U.S. equities plunged, finishing near the lows of the day, following disappointing quarterly results from Target Corporation and Lowe's Companies, with both retailers warning of rising cost pressures.
U.S. equities plunged, finishing near the lows of the day, following disappointing quarterly results from Target Corporation and Lowe's Companies, with both retailers warning of rising cost pressures. Persistent inflation pressures have forced the Fed to get aggressive with its monetary policy tightening campaign against the backdrop of slowing economic growth. The downdraft came after stocks rebounded yesterday on some positive retail sales data and signs China's lockdowns may be set to ease. Meanwhile, the ongoing war in Ukraine, rising interest rates, and the recent jump in the U.S. dollar also added to the uneasiness. Housing dominated the economic calendar, with construction activity decelerating, and mortgage applications falling to snap a two-week rebound. Treasuries were mixed, the U.S. dollar finished to the upside to remain near 20-year highs, while crude oil prices declined, and gold lost modest ground. Europe finished mostly lower following further signs of rising inflation pressures in the region, while markets in Asia were mixed.
The Dow Jones Industrial Average tumbled 1,165 points (3.6%) to 31,490, the S&P 500 Index fell 165 points (4.0%) to 3,924, and the Nasdaq Composite plunged 566 points (4.7%) to 11,418. In heavy volume, 5.0 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $2.81 to $109.59 per barrel. Elsewhere, the gold spot price traded $3.00 lower to $1,815.90 per ounce, and the Dollar Index was up 0.5% at 103.85.
Target Corporation (TGT $162) reported adjusted Q1 earnings-per-share (EPS) of $2.19, well below the $3.07 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $25.2 billion, above the Street's forecast of $24.5 billion. Q1 same-store sales rose 3.3% y/y, versus the expected 0.8% gain. TGT said it faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below its expectations. The company also said its gross margin declined, reflecting higher markdown rates, driven by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions, and increased compensation and headcount in its distribution centers. TGT reaffirmed its full-year revenue growth guidance. Shares of TGT tumbled nearly 25%.
Lowe's Companies Inc. (LOW $184) posted Q1 EPS of $3.51, above the expected $3.22, with revenues declining 2.9% y/y to $23.7 billion, below the forecasted $23.8 billion. Q1 same-store sales fell 4.0% y/y, compared to the estimated 2.5% decline. The home improvement retailer noted increased uncertainty in the macro environment and that its outdoor seasonal categories were impacted by unseasonably cold temperatures. LOW reaffirmed its full-year guidance, noting that now that spring has finally arrived it is pleased with the improved sales trends it is seeing in May. LOW traded solidly lower.
The markets remained choppy after a six-week losing streak for the S&P 500 as they grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Doom and Gloom: When Will It End?, how bearish sentiment is becoming a contrarian support; but for now, aggressive Fed action, tightening financial conditions, and the liquidity drain may keep downward pressure on stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.
Housing construction activity declines, mortgage applications fall
Housing starts (chart) for April dipped 0.2% month-over-month (m/m) to an annual pace of 1,724,000 units, below the Bloomberg consensus estimate of a 1,756,000 unit pace, and compared to March's downwardly-revised pace of 1,728,000 units. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell by 3.2% m/m to an annual rate of 1,819,000, slightly above expectations calling for 1,814,000 units, and compared to the downwardly-revised 1,870,000 unit pace in March.
In other housing news, the MBA Mortgage Application Index fell 11.0% last week, following the prior week's increase of 2.0%. The index snapped a string of two weekly increases as a 9.5% fall in the Refinance Index was met with an 11.9% tumble for the Purchase Index. However, the average 30-year mortgage rate pulled back from a recent spike, declining 4 basis points (bps) to 5.49%, but is up 234 bps versus a year ago.
Treasuries were mixed and yields have been choppy as of late following a recent spike as markets anticipate tighter Fed monetary policy following the early May 50 bp rate hike, and comments yesterday from Fed Chief Jerome Powell that reiterated an aggressive stance. Schwab's Liz Ann Sonders discusses the Fed's actions and implications in her article, 50 Ways to Leave Your Mark.
As the Fed launches a series of rate hikes to try to cool off inflation, check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes, where they provide their insight into some of the most frequently asked questions they have received this year.
The yield on the 2-year Treasury note was up 1 bp at 2.69%, while the yields on the 10-year note and the 30-year bond rate were down 8 bps at 2.90% and 3.08%, respectively.
Tomorrow's economic calendar will hold initial jobless claims for the week ended May 14, forecasted to show that 200,000 first-time unemployment applications were filed, as well as existing home sales for April, with economists calling for a 2.1% m/m decline to an annual rate of 5.65 million units. The Leading Index for April is also on tap, estimated to be flat m/m following March's 0.3% increase. The Philadelphia Fed Business Outlook Index will round out the docket, expected to decline to a level of 15.7 in May from April's 17.6, with a reading above zero denoting expansion in activity.
Europe mostly lower amid expectations of tighter monetary polices
European equities were mostly lower, as monetary policy remained in focus after recent rate increases from the U.S. and the U.K. Persistent inflation pressures have prompted central banks to raise rates and today's data may have solidified expectations that the European Central Bank could begin to tighten policy this year after Eurozone consumer price inflation was unrevised and the core rate remained at a record high. Additionally, U.K. consumer and retail price inflation both accelerated in April and producer prices for the region came in hotter than expected. Signs of slowing economic activity have raised fears of a possible recession, while the ongoing war in Ukraine has exacerbated inflation and economic concerns. Bond yields in the Eurozone and the U.K. were mixed after seeing a recent rise in rates that has also added to the market skittishness. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his latest commentary, Hedging Stocks Against Rising Rates, noting how investors should consider hedging the possible risk of higher interest rates with the addition of short duration stocks, a potential way to manage risk while remaining invested in the markets. You can follow Jeff on Twitter: @JeffreyKleintop. Meanwhile, both the British pound and the euro lost ground versus the U.S. dollar.
The U.K. FTSE 100 Index fell 1.1%, France's CAC-40 Index lost 1.2%, Germany's DAX Index and Switzerland's Swiss Market Index decreased 1.3%, and Italy's FTSE MIB Index was down 0.9%, while Spain's IBEX 35 Index was nearly flat.
Asia mixed as choppiness remains
Stocks in Asia finished mixed as the recent volatility caused by a flurry of headwinds remained, including tighter monetary policy across the globe, signs of slowing economic growth, a recent rally in the U.S. dollar, and the ongoing war in Ukraine. Chinese stocks dipped after yesterday's gains for technology shares following the government's pledge of support for the sector, as investors still grappled with the implications of China's strict zero-COVID policy, although recent data has shown positive developments regarding new cases outside quarantine zones. Schwab's Jeffrey Kleintop discusses in his latest article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. In economic news, Japan's preliminary Q1 GDP contracted by a smaller amount than expected but was a solid deceleration from the expansion seen in Q4, while the country's Tertiary Index for March rebounded more than anticipated. Additionally. India's wholesale price inflation accelerated more than expected for April.
Japan's Nikkei 225 Index rose 0.9%, with the yen holding steady and continuing to consolidate after a recent tumble versus the U.S. dollar. China's Shanghai Composite Index decreased 0.3%, the Hong Kong Hang Seng Index advanced 0.2%, Australia's S&P/ASX 200 Index was up 1.0%, India's S&P BSE Sensex 30 Index was 0.2% lower, and South Korea's Kospi Index traded 0.2% to the upside.
Tomorrow's international economic calendar will be fairly light, as Australia will release employment figures, and Japan will offer trade data.
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