With no major economic indicators or schedules scheduled to shake the market this week (October 5-9), the New York stock market is expected to focus on U.S. Treasury yields and oil price trends.
*Figure 1*
Last week, the three major U.S. stock indices showed mixed results. The Nasdaq Composite Index rose 0.45%, while the Standard & Poor's (S&P) 500 Index fell 0.27%. The Dow Jones Industrial Average fell 1.26%. Separately, the Philadelphia Semiconductor Index jumped 3.69%, showing that it is still the hottest index.
What is striking is the continued downward pressure on the Dow. The Dow has been steadily declining since rising 2.96% in the first week of August. In the last five weeks, all of them are falling except for one week where it rose by 0.28%.
The Dow index includes big techs such as Nvidia and Apple, but is also considered a benchmark representing traditional industries and blue-chip stocks. The market's consensus is that the Dow's continued weakness is due to high interest rates and high oil prices.
Traditional industries are more vulnerable to high interest rates compared to the explosively expanding artificial intelligence (AI) and semiconductor industries. The AI industry is currently able to withstand high interest rates due to strong demand and high profitability, but traditional industries are bound to face a greater burden in the process of refinancing existing loans along with a slowdown in demand due to high interest rates.
The Russell 2000 index, which focuses on small and mid-cap stocks that are more vulnerable to high interest rates, has fallen nearly 8% since peaking in mid-August until last week. Although it is overshadowed by the vibrancy of the AI theme, the impact of high interest rates is already permeating most industries except the AI industry. Among companies included in the S&P 500, 80% have fallen at least 10% from their 52-week high, and about 40% have fallen at least 20%, already entering a bear market.
Sam Stovall, chief investment strategist at CFRA Research, pointed out that among the 153 sub-sectors of the S&P 1500 index, which covers large-cap, mid-cap, and small-cap stocks, only 12% are above both the 50-day and 200-day moving averages.
To that extent, the direction of the 'crazy' US Treasury bond interest rate is important, but there is no clear solution.
When it was announced on the 2nd that new non-agricultural employment in the U.S. fell sharply more than expected in September, government bond yields instantly expanded their decline. However, in the afternoon, government bond yields turned upward again, and the two-year yield ended the day with an increase of more than 3 basis points. The market sentiment is that it is difficult to stop the current interest rate rise trend with a slowdown in employment alone.
Art Hogan, chief market strategist at B. Riley Wells, analyzed, “It is clear that the one-two punch of rising energy prices and a surge in U.S. Treasury yields has kept investors in a wait-and-see attitude over the past month.”
There are no economic indicators or events scheduled to affect U.S. Treasury yields this week. Last week, New York Federal Reserve Bank President John Williams, who argued that the pace of interest rate hikes should be adjusted, is scheduled to make a public statement, but it is unclear whether the soft move will work again.
The fact that oil prices have fallen for two consecutive weeks is at least giving the market some breathing room. West Texas Intermediate (WTI) November contract prices fell 1.41% last week, ending the week at $91.11 per barrel. It is weak for two weeks in a row, following a 7.87% plunge the previous week.
However, the price of December Brent crude oil, which is the benchmark for international oil prices, ended last week at $102.25. Compared to WTI, the intensity of the decline is weaker. This means that the gap in the market's view of the prices of the two core crude oils is growing.
*Figure 2*
The situation surrounding the crude oil market is complex. The United States and Iran began face-to-face negotiations in New York at the United Nations General Assembly, but they ultimately ended empty-handed. Saudi Arabia and Yemeni government forces have announced that they will launch a large-scale military operation targeting Houthi rebels in Yemen this week. This is an inflection point where the military conflict between Saudi Arabia and the Houthi rebels could prolong.
On the other hand, crude oil information analysis company Kpler announced last week that the volume of crude oil passing through the Strait of Hormuz has recovered to the level before the outbreak of the Iran war. This is evidence that Iran's influence in the Strait of Hormuz is weakening and the U.S. military's convoy operation is becoming effective.
Meanwhile, the minutes of the September Federal Open Market Committee (FOMC) meeting will be released this week. At the last meeting, committee members unanimously voted to raise interest rates, but the market will be trying to analyze what kind of hawkish conversation was exchanged during the process.
◇Main schedules and speeches
- October 5th
September S&P Global Services Purchasing Managers' Index (PMI)
September Institute of Supply Management (ISM) Service PMI
September Conference Board (CB) Employment Trend Index
- October 6th
August trade balance/import/export
Speech by Federal Reserve Vice Chair of Financial Supervision Michelle Bowman
- October 7th
Speech by Rory Logan, President of the Dallas Fed
Speech by New York Fed President John Williams
September Federal Open Market Committee (FOMC) Minutes
- October 8th
Weekly new unemployment claims
August wholesale inventory
Speech by Alberto Musalem, President of the St. Louis Fed
- October 9th
Kansas City Federal Reserve President Jeffrey Schmid's speech
October University of Michigan consumer sentiment index and expected inflation
