U.S. equities finished lower with the Dow whipsawing within a more than 900-point range following the Fed's monetary policy decision. The Central Bank raised rates by 75 basis points for a fourth-straight meeting, but opened the door to slowing within its statement. However, in his presser following the announcement, Chairman Powell reiterated that any notion of a pause was premature. Treasury yields were mixed and the U.S. dollar traded to the upside, while crude oil prices gained ground, and gold saw a modest loss. In economic news, mortgage applications fell for a sixth-straight week even as mortgage rates snapped a string of increases, and ADP's private sector employment report came in above estimates ahead of Friday's key labor report. Earnings season continued to roll on, with Advanced Micro Devices missing earnings forecasts, and CVS Health exceeding profit projections and raising its guidance. Ford Motor Company reported October sales that showed a year-over-year decline, but EV sales grew. Asia finished mixed with mainland Chinese markets and Hong Kong continuing rallies, while Europe also diverged amid some likely trepidation ahead of the Fed decision.
The Dow Jones Industrial Average fell 505 points (1.6%) to 32,148, the S&P 500 Index tumbled 96 points (2.5%) to 3,760, and the Nasdaq Composite plunged 366 points (3.4%) to 10,525. In moderate volume, 4.8 billion shares of NYSE-listed stocks were traded, and 5.3 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.63 to $90.00 per barrel. Elsewhere, the gold spot price decreased $7.90 to $1,641.80 per ounce, and the Dollar Index was 0.4% higher at 111.97.
Advanced Micro Devices Inc. (AMD $59) reported adjusted Q3 earnings-per-share (EPS) of $0.67, below the $0.69 FactSet estimate, as revenues rose 29.0% year-over-year (y/y) to $5.6 billion, roughly in line with its guidance provided early in October. The chipmaker said its revenue growth was led by performance out of its data center, gaming, and embedded segments. AMD issued Q4 revenue guidance that was below estimates but noted that the profitable server chip market will continue to bolster its results. Shares were lower.
CVS Health Corporation (CVS $97) posted adjusted Q3 EPS of $2.09, topping the expected $2.00, with revenues rising 10.0% y/y to $81.2 billion, exceeding estimates of $76.7 billion. The company said including pre-tax opioid litigations charges and a $2.5 billion pre-tax loss on assets held for sale related to Omnicare long-term care business it booked a $2.60 per share loss. The company said it continues to execute on its strategy of focusing on expanding capabilities in health care delivery, and the announced acquisition of Signify Health will further strengthen its engagement with consumers. CVS raised its full-year earnings outlook and shares rose.
Ford Motor Company (F $13) reported total October vehicle sales were down 10.0% y/y to 158,327 units, but above the Street's forecast of 152,000 units. Truck and SUV sales were constrained by tight inventories and limited production, though it said its electric vehicle sales grew. Shares traded lower.
Stocks have posted three weekly gains out of four to cap off a strong October performance, with bond yields and the U.S. dollar stabilizing somewhat after elevated Treasury yields and the U.S. dollar have added to global economic pressure and threatened corporate profits as discussed in the latest Schwab Market Perspective: No Stopping the Fed.
Meanwhile, as Q3 earnings season has shifted into high gear, of the 347 S&P 500 companies that have reported results thus far, about 55% have topped revenue expectations and roughly 70% have bested profit projections. Compared to last year sales growth is tracking at 11.1% and earnings growth is on pace to be up 3.8%.
Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Disappearing Act: Earnings, how earnings weakness is starting to materialize across a broader swath of industries, with hits coming from a strong dollar, weaker demand, and aggressive monetary policy.
Additionally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, The End of Earnings Growth?, how the earnings outlook is dimming as the economy slows, which could result in cuts to earnings forecasts and downside for stocks. However, Jeff points out that U.K. earnings have been a surprising outperformer.
Fed hikes 75 bps again, but hints at possibility of slowing in near future
The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, raising the target for the fed funds rate by 75 basis points (bps) to a range of 3.25% to 4.00%, the fourth increase of that magnitude in as many meetings. In its statement, the Committee noted that recent indicators have showed modest growth, job gains remain robust and the unemployment rate continues to be low. However, inflation remains elevated, citing supply and demand imbalances related to the pandemic, as well as higher energy and food prices. The statement also noted that the continued war in Ukraine is creating additional upward pressure on inflation and weighing on economic activity globally. The Committee said that future rate increases will be appropriate to achieve its goals, but in determining the pace of future increases in the target range, it will "take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." The decision was unanimous among Committee members. No updated economic projections were provided at this meeting.
Shortly after the announcement in his customary press conference, Chairman Jerome Powell said that consumer spending growth has slowed, and housing activity has weakened as a result of the rise in interest rates. He also noted that while future rate increases appear to be appropriate, the speed of which has become less important currently, and the time to slow the pace of increases could come as soon as the December or February meetings. However, he noted that the ultimate level of rates will be higher than initially thought, and he reiterated that the notion of a pause any time soon was very premature. Get more insight on the Fed's decision from Schwab's Director of Fixed Income Strategist for the Schwab Center for Financial Research Collin Martin, CFA, later today on our Insights & Education page.
The ADP Employment Change Report showed private sector payrolls rose by 239,000 jobs in October, above the Bloomberg forecast calling for a 185,000 gain, while the prior month's figure was revised lower to a 192,000 gain from the initially reported 208,000 rise. The report, which does not include government hiring and firing, comes ahead of Friday's broader October nonfarm payroll release, expected to show headline employment rose by 196,000 and private sector job growth increased by 200,000 jobs. The unemployment rate is forecasted to tick higher to 3.6% from 3.5% and average hourly earnings are projected to rise 0.3% month-over-month (m/m) and be up 4.7% y/y.
The MBA Mortgage Application Index declined 0.5% last week, following the prior week's drop of 1.7%. The index fell for a sixth-straight week as a 0.2% rise in the Refinance Index was more than offset by a 0.8% decrease for the Purchase Index. The decline came even as the average 30-year mortgage rate declined for the first time in 11 weeks, decreasing 10 basis points (bps) to 7.06%—coming off a two-decade high—but is up 382 bps versus a year ago.
Treasury yields were mixed, as the yield on the 2-year note gained 5 bps to 4.58%, the yield on the 10-year note increased 3 bps to 4.08%, while the 30-year bond rate declined 1 bp to 4.12%.
Elevated bond yields and the U.S. dollar have fostered volatility in the markets, with the Fed leading a global monetary policy tightening charge. Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her article, Markets to Fed: Slow Down, You Move Too Fast, and how, if these trends continue, the Fed may end up slowing its pace of tightening—but not stopping it.
In her latest article, Different Strings… Similar Story, Schwab's Liz Ann Sonders discusses how a lot of attention has been paid to the elevated risk (and announcement) of a recession, but investors should instead focus on signals coming from leading economic indicators.
Tomorrow's economic calendar will be a busy one, beginning with preliminary Q3 nonfarm productivity and unit labor costs, with the former expected to have declined 0.1% quarter-over-quarter (q/q) and the latter to have gained 3.3% q/q, followed by the trade balance for September, forecasted to show the deficit widened to $68.1 billion. A look at the services side of the economy is on tap, courtesy of the ISM Services Index, anticipated to move lower to a level of 56.0 for October from the prior month's 56.7, and the final read on S&P Global U.S. Services PMI, projected to remain at the initial reading of 46.6. Rounding out the docket will be initial jobless claims for the week ended October 29, with economists calling for 222,000 first-time unemployment applications to have been filed, as well as factory orders for September, estimated to have increased 0.3% m/m following August's flat reading.
Europe diverged ahead of expected Fed rate hike
Stocks in Europe were mixed as investors focused on today’s monetary policy decision from the Fed in the U.S., which is expected to deliver a 75-bp rate hike for the fourth time. Any rate increase by the Fed would follow last week's monetary policy decision from the European Central Bank (ECB), which raised its benchmark interest rate by 75 bps for a second time. The euro and British pound nudged lower versus the U.S. dollar and bond yields in the Eurozone and the U.K. dipped. In economic news, Germany's exports unexpectedly declined in September, while the nation's unemployment change rose by a smaller amount than anticipated. S&P Global's Eurozone Manufacturing PMI was revised lower to a larger pace of contraction than initially reported for October.
Schwab's Jeffrey Kleintop notes in his latest article, Revenge of the Markets, how markets can have more sway over policymakers than vice versa, as demonstrated in the U.K. recently, as the U.K. announced a new prime minister last week after its former leader resigned following a failed tax-cutting plan that rocked the financial markets, particularly bonds and currencies. Jeff offers three ideas for what markets may compel other policymakers to do next. Mounting inflation worries have also added to the market uneasiness and pushed the monetary policy tightening on both sides of the pond, while being exacerbated by the persistent energy crisis in the region due to the continued war in Ukraine.
The U.K. FTSE 100 Index and Germany's DAX Index were down 0.6%, France's CAC-40 Index fell 0.8%, and Spain's IBEX 35 Index declined 0.4%, while Italy's FTSE MIB Index was flat, and Switzerland's Swiss Market Index advanced 0.2%.
Asia mixed as markets anticipate Fed rate hike
Stocks in Asia finished mixed, as Hong Kong and Mainland Chinese growth stocks continued to rally amid lingering rumors of a potential end to China’s zero-COVID strategy. The speculation surrounding China’s potential end to its policy sparked a great deal of interest as the country continues to try to stabilize its economy that has been hampered by COVID-induced lockdowns. 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. Markets in Hong Kong were halted early amid a tropical cyclone warning.
The markets braced for today's monetary policy decision out of the U.S., with another 75-bp rate hike likely in the offing, following this week's decision by the Reserve Bank of Australia’s (RBA) to raise interest rates by 25 bps for a second-straight meeting. Economic news was relatively light, with South Korea reporting that its October consumer price inflation rose by a smaller amount than expected m/m, but accelerated compared to the same period a year ago.
Japan's Nikkei 225 Index dipped 0.1%, with the yen gaining ground versus the U.S. dollar but remaining at multi-decade lows. The Hong Kong Hang Seng Index rose 2.4%, and China's Shanghai Composite Index climbed 1.2%. South Korea's Kospi Index and Australia's S&P/ASX 200 Index both ticked 0.1% higher, but India's S&P BSE Sensex 30 Index declined 0.4%.
Tomorrow's international economic calendar will have a slew of services PMI from across the globe, as well as trade data from Australia, as well as employment figures out of Italy, Spain, and the Eurozone.
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