Stressed-out markets will get a look Wednesday at the health of the U.S. services sector, a part of the economy considered to be the engine that will keep the country from falling into recession.
Economists expect the ISM nonmanufacturing index will fall to 55.1, from 55.3 in December, when it is reported at 10 a.m. ET. The ISM has not been below December’s level since April 2014. Any number above 50 shows expansion. There is also ADP payrolls data at 8:15 a.m., a warm up to Friday’s government report, and Markit services PMI data at 9:45 a.m. China also has services PMI data overnight.
Oil weighed heavily on markets Tuesday, but was trading higher Wednesday morning. Traders await oil inventory data from the U.S. government at 10:30 a.m. ET after the American Petroleum Institute reported another larger–than-expected build in supply late Tuesday.
Stocks futures were higher Wednesday morning after the market was crushed Tuesday, with the Dow down 295 points to 16,153, and the S&P 500 falling 1.9 percent to 1,903. Oil dropped Tuesday below the psychological $30 per barrel level, with West Texas Intermediate futures at $29.88, off 5.5 percent. Gasoline also plummeted, losing 8 percent to $1.0008 per gallon, its lowest price since 2008.
The fall in oil also helped feed a buying frenzy Tuesday in Treasurys where the 10-year yield fell to 1.86 percent, its lowest level since April. It was at 1.88 percent Wednesday morning.
“It would be nice to see some encouraging data from the U.S. to put to rest some of this fear that’s surfaced again,” said George Goncalves, head of U.S. rates strategy at Nomura. “It’s ‘oh my goodness, if we are indeed slowing down, the central banks have no tools left and it’s going to be really bad.’ … It just feels like we’re trying to invent this slowdown to fit the story of bad price action.'”
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U.S. manufacturing data have been weak, and the ISM manufacturing index has been under 50, signaling a manufacturing recession. But so far the much-larger services economy has been faring well. Markets have been fearful that a slowing China and falling oil prices are a precursor to a U.S. recession, though Wall Street economists put odds of just about 20 percent on a recession this year.
“The early morning data will be important. If it’s anywhere within consensus levels we should stabilize,” Goncalves said. He said the 10-year yield may touch 1.75 percent but if it does that would spur more buying. “If we get to 1.75, some of the mortgage accounts will buy Treasurys for their convexity which then becomes positive. … It’s a support level on the technical charts. It’s a technical support level where accounts will have to get long.”
The stock market was also a focus Tuesday of the bond market, which benefited from risk averse investors. The drop in the 10-year yield was dramatic, but it also broke several key technical levels including 1.90 percent. The yield also dipped below another important level of 1.873 percent and could challenge the April low of 1.824 percent.
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Tony Crescenzi, portfolio manager and vice president at Pimco, said the 10-year has rarely stayed below 2 percent during the past four years. “It’s even harder for it to get below (1.75) percent. That would signal there’s potential for the Fed to relent. Fed speeches don’t seem to point to that yet. It would point to more stress globally,” said Crescenzi.
The Fed hiked rates in December as other central banks were getting easier. The Fed has forecast four rate increases for this year, but officials stress that it will rely on the strength of the data when it meets. The market has been expecting barely one hike this year, and diverging central bank policies have raised some doubts about whether the Fed can ease. Last week, the Bank of Japan surprised markets and moved to negative interest rates.
Crescenzi said one of the biggest drivers of flows into Treasurys was the fact that U.S. yields are much more attractive than rates elsewhere, especially in Europe and now Japan, where trillions of dollars in bonds have negative yields.
“QE (quantitative easing) is becoming yesterday’s news, and negative rates is becoming the new wave of central bankers. This isn’t to say it would happen here,” said Crescenzi. “It’s working on the interest rate front but is it working in terms of higher growth and inflation? Not yet.”
Crescenzi said many of the Japanese yields have turned negative since the end of last year. “You have to go out to the eight year to find in Japan a yield that’s positive,” he said. “It’s really more about flows than fundamentals at the moment, and those flows dominate movement and market price.”
As for stocks, Tuesday’s action was violent and ugly. “I think we’re in a period of what’s going to be very choppy behavior. I can make the case that we can still get up to 1,965 (on the S&P). But ultimately this is a counter-trend move and some of the weakness in energy is very discouraging and we’re still keen on being selective and cautious in this environment,” said Ari Wald, technical analyst at Oppenheimer Asset Management. Wald said the internals look weak, and market breadth is poor. He said he recommends staying with large-cap growth names, like Facebook.
“There really hasn’t been any signs of basing in the oil market, which is what the equity market needs. It just needs to stop going down,” he said. Oil fell Monday and Tuesday as talk about an OPEC deal to cut production faded, and traders focused on global supply concerns. Russia’s January production was also reported at 10.88 million barrels a day, a new, post-Soviet-era high.
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The market recovered substantial losses Monday to close essentially flat and that had encouraged some traders. During Tuesday’s trading, the S&P 500 fell below the psychological 1,900 level.
Scott Redler, who follows short-term technicals, said the stock market could have a tough time moving higher. “If anyone’s thinking there’s a chance this fledgling rally can hang on, (the S&P) has to hold above the 1,890 area,” said Redler, partner at T3Live.com. He said if that broke, the next lower levels would be 1,855, then 1,810. The S&P 500 reached an intraday low of 1,812 on Jan.20.
Besides economic reports, there are earnings including Comcast,General Motors, Merck, GlaxoSmithKline, Alexion Pharma, International Paper, Marathon Petroleum and Humana before the opening bell. After the bell, GoPro, Yum Brands, Buffalo Wild Wings, AvalonBay,Shutterfly and Take Two Interactive report after the close.