Equity markets dropped sharply on Tuesday with investors worried about higher rates with data indicating the consumer is wreaking adding to the bearish sentiment.  The Costco report after the bell would seem to support the notion of a struggling consumer despite their top line beat of estimates.  Today investors will have to deal Mortgage Apps, Durable Goods, and Petroleum numbers as well as a handful of notable reports to find directional inspiration.  We are overdue for a relief rally but keep in mind if it does begin it could rather be muted with a possible government shutdown possible at midnight Friday.  Expect the challenging price action to continue if the possibility persists.

Overnight Asian markets reversed early bearishness finding some relief in some industrial data and Australian inflation modest improvement to close mostly higher overnight.  However, European markets remain muted and mostly lower this morning as consumer data cause continued sentiment concerns.  U.S futures on the other hand are trying to put on a brave face an inspire a bit of a relief rally ahead of potential market-moving earning and economic reports with a looming government shutdown weighing on investor’s minds.

Economic Calendar

Earnings Calendar

Notable reports for Wednesday include CNXC, FUL, JEF, MU, PAYX, & WOR.

News & Technicals’

The U.S. is facing a potential government shutdown if Congress fails to pass a spending bill by Oct. 1, the start of the new fiscal year. This would mean that many federal agencies and programs would have to stop or reduce their operations, affecting millions of Americans and the economy. This is not the first time that the U.S. has faced such a situation, as political disagreements over the budget and the debt ceiling have often led to impasses in the past. In fact, in 2011, after a prolonged standoff over raising the debt limit, S&P downgraded the U.S. long-term credit rating from AAA, the highest possible rating, to AA+, indicating a slightly higher risk of default. The downgrade was a historic and unprecedented move that reflected the growing political polarization in Washington.

Costco, the wholesale retailer, reported its quarterly earnings on Tuesday, beating the analysts’ expectations. The company earned $1.25 per share, higher than the estimated $1.17 per share. The revenue was $44.77 billion, also higher than the expected $43.99 billion. However, the company’s comparable sales, which measure the sales growth at stores open for at least a year, were not very impressive. The comparable sales increased by 1.1% globally, but only by 0.2% in the U.S., which is Costco’s largest market. The company attributed this to the strong performance of its grocery business, which offset the weaker demand for discretionary items, such as clothing, jewelry, and furniture. Costco also faced higher costs due to the pandemic, such as wages, sanitation, and e-commerce investments.

Indonesia, the largest e-commerce market in Southeast Asia, is planning to tighten its regulations on online shopping, especially on social media platforms. The country’s Ministry of Trade said on Tuesday that it is working on a new rule that would ban transactions on social media, such as Facebook, Instagram and TikTok. The ministry said that social media platforms are not registered as e-commerce businesses and do not comply with the existing laws and standards. The move is aimed at protecting local consumers and sellers, especially the micro, small, and medium-scale enterprises (MSMEs), which have been affected by the influx of foreign goods sold through social media. President Joko Widodo said that the MSMEs have seen their sales start to decline due to the unfair competition from foreign products. The new regulation is expected to benefit the traditional e-commerce players in Indonesia, such as Sea Ltd., which operates Shopee, one of the leading online shopping platforms in the region. Citi, a global bank, said that the regulation would reduce the competitive pressure from TikTok, which has been expanding its e-commerce presence in Indonesia.

The stock market dropped sharply on Tuesday, reversing the gains from Monday, as investors were worried about the Fed’s plan to keep interest rates high for a longer period. The Fed’s decision was based on its assessment of the inflation and labor market conditions. The sectors that suffer the most today are the ones that depend on consumer spending and innovation, such as consumer discretionary and technology. The only sectors that performed better were the ones that provided essential goods and services, such as health care and consumer staples. The energy sector also benefited from the rising oil prices. The global markets also followed a downward trend. Today we have a few notable earnings reports as well as Mortgage Apps, Durable Goods, and Petroleum numbers for the bulls or bears to find inspiration.  The indexes remain in an extreme short-term oversold condition so be prepared for a relief rally to begin at any time assuming the data does not pile on to the bearishness.  Also, keep in mind any relief rally could be muted due to the uncertainty of a possible government shutdown on Oct. 1^st.

Trade Wisely,

Doug