A continued slide in oil prices and disappointing news out of China seems to have underscored fears about global economic growth, even as investors appear to worry about the Fed’s reaction to inflation in the United States.
The concerns helped send U.S. shares lower on Friday, with all three major U.S. indices ending in the red, although they bounced from session lows.
U.S. producer price data that rose more than expected helped contribute to the bearish sentiment amid worries that rising inflation could help lead the Fed to a more hawkish stance. Separate data showed that producer inflation in China fell, and auto sales numbers in the Asian nation showed a slump. Amid an economic slowdown and the trade dispute with the United States, China also moved to shore up lending to its private sector, and the move helped put pressure on banks in the nation.
China is a key engine for global economic growth, so any signs of economic weakening there can send shivers through investors.
Big Losing Streak for Crude
Meanwhile, oil prices continued their precipitous decline, likely in part on worries about global economic growth. (See more below). It was the 10th-consecutive session of losses for U.S. crude, the worst streak in more than 34 years. The decline comes ahead of a meeting of OPEC members and their allies this weekend. Investors may want to tune in to the results of the meeting to see whether there is any news of planned changes to output, which could impact oil prices.
The brightest spot for the U.S. market on Friday came from the consumer staples sector. That’s perhaps not too surprising because of those stocks’ defensive nature. Those equities tend to do better when other stocks falter because people still need to buy things like toothbrushes regardless of whether the economy tanks or inflation rises.
We’ve also seen data recently suggesting that the American consumer is healthy, perhaps providing a bullish backdrop for these companies.
There’s been plenty of noise surrounding interest rates, market volatility, and the U.S. midterm elections. But investors may want to pay attention to some international issues that continue to percolate even if they may not dominate the market-related headlines every day. It seems likely that market participants will continue to monitor Brexit negotiations and Italy’s budget situation.
Of course, trade and tariff issues between the U.S. and China have taken up more attention. Investors have continued to watch for developments in the dispute between the world’s two largest economies, as some think a trade war could dent global economic growth. The frequency of headlines surrounding the issue may increase as we approach the G20 summit at the end of this month and early December. Trump and China’s president Xi Jinping are slated to meet at the gathering.
The Week Ahead
Closer to hand, this coming week we’re scheduled to get data on U.S. consumer prices, a key measure of inflation. (See more below.) Fed Chair Jerome Powell is scheduled to make some public comments in the coming week, which could give investors more insight into the Fed’s current thinking. It could be worth checking in on his comments to see if he mentions anything about inflation, oil prices, or tariffs. The closely-watched benchmark 10-year Treasury yield fell back below 3.2% on Friday as worries about overseas weakness might have outdueled concerns about rising U.S. producer prices.
The new week also is scheduled to give us data on retail sales for October. Sales are expected to climb 0.5%, according to a Briefing.com consensus. Also in the new week, earnings results are expected from Home Depot and Macy’s, along with Wal-Mart, Nordstrom, and J.C. Penney. Many big retailers have been outpacing the broader S&P 500 since posting their October lows.
Figure 1: Steady As She Goes: Despite the stock market’s flop on Friday, volatility, as measured by the VIX (candlestick), stayed pretty subdued not far off the week’s lows. That could be a sign that investors don’t anticipate the kind of sharp moves seen last month. At the same time, the dollar index (purple line), started moving back toward recent highs, possibly one weight on stocks Friday. Data Sources: Cboe, ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.thinkorswim
Is the Porridge Getting Too Hot? One factor that has helped the stock market is the so-called Goldilocks scenario for the economy. Basically, we’ve been seeing strong economic growth while inflation readings have been relatively tame. In other words, if the economy were Goldilocks’ porridge, it wouldn’t be too hot or too cold. In recent weeks, rising interest rates and related market volatility have overshadowed optimism about the Goldilocks scenario, so we thought it would be a good time to re-examine it. Investor concerns about inflation on Friday stemming from a higher-than-expected reading on producer prices raise the question about whether we’ve seen a tipping point, or might see one soon.
Consumer Price Report Coming Up: Consumer prices are the cousins of producer prices as producers often pass their rising costs along, ultimately impacting end buyers. On Wednesday morning, we’re scheduled to see a report on October consumer prices, and it may be worth considering paying attention to given the sensitivity after the stronger-than-forecast producer price reading. While both reports aren’t the only factors that paint the picture of inflation, they’re both important parts of the whole. And if the consumer price reading comes in higher than expected, it could reinforce fears about the Fed becoming more hawkish. Recall that a recent October employment report showed an annualized 3.1% rise in hourly earnings— the highest rate since 2009.
More Bearish News for Oil: One part of the market at least is pointing toward lower inflation. U.S. oil prices entered a bear market Thursday and fell for the 10th straight trading session Friday. The weakness comes against a backdrop of worry about slowing global economic growth putting a dent in demand for black gold even as output is high from key producers. Easing tensions about Iranian supply as the Trump administration has granted waivers to key buyers of oil from the Persian republic have also helped bring down prices. On Wednesday, data showed that U.S. crude inventories rose. Friday provided more bearish news for the market as Baker Hughes, an oilfield services company, reported an increase in the U.S. oil rig count. Much is riding on whether oil prices continue to falter. If consumers pay less at the pump, they might spend the money elsewhere in a potential benefit to consumer discretionary companies. Manufacturers and transport companies that use a lot of fuel could also benefit. But of course, energy producers would likely take a hit.
TD Ameritrade® commentary for educational purposes only. Member SIPC.