than doubled this year. Amazon could provide insight into cloud computing and preholiday retail demand. Microsoft is also a cloud giant, putting its Azure cloud platform in focus when the company reports today. Shares of Amazon and Alphabet climbed in premarket trading this morning.

  • Others worth watching include grain processor Archer-Daniels-Midland (ADM), beverage giant Coca-Cola Co. (KO), oilfield services provider Halliburton (HAL), and music streamer Spotify Technology (SPOT).
  • Coca-Cola shares popped in premarket trading after the company delivered better-than-expected earnings per share and revenue and provided above-consensus guidance for fiscal 2023. Unit case volume, a closely watched metric, grew 2%. Volume remains worth tracking for retailers because it can show whether they’re actually moving more product, not just getting additional revenue by raising prices. Wall Street has seen a lot of revenue growth in recent quarters from inflation, but there’s a sense that investors want to see more of an organic growth profile from companies.
  • General Motors (GM), also appeared to impress Wall Street with its results. Both revenue and earnings per share beat analysts’ average expectations. However, the company withdrew its guidance due to the United Auto Workers (UAW) strike.
  • Close to 78% of S&P 500 companies reporting to date have beaten analysts’ earnings expectations. The average over the prior four quarters is 74%. It’s still early, with about 20% of companies reporting, but the percentage of companies beating analysts’ revenue estimates is far lower, below 50%. This could bear watching.

Eye on the Fed

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Walkabouts with Dan

Investors are nearly unanimous in the view that the Fed will keep rates unchanged following the next gathering of the Federal Open Market Committee (FOMC), the central bank’s policy-setting arm.

Early Tuesday, odds were pegged at 99.6% that the FOMC will hold its benchmark funds rate at the current 5.25% to 5.50% target range following its October 31–November 1 meeting, according to the CME FedWatch Tool. The market isn’t quite as confident on the expected results following the FOMC’s December 12 meeting, with odds rates the Fed will remain on pause currently 75%.

“We think the Fed is done hiking rates,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. “Inflation is moving in the right direction and the recent rise in long-term yields should do some of the Fed’s work for it.

“We know that Fed policy acts with long and variable lags, and we don’t think the transmission mechanism is broken,” Collin adds. “We think it’s just taking more time than expected for the aggressive pace of rate hikes to work their way through the economy, but we’re starting to see signs of cracking as consumer loan delinquencies are on the rise.”

Talking technicals: The S&P 500’s chart posture eroded further Monday as the benchmark closed below its 200-day Simple Moving Average (SMA) for the second-straight session, though it ended above 4,200, another key support level. Whether this presages further chart breakdown remains to be seen, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. SPX managed a firm recovery from Monday’s initial slide before ending just 0.1% lower. 

CHART OF THE DAY: VOLATILITY REARS ITS HEAD. After grinding along near multi-year lows for much of the summer, Cboe Volatility Index® (VIX) has been working higher since mid-September, briefly topping 23 on Monday to the so-called fear gauge’s highest point since last spring’s banking industry turmoil. The recent rise in the VIX, which is based on options contracts linked to the S&P 500, reflects heightened market jitters over high interest rates and geopolitical tensions. While recent volatility is up, it’s not extreme. A VIX reading of 20 to 30 is considered an “elevated uncertainty zone,” says Randy Frederick, managing director, trading and derivatives, at the Schwab Center for Financial Research. The 30 to 40 range represents a “high anxiety zone,” Randy says. Data source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Practical Investing

Ideas to mull as you trade or invest

Not in deal-making mood: U.S. merger and acquisition activity fell nearly 13% in September from August levels with 1,033 deals compared with 1,182 in August, according to FactSet. By contrast, aggregate M&A spending in September rose 7% from August, in part driven by large tech industry transactions, including cloud computing and cybersecurity giant Cisco Systems’ (CSCO) agreement to acquire Splunk, Inc. (SPLK) for $26.5 billion. Other major deals included Smurfit Kappa Group’s (SMFKY) agreement to acquire WestRock Co. (WRK) for $11.1 billion and J.M. Smucker Co.’s (SJM) agreement to acquire Hostess Brands, Inc. (TWNK) for $4.6 billion. Broadly, September extended this year’s trend as M&A activity lags well-behind last year’s levels, reflecting factors including uncertainty over the economy and historically high interest rates that are raising the cost of corporate funding. Through the first nine months of 2023, M&A deals totaled 3,299, down 24% from the same period in 2022, according to FactSet.

Put a sweater on: Winter is coming, and heating bills will vary depending on where you live and how you heat your home. U.S. households that use natural gas, electricity, or propane as their main heating fuel could catch a break this winter, while those using heating oil likely will spend more, according to a recent Energy Information Administration (EIA) forecast. U.S. households burning natural gas—roughly 46% of the country’s homes—face an estimated heating bill of about $601 for the 2023–24 winter on average, down 21% from last winter. The drop largely reflects abundant supplies and sharply lower natural-gas prices, which are down 66% from year-ago levels, based on wholesale markets. By contrast, household heating-oil bills are expected to rise 8%, to $1,851, according to EIA. Heating oil costs have climbed as crude oil prices rallied since late summer, surpassing $95 a barrel in late September. Of course, much depends on the weather, and the EIA expects the coming winter to be similar to last year’s.

Flexible technicals: The recent push under the 200-day simple moving average (SMA) for the SPX didn’t appear to generate much follow-through selling suggesting that “the 200-day SMA may be a bit of a bull-versus-bear battleground, at least near-term; if the bulls can push back above this indicator, it might suggest a successful retest of support from the initial bounce earlier this month,” says Schwab’s Nathan Peterson. “You have to be flexible with technicals,” he adds. “This is why some traders may wait for multiple closes below support for bearish confirmation.” If the S&P 500 continues slipping, Nathan sees the next key support level around 4,050, which represents the 50% Fibonacci retracement level from the October low.


VIDEO: Why Bond Yields Are a Key Economic Barometer | WSJ
The Wall Street Journal

Oct. 25: September New Home Sales and expected earnings from Boeing (BA) and IBM (IBM).

Oct. 26: Initial Weekly Jobless Claims, September Durable Orders, Q3 Gross Domestic Product, and expected earnings from Bunge (BG), Comcast (CMCSA), Honeywell (HON), Mastercard (MA), Merck (MRK), Southwest (LUV), Amazon (AMZN), and Ford (F).

Oct. 27: September Personal Income and Personal Spending, September Personal Consumption Expenditures (PCE) prices, Final October University of Michigan Consumer Sentiment, and expected earnings from AbbVie (ABBV), Exxon Mobil (XOM), and Chevron (CVX).

Oct. 30: Expected earnings from McDonald’s (MCD).

Oct. 31: S&P Case-Shiller home price index and October Consumer Confidence. Expected earnings from Cadence Design (CDNS) and Nucor (NUE)

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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