Down Trend Continues to Evolve

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KR Opinion

As the week progresses, the markets are exhibiting a downward trend. Notably, the S&P 500 has reached one of its projected lows at the 5081 level, where it found some support, but downward pressure persists due to mixed news flows. The recent data showed weaker housing figures, which were anticipated.

In yesterday's report, I advised monitoring industrial production as a potential indicator of economic divisions, particularly between labor and income versus GDP and retail sales. However, industrial production figures met expectations without any surprises. Despite significant declines in previous manufacturing reports, we'll continue to monitor any signs of economic segmentation.

Looking ahead to Wednesday, no significant news releases are expected to trigger market volatility. Therefore, market dynamics are likely driven by sentiment, suggesting the possibility of trading within a sideways range with a slight upward tilt.

I will discuss this further in the technical analysis section below.

Looking back on Tuesday’s Action

On Tuesday, the stock market experienced a turbulent session. The S&P 500 closed down by 0.2%, while the Nasdaq Composite fell by 0.1%. In contrast, the Dow Jones Industrial Average managed a slight increase of 0.2%, primarily due to strong performance from its largest component, UnitedHealth, which rose by 5.2% following its earnings report.

In the early part of the trading day, the S&P 500 and the Nasdaq showed minimal changes, hovering close to their previous closing values. However, market volatility picked up in the afternoon following comments from Federal Reserve Chair Jerome Powell.

Powell's remarks, which were largely as expected, supported the view that recent adjustments to interest rates were appropriate. During a panel discussion, he noted that tight monetary policy might need more time to address inflation, as recent data showed little effective progress. Additionally, a Wall Street Journal article by Nick Timiraos suggested that Powell is moderating expectations for future rate cuts.

The bond market showed a subdued reaction to these events. Despite weaker-than-expected housing data released that morning, yields had already been high, with the 2-year note yield climbing two basis points to 4.96% and the 10-year note yield increasing by three basis points to 4.66%.

This rise in yields seemed to reinforce a negative sentiment throughout the trading session, with declining stocks outnumbering advancing ones by nearly 2-to-1 on the NYSE and Nasdaq.

Disappointing earnings from Bank of America and others contributed to the downward pressure, leading to a 1.3% drop in the SPDR S&P Bank ETF.

·  S&P 500:+5.9% YTD

·  Nasdaq Composite: +5.7% YTD

·  S&P Midcap 400: +2.6% YTD

·  Dow Jones Industrial Average: +0.3% YTD

·  Russell 2000: -2.9% YTD

Reviewing today's economic data:

- March Housing Starts were reported at 1.321 million units, below the KR Forecast consensus of 1.485 million. The previous figure was revised upward to 1.549 million from 1.521 million. March Building Permits were reported at 1.458 million, also below the KR Forecast consensus of 1.518 million, with a revision of the prior figure from 1.518 million to 1.523 million.

- The main insight from this report is the continued stress on a supply-constrained housing market. Single-unit starts declined by double-digit percentages across all regions except the West, which saw a minor increase of 1.3%. Building permits for single-family homes decreased across all regions, most notably by 5.3% in the South, the largest housing market in the country.

March Industrial Production increased by 0.4%, matching the KR Forecast consensus. The previous figure was revised upwards from 0.1% to 0.4%. March Capacity Utilization was 78.4%, slightly below the KR Forecast consensus of 78.6%. The previous figure was revised from 78.3% to 78.2%.

- The critical takeaway from this report is that industrial production maintained a positive trajectory in March, supported by improvements in manufacturing output, indicative of a growing economy.

Looking ahead to Wednesday's economic calendar:

- 7:00 ET: Weekly MBA Mortgage Index (previous 0.1%)

- 10:30 ET: Weekly crude oil inventories (previous +5.84 million)

- 14:00 ET: April Beige Book release

- 16:00 ET: February Net Long-Term TIC Flows (previous $36.1 billion)

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