U.S. stocks are declining as the markets await tomorrow’s highly anticipated monetary policy decision from the Federal Reserve. The Central Bank is expected to deliver another 75-basis point rate hike, while the markets are also grappling with the possibility of a 100-basis point hike that stems from last week's hotter-than-expected consumer price inflation report. Housing starts rose much more than expected, while building permits dropped more than anticipated. In equity news, Ford announced that inflation and parts shortages will raise supply costs by $1 billion above initial expectations, but still reaffirmed its full year guidance. UnitedHealth Group was given permission from a federal judge to proceed with its acquisition of Change Healthcare, which the U.S. Department of Justice tried to block. Treasury yields are higher, particularly on the long end of the curve, and the U.S. dollar is increasing. Crude oil prices are declining, and gold is losing ground. Asian stocks finished broadly higher as China’s central bank kept its benchmark lending rates unchanged, and as Hong Kong is set to ease hotel quarantine rules. European stocks are declining in late-day trading amid a larger rate hike than anticipated from Sweden’s central bank, and as Germany’s producer price index unexpectedly soared.
At 10:51 a.m. ET, the Dow Jones Industrial Average is down 1.2%, the S&P 500 Index is declining 1.1%, and the Nasdaq Composite is decreasing 0.7%. WTI crude oil is moving $1.16 lower to $84.20 per barrel, and Brent crude oil is falling $1.66 at $90.34 per barrel. The gold spot price is trading $6.60 lower to $1,671.60 per ounce, and the Dollar Index is advancing 0.4% to 110.08.
Ford MotorCompany(F $14) stated that a combination of inflationary pressures and parts shortages will leave the company with more unfinished vehicles than initially expected. The automobile manufacturer estimates that Q3 inflation-related supply costs would be about $1 billion higher than anticipated. Despite this unexpected rise in costs, F reaffirmed its full-year guidance. Shares are falling.
In other equity news, a federal judge ruled that UnitedHealth Group Incorporated (UNH $521) could continue with its acquisition of Change Healthcare Inc. (CHNG $27), dealing a blow to the Biden administration’s healthcare anti-trust efforts as the U.S. Department of Justice tried to block the sale. Shares of UNH are declining, while CHNG is noticeably higher.
The S&P 500 Index fell sharply last week, bolstered by a hotter-than-expected August consumer price inflation report, which boosted Treasury yields and resumed the U.S. dollar's rally. For a look at the volatility, check out what our experts from the Schwab Center for Financial Research think in the article, Stock Market Volatility: Inflation Strikes Again. Given these conditions, Schwab recommends that investors stay disciplined. For stock investors, that means taking a sector-neutral approach and focusing on high-quality factors such as strong profit margins, high free-cash-flow yield, low volatility, and positive forward earnings revisions. Investors should also periodically rebalance their portfolios to maintain their strategic long-term allocations in the face of rapidly shifting markets.
Housing starts soared above expectations, building permits fell more than anticipated
Housing starts (chart) for August soared 12.2% month-over-month (m/m) to an annual pace of 1,575,000 units, well above the Bloomberg consensus estimate of a 0.3% rise to a 1,450,000-unit pace, and compared to July's downwardly revised 10.9% decline to 1,404,000 units. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dropped by 10.0% m/m to an annual rate of 1,517,000, well below expectations calling for a 4.8% decline to 1,604,000 units, and compared to the unrevised 1,674,000-unit pace posted in July.
Treasury yields are higher, with the yield on the 2-year note increasing 3 basis points (bps) to 3.95%, the yield on the 10-year note soaring 8 bps to 3.56%, and the 30-year bond rate climbing 7 bp to 3.58%.
The markets are awaiting this week's main event in the form of the Federal Open Market Committee's (FOMC) monetary policy decision on Wednesday, with expectations calling for a 75-bp rate hike. The FOMC's decision will be accompanied by updated economic projections, which will give the markets a sense of how aggressive the Fed will remain as containing inflation remains top priority. The U.S. dollar has been volatile recently but remains near multi-year highs.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Rate Hikes, Quantitative Tightening, and Bond Yields, how in its quest to reduce inflation, the Federal Reserve appears set to continue to hike interest rates and reduce the size of its balance sheet. She offers a look at what this may mean for the bond market. Kathy also offers analysis of the greenback in her commentary, The Strong Dollar: Can It Continue?
Europe declining amid an unexpectedly high rate hike and inflation data
Stocks in Europe are trading lower in late-day action following a larger-than-expected rate hike from Sweden’s central bank, and amid further disappointing economic data in the region. Sweden’s Riksbank raised its policy rate by 100 bps to 1.75%, above expectations of a 75 bp rise, which represents the bank’s largest rate hike in three decades. Stocks in Europe have been choppy lately following concerns over economic growth, the aggressive monetary policy of central banks globally, and continued volatility in the energy markets that have kept investors on edge. The markets are awaiting this week's monetary policy decisions from the Fed, Bank of England (BoE), and Bank of Japan (BoJ). Continued aggressive rate hikes out of the U.S. and U.K. are expected, though the BoJ is anticipated to keep its policy steady. In other economic news, the pressure on the European Central Bank to continue raising interest rates increased after data showed Germany’s producer price index (PPI) unexpectedly soared as electricity prices have continued to climb. Germany’s August PPI climbed 7.9% m/m, well above expectations of a 2.4% rise and versus the prior month’s 5.3% growth rate. On a year-over-year (y/y) basis, PPI rose 45.8%, much higher than the expected 36.8% increase, and compared to July’s 37.2% advance.
With elevated inflation pressures forcing the aggressive monetary policies, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Home Is Where the Inflation Is, how central banks that base inflation measures on rentals rather than home prices may persist in hiking rates, thus applying more economic brakes despite easing home sales. You can follow Jeff on Twitter: @JeffreyKleintop. The euro and British pound are trading lower versus the U.S. dollar, and bond yields in the Eurozone are rising.
The U.K. FTSE 100 Index is trading 0.8% lower, France's CAC-40 Index is declining 1.3%, Italy's FTSE MIB Index is dropping 1.7%, Germany's DAX Index is decreasing 1.1%, Switzerland's Swiss Market Index is losing 1.2%, and Spain's IBEX 35 Index is down 1.4%.
Asia ended higher following economic data and in anticipation for monetary policy decisions
Stocks in Asia finished broadly higher amid some mixed economic data and as investors look ahead to global monetary policy decisions that will be released later this week. The Fed and BoE are expected to hike rates, while the BoJ is forecasted to maintain its accommodative policy. The People’s Bank of China kept its one- and five-year loan prime rates (LPR) unchanged from last time. The one-year LPR—a reference rate for short-term corporate loans—remained at 3.65% after the 5 bps cut in August, and the five-year LPR—a benchmark for mortgage loans—stayed at the 4.30% August growth rate, after being cut 15 bps the month prior. Additionally, the Reserve Bank of Australia released the minutes of its September policy meeting, which stated, “All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.” The members discussed the arguments surrounding whether to raise interest rates by 25 or 50 bps, and said that the size and timing of rate hikes will continue to be guided by incoming data, as well as the outlook for inflation and the labor market.
Central banks in North America, Europe, and the U.K. have aggressively tightened monetary policies, though the BoJ has abstained. China's central bank has diverged and loosened its policy in the past couple months as recent COVID-related restrictions in parts of the country have negatively impacted economic growth. However, Hong Kong did lift some restrictions, with the government announcing plans to ease the city’s hotel quarantine rules for travelers, which boosted shares of Hong Kong technology companies. Meanwhile, geopolitical tensions remain high between China and the U.S. after President Biden said he would defend Taiwan if China were to invade the country.
China, the world's second-largest economy, has also been hampered by regulatory crackdowns and real estate issues, and Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics including inflationary concerns, currency movements, government policies, and more. In other economic news, Japan’s national consumer price index (CPI) for August nears an eight-year high at a 3.0% y/y growth rate, above the Bloomberg forecast of 2.9%, and north of the prior month’s reading of 2.6%. Excluding food and energy, the CPI rose to 1.6%, slightly above expectations, and versus the prior month’s 1.2% gain.
Japan's Nikkei 225 Index rose 0.4%, as the yen continued to drop versus the U.S. dollar, remaining near multi-decade lows that have come amid the BoJ's lack of keeping up with other key global central banks in monetary policy. China's Shanghai Composite Index increased 0.2%, and the Hong Kong Hang Seng Index gained 1.2%. India's S&P BSE Sensex 30 Index moved 1.0% higher, Australia's S&P/ASX 200 Index advanced 1.3%, and South Korea’s Kospi index went up 0.5%.
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