Market retreats ahead of Fed
- Stocks fall, wholesale inflation surprises to upside
- Defensive sectors lead, oil tumbles to new 2022 lows
- This week: Fed rate announcement, CPI, retail sales
The fall rally throttled back as traders prepared for one of the last inflation reports—and the final Federal Reserve meeting—of the year.
After starting last week with its sharpest two-day pullback in more than a month, the S&P 500 (SPX) ended it on a cautious note as Friday’s Producer Price Index (PPI) reading showed inflation at the wholesale level was higher than expected in November:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
The headline: Stocks pull back as traders await final rate hike of the year.
The fine print: Last week’s decline coincided with renewed chatter about a recession occurring next year, although Morgan Stanley & Co. recently noted the possibility for an economic “soft landing.”1
The number: +7.4%, the PPI’s year-over-year increase in November—above the 7.2% estimate, but still below October’s 8% reading.
The move: Prometheus Biosciences (RXDX) jumped 225% last Wednesday–Thursday after announcing positive stage-2 clinical trial results for a Crohn’s disease treatment.2
The scorecard: The small-cap Russell 2000 (RUT) and the Nasdaq 100 (NDX) tech index fell the most last week:
Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)
Sector roundup: The strongest S&P 500 sectors last week were utilities (-0.3%), health care (-1.1%), and consumer staples (-1.7%). The weakest sectors were energy (-8.4%), communication services (-5.2%), and consumer discretionary (-4.4%).
Stock movers: Vivint Smart Home (VVNT) +32% to $11.90 on Tuesday, Prometheus Biosciences (RXDX) +166% to $95.80 on Wednesday (and +22% to $117.21 on Thursday). On the downside, Mirati Therapeutics (MRTX) -23% to $71.52 on Tuesday (and -31% to $49.59 on Wednesday).
Futures: Oil prices skidded to new year-to-date lows last week, with January WTI crude oil (CLF3) falling to an intraday low of $70.08/barrel on Friday before closing around $71.50 (see “Slippery oil market”). After falling nearly $30 to $1,781.50/ounce last Monday, February gold (GCG3) climbed the remainder of the week to close Friday around $1,808. Week’s biggest up moves: March soybean meal (ZMH3) +10.8%, December VIX (VXZ2) +7.5%. Week’s biggest down moves: January natural gas (NGF3) -14.8%, December ethanol (ZKZ2) -9.9%.
Coming this week
Get ready, the latest Consumer Price Index (CPI) comes out a day before the Fed announces its final rate hike of the year, with the markets still (as of Friday) forecasting 77% odds of a 0.5% increase:3
●Monday: NY Fed Consumer Inflation Expectations
●Tuesday: NFIB Small Business Optimism Index, Consumer Price Index (CPI)
●Wednesday: Import Price Index, Fed interest rate announcement
●Thursday: Retail Sales, Empire State Manufacturing Index, Industrial Production, Capacity Utilization, Business Inventories
●Friday: S&P Global Manufacturing and Services PMIs (flash), December ("Quadruple Witching") expiration
This week’s earnings include:
●Monday: Coupa Software (COUP), Oracle (ORCL)
●Tuesday: ABM Industries (ABM), Braze (BRZE), Core & Main (CNM)
●Wednesday: Lennar (LEN), RCI Hospitality Holdings (RICK), Heico (HEI)
●Thursday: Jabil (JBL), Scholastic Corp (SCHL)
●Friday: Darden Restaurants (DRI), Winnebago (WGO)
Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.
Fall rally gets tested
“Market absorbs big-tech stumble” showed how one of the simplest elements of price action—a series of higher highs and higher lows—can be used to define an uptrend.
It was precisely what the SPX managed to do for more than seven weeks after hitting a new year-to-date low in October. Between October 12 and November 30, the SPX gained 14.1% while swinging to four higher highs (HH) and higher lows (HL):
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
But the index broke the pattern for the first time last week, trading below the November 29 low to form a lower low (LL).
That doesn’t necessarily mean the fall rally has run its course. Just as it takes a series of higher highs and lows to define an uptrend, it requires more than one lower low or lower high to define a downtrend.
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1 MorganStanley.com. Is the U.S. Headed for a Soft Landing? 12/2/22.
2 Dow Jones Newswires. Prometheus Biosciences Shares Continue to Rally as Analysts Cheer. 12/8/22.
3 CME Group FedWatch Tool. Target Rate Probabilities for 14 Dec 2022 Fed Meeting. 12/9/22.