Wall Street drifts ahead of reports on inflation and big retailers’ profits

HONG KONG – Wall Street is drifting Monday to start a week that could bring more action to financial markets, with several big reports on the calendar.

The S&P 500 was 0.2% lower in midday trading. The Dow Jones Industrial Average was virtually unchanged, as of 11 a.m. Eastern time, and the Nasdaq composite was 0.3% lower.

The market is coming off a week with relatively few data reports to give hints on Wall Street’s central questions: When will the Federal Reserve halt its hikes to interest rates and begin cutting them, and can the economy stay as resilient as it has? But this upcoming week will offer more, including the latest monthly update on inflation and earnings reports from some of the nation’s biggest retailers.

The profit reporting season for the summer is winding down, and the majority of companies have again topped analysts’ expectations. Henry Schein became the latest to beat Wall Street’s forecasts, and the provider of health care products rose 7.6%.

Tyson Foods’ results also topped expectations for adjusted earnings, but its stock was basically flat after it warned of potentially more challenging times ahead.

Tyson said its beef division could lose money this upcoming fiscal year and its pork unit could roughly break even. It expects overall revenue, including chicken sales, to be roughly flat this upcoming fiscal year.

Later this week, Target, TJX and Walmart will report their own results, and more attention may be on what they say about upcoming trends than about the summer.

The economy has remained remarkably strong recently, even though the Federal Reserve has hiked its main interest rate to its highest level since 2001 in hopes of stamping out high inflation. But worries remain about whether it can stay that solid as the full effects of all the rate hikes make their way through the system.

That’s why so much attention will be on Tuesday’s inflation report. The hope is that inflation will continue to cool from its peak in the summer of 2022, when it topped 9%, and convince the Federal Reserve that no more hikes to rates are necessary. That in turn could speed up the timeline for potential cuts to interest rates, which can juice financial markets.

Economists expect the report to show that consumers paid prices that were 3.3% higher in October than a year earlier, down from September’s inflation rate of 3.7%.

Treasury yields have already jumped since the summer, catching up to the Federal Reserve’s main interest rate, which affects overnight loans. Not only do higher rates and yields hurt prices for investments, they also drag on the economy broadly and raise the pressure on the entire financial system.

Federal Reserve Chair Jerome Powell gave some hope recently that the rise in longer-term Treasury yields could act as substitutes for further rate hikes, which could mean the Fed may be done with them. But Powell said last week the Fed would not hesitate to hike rates again if needed.

In the bond market, the yield on the 10-year Treasury was up to 4.66% from 4.63% late Friday.

High rates and yields weigh on all kinds of investments, and they tend to hit technology and other high-growth companies particularly hard. That had Big Tech stocks as the heaviest weights on the S&P 500, including a 0.8% dip for Apple and 0.5% slip for Microsoft.

Those two companies, along with five other Big Tech stocks that make up what’s called the “Magnificent Seven,” have been disproportionately responsible for most of this year’s gains for the S&P 500.

Of the 11 sectors that make up the index, seven are down for the year. And so is the average stock within the index.

“Such weak price breadth is not indicative of a healthy bull market, in our view, and accurately reflects the challenging earnings dynamics occurring under the surface of the market,” according to strategists at Morgan Stanley led by Michael Wilson.

He sees the challenge continuing into early 2024 before a sustainable profit recovery could take hold.

More shakiness could be ahead if investors worry about a couple challenges facing the Treasury market, according to Chris Larkin, managing director at E-Trade from Morgan Stanley

The credit-rating agency Moody’s said late Friday that it may downgrade the top-tier “AAA” rating it has for U.S. government debt given the cost of rising interest rates and political polarization in Congress.

The latter has been playing out in yet another showdown that could result in a U.S. government shutdown.

While a shutdown or the cutting of a credit-rating agency’s outlook likely wouldn’t trigger big moves by themselves, general worries about big spending deficits by Washington, and the inability in Congress to work together to solve many issues, have been behind some of the recent run higher in Treasury yields.

In stock markets abroad, Chinese indexes were higher after Alibaba Group Holding and JD.com reported a pickup in sales for this year’s Singles’ Day shopping festival. Like other Chinese companies, they’re grappling with a stop-start recovery in the world’s second-largest economy.

On Wednesday, China’s leader, Xi Jinping, is set to meet with President Joe Biden on the sidelines of a Pacific Rim summit in California. It will be the first face-to-face encounter in a year between the leaders of the world’s two biggest economies.

Both seek a greater measure of stability to a relationship that is being defined by differences over export controls, tensions over Taiwan, the wars in the Middle East and Europe, and incidents such as the infamous spy balloon.

Stock indexes were mostly higher across the rest of Asia and Europe.

___

AP Writers Zimo Zhong and Matt Ott contributed.