Bonds Rally, Oil Bites: A Market Caught Between Two Worries

Grant Calloway

Good morning. It's Friday, October 23rd. Yesterday the Nasdaq dropped 2.6 percent, its worst day since June 5th, and the question we left you with was whether chips would find a floor. Here's the surprise. The loudest move this morning isn't in stocks at all. It's in bonds.

Grant Calloway

Thursday's chip rout sent the Philadelphia Semiconductor Index down 6.7 percent. That puts it 26 percent below its June records. Money ran for cover in Treasuries, and the 10 year yield had its biggest one day drop in more than two years. It slid back under that 5 percent line and sits around 4.97 percent this morning. It was above 5.05 earlier in the week.

Grant Calloway

That ripples straight into the Federal Reserve. The Fed meets Wednesday, October 28th. Per fed funds futures, the market implied odds of a rate hike next week have collapsed to about 5 percent. They were 15 percent earlier this week and 37 percent at the end of September. So a rout in tech just took a rate hike nearly off the table. That's not the kind of relief you cheer about. It's the kind you ask questions about.

Grant Calloway

Now the tape. As of early this morning, Dow futures are the weak spot, down about 1.2 percent, and the cash Dow was roughly 550 points lower near 52,300 at the open. S&P futures are off about 0.6 percent, hovering near flat for the week. Nasdaq 100 futures are down about 0.3 percent, so no fresh waterfall in tech, but no clean bounce either. Did chips stabilize? I'd call it a pause, not a verdict. Russell 2000 futures are sluggish and lower.

Grant Calloway

Overseas. Japan's Nikkei fell as much as 2.3 percent at one point, then pared that back to close a bit under half a percent lower, around 62,600. That's roughly 4 percent down for the week, its second straight weekly loss. Japan's September core inflation ran above the Bank of Japan's 2 percent target, which keeps rate hike talk alive there. In Europe, the Stoxx 600 slipped about a quarter of a percent to 636, down more than 1 percent on the week. Kering fell 11.2 percent on weak Gucci sales. Volvo Cars cratered 27 percent to an all time low after a wider than expected operating loss and 2,500 layoffs. On the bright side, Holcim rose 5.5 percent on raised guidance and L'Oreal gained 4 percent on a sales beat. Also, France is a mess. Weekend shutdowns, businesses closing, and Moody's reviewing its credit rating, with French 10 year yields near 5.10 percent.

Grant Calloway

And oil. Brent is near five month highs, around 110 to 112 dollars a barrel. WTI is about 101. The backdrop is fresh Houthi strikes on Saudi targets, reports of a UAE oil spill, and reports that the U.S. and Israel are mapping contingency options on Iran after the midterms. Hold onto that number. It matters in a few minutes.

Grant Calloway

Movers. American Express is down about 2.3 percent premarket near 318 dollars, and that is a perfect little morality tale. Earnings per share of 5.42 dollars against 4.58 expected. Full year guidance raised to 18.30 to 18.60. But revenue of 20.06 billion narrowly missed the 20.12 billion estimate, and CEO Steve Squeri announced a 5 percent workforce cut. Great quarter, shrugged off.

Grant Calloway

Telecom is the real casualty. Bloomberg reported that SpaceX is in talks with Crown Castle and American Tower to access up to 80,000 cell sites to build a fourth national wireless network. AT&T is down about 5.5 percent, Verizon roughly 4 percent, T Mobile around 3 percent. The tower owners themselves are flat to slightly green, since they'd be the landlords. Bernstein's Laurent Yoon called committing to 80,000 macro sites a potential point of no return for SpaceX. Talks are talks, folks. Nothing's signed.

Grant Calloway

Still on movers, and here's where your after hours beats get confirmed. Bloom Energy posted third quarter revenue of 1.2358 billion dollars and earnings of 94 cents against roughly 67 to 69 cents expected, and raised full year revenue guidance to 4.4 to 4.6 billion on data center power demand. Shares are surging. Western Digital reported revenue of 4.38 billion and earnings of 4.63 against 4.10 expected, with operating income of 2.05 billion, driven by enterprise hard drive orders for AI. Deckers came in at 1.481 billion in revenue and 2.31 per share, and bought back 299 million dollars of stock. Energy services too. SLB earned 64 cents against 62 expected on 9.45 billion in revenue, citing strong North American demand and a rebound in Middle East drilling. Notice the spread. Power, storage, footwear, oilfield services, a card company, and phone carriers. That's a market, not a tech trade.

Grant Calloway

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Grant Calloway

Now, Bull versus Bear. The question: is that bond rally good news or a warning light? Start with the bull. Yields back under 5 percent take heat off stock valuations, the Fed hike door is nearly shut for next week, and companies keep delivering. About 83 percent of reporting S&P 500 companies have beaten expectations. Amex, Western Digital, SLB, Bloom. Lower yields give cyclicals room to run. That's a respectable case.

Grant Calloway

Now the bear, and I find this one harder to wave off. That rally wasn't disinflation. It was a scared bid after a tech break. Look at the other screen. Brent above 110, WTI above 100. If energy stays here, input costs stay sticky. If the Fed holds while growth cools, margins get squeezed from both sides. And look at how beats are being treated. Amex beat by 84 cents and trades lower on a small revenue miss. Good news is being sold the second there's a flaw or a capex disclosure.

Grant Calloway

Where do I land? I traded through two crashes, and I've learned that when bonds and oil send opposite messages, someone's wrong. Bonds say growth worry. Oil says inflation pressure. Both can't be fully right for long. The bull has the earnings. The bear has the oil. I give the edge to the bear on caution, and the bull on corporate health, and I'll let the 9:45 data break the tie. That's my read of what the market is doing, not a call for you.

Grant Calloway

On deck, all times Eastern. At 9:45, S&P Global flash PMIs. Manufacturing is expected at 55.4, down from 57, and services at 57.9, down from 58.7. At 10:00, University of Michigan consumer sentiment, revised, expected at 46.3, plus one year inflation expectations, which were 4.7 percent last time. At 1:00, the Baker Hughes rig count. Earnings before the open include Amex, SLB, plus Eni, Volvo, and Booz Allen, with Fed week lurking behind it all.

Grant Calloway

What matters most today? Whether those PMIs back up the growth scare the bond market is pricing, and whether oil stays pinned above 100. If growth is cracking and oil isn't, the bears get their story.

Grant Calloway

A market that sells a great earnings report is a market with a lot on its mind. We'll pick it up Monday morning, with the Fed meeting three days out. This podcast is for educational purposes only and is not investment advice. I'm Grant Calloway. Have a good weekend.