U.S. stocks ended the day in the red, continuing last week's sharp drop following comments from Fed Chairman Jerome Powell last Friday that heightened inflationary concerns. During the Fed symposium in Jackson Hole, Wyoming, Powell signaled that "pain" could be felt by businesses and households alike as the Central Bank continues its aggressive monetary policy with the goal of restoring price stability. Treasury yields continued to climb, with the yield curve steepening, though the U.S. dollar remained subdued after hitting fresh multi-decade highs early last week. Crude oil prices rallied while gold moved modestly lower. As earnings season is heading to a close, shares of Catalent fell after issuing disappointing guidance, while Pinduoduo rallied after reporting stronger-than-expected Q2 earnings and revenues. The economic calendar was relatively quiet today, but data on Dallas manufacturing activity showed that the index remained in contraction territory despite a slight improvement. Asia finished mostly lower, but China nudged higher. Europe moved broadly to the downside, while U.K. markets were closed for a holiday. The global markets continued to grapple with Friday's hawkish commentary by Fed Chair Powell.
The Dow Jones Industrial Average was down 184 points (0.6%) to 32,099, the S&P 500 Index declined 27 points (0.7%) to 4,031, and the Nasdaq Composite lowered 124 points (1.0%) to 12,018. In moderate volume, 3.4 billion shares of NYSE-listed stocks were traded, and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $3.95 to $97.01 per barrel. Elsewhere, the gold spot price modestly decreased $0.40 to $1,749.40 per ounce, and the Dollar Index was mostly unchanged at 108.42.
Catalent Inc. (CTLT $92) reported adjusted fiscal Q4 earnings-per-share (EPS) of $1.19, above the $1.15 FactSet estimate, as revenues rose 15.0% year-over-year (y/y) to $1.31 billion, just below the Street's forecast of $1.33 billion. The healthcare technology and development company issued full-year guidance that came in south of projections. Shares traded lower.
Pinduoduo Inc. (PDD $66) rallied over 20% after the Chinese e-commerce behemoth reported revenues and earnings that came in stronger than expected for Q2. The company noted that it saw gradual recovery in consumer sentiment in the second half of the quarter.
Q2 earnings season is mostly in the books and of the 485 S&P 500 companies that have reported thus far, roughly 63% have topped revenue forecasts and approximately 75% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 13.9% and earnings are 7.3% higher.
Schwab's Chief Investment Strategist, Liz Ann Sonders points out in her latest article, Fade: Market Hits Resistance as Breadth Waned, how the stock rally since mid-June has looked healthier from a breadth perspective, but low-quality leadership and deteriorating economic data have kept downside risks elevated. You can follow Liz Ann on Twitter: @LizAnnSonders. The recent pullback in the markets has come as the markets anticipate continued aggressive monetary policy tightening as we discuss in the Schwab Center for Financial Research's article, Fed Policy Talk Rattles Market. Stocks dropped after Federal Reserve Chair Jerome Powell vowed to bring inflation down despite potential "pain" to households and businesses.
Treasury yields rose ahead of August business activity and labor data this week
Treasury yields were higher, as the yield on the 2-year note rose 3 basis points (bps) to 3.44%, the yield on the 10-year note gained 7 bps to 3.11%, and the 30-year bond rate increased 4 bps to 3.25%.
Bond yields have continued to move higher, especially on the short end of the curve as the markets anticipated further aggressive monetary policy tightening from the Fed, with Chairman Jerome Powell solidifying last week in Jackson Hole, Wyoming. Also, the U.S. dollar, although cooling off late last week, touched a fresh multi-decade high on August 22.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in our Schwab Market Perspective: Mixed Signals, how the Fed has embarked on one of the most rapid tightening cycles in over 40 years, and with inflation continuing to outpace wage growth, more rate hikes are likely on the horizon. Kathy also offers analysis of the greenback in her commentary, The Strong Dollar: Can It Continue?
The Dallas Fed Manufacturing Index improved but remained in contraction territory (a reading below zero) for August. The index increased to -12.9 from -22.6 in July, and compared to the Bloomberg consensus estimate calling for an improvement to -12.7. The Index came off the lowest in two-years as new orders improved but remained negative, while production and shipments continued to expand. Employment decelerated but remained comfortably in expansion territory, and inflation pressures remained severely elevated but did moderate, with both prices paid and received decelerating.
Today's report kicked off the economic week and with earnings season exiting stage left, it will likely garner heavier scrutiny, amplified by the backdrop of the Fed remaining more aggressive until the data says otherwise. However, with the calendar shifting to September, the headlining data points could be the August ISM Manufacturing Index and this month's key nonfarm payroll report. Finally, we will get some Fedspeak to follow the tone set during last week's Fed annual symposium in Jackson Hole.
Tomorrow's economic calendar will introduce reports on June’s S&P CoreLogic home prices that are projected to increase 0.9% m/m on a seasonally adjusted basis and 19.20% y/y non-seasonally adjusted, versus the prior reads of 1.32% and 20.50%, respectively. Additionally, we will get the Confidence Board's August consumer confidence release that is predicted to give a reading of 98 from the prior month’s 95.7. The Job openings and labor turnover survey (JOLTS) for July will also be introduced, expected to decrease to 10,375,000 from the prior month’s 10,698,000 read.
Europe saw pressure as global markets continue to grapple with Fed tightening implications
Stocks in Europe were broadly lower as the global market conviction seemingly became constrained by Friday's commentary from Fed Chairman Jerome Powell at the Central Bank's annual symposium in Jackson Hole, Wyoming. Powell suggested that the U.S. Central Bank will need to be aggressive with its monetary policy tightening as it remains hyper-focused on bringing down inflation and restoring price stability, even if that means "pain" for businesses and households. The markets also remained skittish amid the festering energy crisis that has unfolded in the region due to tighter gas supplies and surging energy costs as Russia continues to restrict flows from its Nord Stream Pipeline. This has exacerbated inflation concerns that has forced the Bank of England and European Central Bank to join the Fed and move down the monetary tightening path. Volume and trading activity were subdued with the economic calendar in the region void of any major releases today, and while markets in the U.K. were closed for a holiday.
With inflation pressures driving tighter monetary policies, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Shortages Have Led to Gluts, how inventory gluts have been bad news for the stocks of companies experiencing them, but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms. Also, Jeff discusses in his latest article, The End of Rate Hikes?, how the signals from central banks that rate hikes, which began last year, may be coming to an end could be welcome news for investors looking ahead to the next 12 months. The euro traded higher versus the U.S. dollar after dropping below parity with the greenback last week, and the British pound dipped. Bond yields in the Eurozone continued to move to the upside.
Germany's DAX Index was down 0.6%, France's CAC-40 Index declined 0.8%, Spain's IBEX 35 Index fell 0.9%, Italy's FTSE MIB Index decreased 0.2%, and Switzerland's Swiss Market Index traded 0.4% lower.
Asia mostly lower as global markets digest Fed commentary
Stocks in Asia finished mostly lower to begin the week after the U.S. markets fell sharply on Friday in the wake of Fed Chairman Jerome Powell's comments on monetary policy in Jackson Hole, Wyoming. The global markets appear skittish as Powell suggested the U.S. Central Bank will need to remain aggressive with tightening its policy to restore price stability even though this will likely cause economic "pain." However, mainland Chinese markets bucked the trend and nudged higher as China's central bank has diverged and introduced further stimulus measures to try to stabilize its economy that has been hampered by the COVID-induced lockdowns, regulatory scrutiny, and real estate concerns. As such, China announced over the weekend that its industrial profits fell y/y. Chinese stocks also continued to benefit from an auditing agreement between the U.S. and China, potentially removing the risk of delisting of Chinese stocks that trade on U.S. exchanges.
Schwab's Jeffrey Kleintop notes in his article, China's Yo-Yo Economy, that its economy and stock market may remain volatile. Meanwhile, geopolitical tensions between the U.S. and China remained elevated, mostly due to the evolving situation in Taiwan, with the U.S. set to begin trade negotiations in September, of which China has expressed opposition. In other economic news, Australia's retail sales for July rose more than expected.
Japan's Nikkei 225 Index fell 2.7%, with the yen continuing to give back a recent gain versus the U.S. dollar. The yen remains near multi-decade lows versus the greenback following a sharp drop that began in March as the Bank of Japan also lags other key global central banks in monetary policy. The Hong Kong Hang Seng Index declined 0.7%, India's S&P BSE Sensex 30 Index decreased 1.5%, Australia's S&P/ASX 200 Index traded 2.0% lower, and South Korea's Kospi Index dropped 2.2%. However, China's Shanghai Composite Index ticked 0.1% higher.
Tomorrow's international economic calendar will introduce CPI levels out of Germany and confidence data out of the Eurozone. In Asia-Pacific, the most notable report will be Australia's building approvals.
© Charles Schwab
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