Market 09/29: Trying to find a path to rally 48 hours before government shutdown

Tech weakens after morning, SPX loses 4300

Market opens Friday session with fairly stable sentiment thanks to yesterday's tech rally. Optimistic PCE data early in the morning along with the temporary drop in bond yields helped options market flow mainly positive delta in the first half of the session.

However, things started to change after Europe closed with most investors starting to de-risk ahead of the weekend as the US government is on the verge of shutdown starting from next Sunday.

Overall, the market will continue to maintain bearish bias if SPX stays below 4300. After 2 days of technical bounce and shorts-cover rally, short-term market fears have not disappeared at all, making buyers almost absent in the morning today.

If Congress can reach an agreement, even temporary, to keep the government running this weekend, the market is likely to have a recovery bounce early next week.

Core PCE Inflation Index rises at slowest pace in 3 years signaling potential pause in rate hikes

Monthly Core PCE Inflation Index - Fed's preferred gauge of underlying inflation rose at the slowest pace since late 2020. Traders are betting that the Fed's rate hike cycle has ended.

After 3 months of deflation, goods prices rebounded strongly in August.

Compared to the previous month, Income index rose slightly but Spending recorded a decrease (both at 0.4%).

After inflation adjustment, real personal spending increased 2.3% year-over-year.

However, real disposable income has declined for 3 consecutive months, at -0.2% from previous month, meaning the savings rate has significantly decreased.

According to the latest revised data from the Fed, household savings are actually about 1.1 trillion USD less than previously reported.

Wage growth pace also slowed. Year-over-year, private sector wage increase (4.6%) is one-third lower than government employees (6.8%). It may be time to consider cutting government employee wages to reduce current inflation.

All this has pushed the savings rate down to 3.9% of GDP - the lowest in the past year.

Deposits flow into Money-Market Funds continues to rise

After unusual outflows last week, money market funds have become the new safe haven as they continue to see inflows of +6.3 billion USD this week. Total assets reaching new record of 5643 billion USD.

Retail funds continue to see inflows for 23 straight weeks (+7.8 billion USD last week) while institutional funds saw outflows of 1.5 billion USD.

Institutions are withdrawing for two straight weeks, while money from individual consumers is increasing and reaching new record.

The spread between money market funds and bank deposits continues to widen.

After a large drop last week, Fed's Balance Sheet continues to shrink by another 22 billion USD, the lowest since June 2021.

Banks' demand for Fed's emergency relief facility remains at record high of 108 billion USD (+116 million USD last week).

Rising market rates also prompt banks to hold cash at Fed for higher returns instead of investing in stock market, causing the gap between stock market cap and bank reserves at Fed to start narrowing.

NIKE ER - Earnings and margins beat expectations driving stock surge

For the first time in 2 years, Nike missed revenue expectations, with Q1 revenue up only 2% YoY (to 12.9 billion USD). Of which footwear revenue accounts for about 65% (+4%).

• Direct sales up 6% YoY (to 5.4 billion USD). Sales down 2% in North America (Nike's largest market) but up in all other regions where Nike operates.

• Inventory -10% YoY to 8.7 billion USD.

After the first quarter report, Nike stock up 10% thanks to EPS better than expected at 0.94 USD ($0.18 beat).

Nike is having its worst year since 1997 compared to the broader market, due to weakening consumer spending, plus concerns from China - an important market for Nike.

Some other news:

• Microsoft (MSFT.O) discussed selling its Bing business to Apple around 2020.

• BlackRock CEO Larry Fink forecasts 10-year yield could reach above 5%.