Russell 2000 small cap rally extended, bullish signal

The Russell 2000 led equity markets again today, extending an unusual rally in small-cap stocks, which many see as a sign of confidence in the broader market outlook and a move away from the tech heavyweights that dominate Nasdaq. Retail sales data was much stronger than expected, leading to a sharp rise in short-dated bond yields and the expectation that the Fed might soon raise official rates. Oil prices steadied on hopes for diplomatic efforts in Israel and talk that the US will ease sanctions on oil producer Venezuela.

Bottom-line: Risk-on

TODAY’S MAJOR NEWS

Retail sales data beats expectations

Traders interpreted today’s much stronger-than-expected retail sales data as further evidence that the Fed will continue to raise interest rates as it tries to get inflation down to the 2% mandate. This is consistent with general consumer optimism and the solid jobs report released on October 6th.

The Fed isn’t stopping the US economy with its current interest rate stance. Fed fund futures traded at around 40% odds of another rate hike by December or January, and odds of notable rate cuts in 2024 continue to trend lower.  Two-year bond yields rose nine basis points to 5.2%. The market seems to finally be listening to the “higher for longer” rhetoric that’s been coming from the Federal Reserve over the past year.

• Retail sales rose 0.7% month-on-month in September, double the 0.3% expected, and August gains were revised to 0.8% growth, up from the 0.6% initially reported
• On an annual basis, retail sales grew at 3.8% in September, up from 2.9% last month
• Retail sales minus vehicles rose 0.6%, triple the 0.2% growth rate expected, and August gains were revised to 0.9% growth, up from the 0.6% initially reported
• Retail sales minus both vehicles and gas rose 0.6% month-on-month in September, well ahead of the 0.1% expected, with the August number also revised to 0.3%, up from the 0.2% initially reported

Earnings beat expectations

Bank of America reported a 10% rise in profit from a year ago, echoing strong results from banking peers and a generally strong performance by the sector. However, Goldman Sachs disappointed: profits fell 33% from a year ago as it continued a costly retreat from consumer banking, a write-down on the GreenSky specialty lender it is selling, and tried to recover from a prolonged slump in dealmaking. FactSet reports that 84% of S&P 500 companies have reported a positive EPS surprise, and 66% of S&P 500 companies have a positive revenue surprise. Earnings are growing at 0.4% annually in Q3, after a decline in the previous three quarters.

Biden visits Israel

US President Joe Biden is expected to travel to Israel on Wednesday to show his support for the nation. The travel plans were announced after Israel agreed to allow humanitarian aid into the Gaza Strip. Israel continues to strike Gaza with targeted missiles to soften things ahead of an anticipated ground assault. Iran’s Supreme Leader accused Israel of genocide, calling it to immediately halt the attack on Gaza while warning it against a ground assault. That raised fears that the conflict could spread regionally in the days ahead and disrupt regional supply chains, economic growth, and energy output. The markets remain relatively stable, although we’ve seen increased volatility in the VIX as traders assess risk options. This leaves the markets quite vulnerable to headline risk in the future.

TODAY’S MAJOR MARKETS

Russell 2000 leads market rally

• The broadly-based Russell 2000 again led equity markets in morning trade, up 1.7% at lunchtime, with the S&P 500 and Russell 2000 up 0.2%
• Foreign equity markets rallied overnight, with the Nikkei 225 and FTSE 200 up 1.2% and 0.6%, respectively, while the DAX was up 0.1%
• The VIX, Wall Street’s fear index, fell to 17.1

Bond yields continue to rise, dollar flat

• 2- and 10-year yields traded up to 5.20% and 4.81%, respectively, continuing their upward ascent
• The dollar index was unchanged at 106.1
• Versus the dollar, Sterling and the Yen were off by 0.1%, while the Euro was down 0.2%

Commodities stabilize

• Crude oil prices stabilized after recent weakness, down 0.2% to $86.4 per barrel
• Spot gold prices fell 0.1% to $1,937 per ounce, but silver prices rose by 1.5% to $23.1 per ounce (unusual strength given recent weakness in gold)
• Grain and oilseed markets were again mixed

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com