U.S. stocks are falling sharply, giving up yesterday's rally. The markets continue to contend with the ultimate impacts of aggressive monetary policy tightening globally. Earnings reports disappointed, as Micron Technology and CarMax both missed earnings estimates and lowered their guidance. A host of economic reports were released, as jobless claims came in below estimates, while Q3 GDP and Personal Consumption were revised higher. Additionally, the Leading Economic Index declined more than anticipated, and manufacturing activity in the Kansas City region fell further into contraction territory. Treasury yields are mixed, and the U.S. dollar is ticking higher, while crude oil and gold prices are declining. Asian stocks finished mixed and markets in Europe ended the day lower as the international markets continued to digest recent central bank actions.
At 12:50 p.m. ET, the Dow Jones Industrial Average is down 2.0%, the S&P 500 Index is falling 2.5%, and the Nasdaq Composite is dropping 3.3%. WTI crude oil is losing $0.97 to $77.32 per barrel, and Brent crude oil is dipping $0.51 at $82.07 per barrel. The gold spot price is trading $24.30 lower to $1,801.10 per ounce, and the Dollar Index is advancing 0.4% to 104.52.
Micron Technology Inc. (MU $49) reported an adjusted fiscal Q1 loss of $0.04 per share, compared to the FactSet estimate of a $0.02 per share shortfall, as revenues fell 46.8% year-over-year (y/y) to $4.09 billion, versus the Street's forecast of $4.13 billion. The chip company cited challenging conditions but said its strong technology, manufacturing and financial position put it on solid footing to navigate the near-term environment, and it is taking decisive actions to cut its supply and expenses. MU added that it expects improving customer inventories to enable higher revenue in the fiscal second half, and to deliver strong profitability once it gets past this downturn. The company issued Q2 guidance that was below expectations. Shares of MU are declining.
CarMax Inc. (KMX $55) posted Q3 earnings-per-share of $0.24, well below the expected $0.65, with revenues falling 23.7% y/y to $6.51 billion, south of the forecasted $7.16 billion. The company said combined retail and wholesale used vehicle sales were down 28.0% from the same period a year ago. KMX lowered its capital expenditure outlook and paused its share repurchase program, given its Q3 performance and continued market uncertainties. Shares are falling.
The equity markets remain choppy amid uncertainty regarding the economic impact of aggressive monetary policy tightening from the Fed. This has caused recession worries and volatility in the markets to ramp up. The Schwab Center for Financial Research discusses the recent volatility in the latest article, Stock Market Volatility: Fed Concerns to the Fore. Additionally, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, U.S. Outlook: How Many More Times, Fed?, how Powell, among other Fed officials, has seemingly shifted his attention from the rear-view mirror to the windshield. She points out how inflation is a lagging indicator, but the impact of monetary policy changes is in the future.
Jobless claims, regional manufacturing data, and Leading Index declined, Q3 GDP revised higher
Weekly initial jobless claims (chart) came in at a level of 216,000 for the week ended December 17, below the consensus Bloomberg estimate of 222,000 and compared to the prior week's upwardly revised 214,000 level. The four-week moving average declined by 6,250 to 221,750, and continuing claims for the week ended December 10 declined by 6,000 to 1,672,000, just south of estimates calling for 1,675,000. The four-week moving average of continuing claims rose by 30,250 to 1,657,250.
The final look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 3.2%, upwardly revised from the second release's 2.9% gain and versus estimates of an unchanged adjustment. Q2's figure was unadjusted at a 0.6% contraction. Personal consumption was revised higher to a 2.3% rise for Q3 from the previous estimate of a 1.7% gain and versus expectations to be unrevised. Q2 consumption was unadjusted at a 2.0% rise.
On inflation, the GDP Price Index was revised upward to a 4.4% gain, versus estimates the be unrevised at a 4.3% increase, and the core PCE Index, which excludes food and energy, was adjusted higher to a 4.7% advance compared to expectations of an unadjusted 4.6% gain.
The Conference Board's Leading Economic Index (LEI) for November went down 1.0% m/m, far more than estimates calling for a 0.4% decline, and compared to October’s negatively revised 0.9% fall. The index recorded its ninth consecutive monthly loss.
The Conference Board noted in its report, “Only stock prices contributed positively to the US LEI in November. Labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth. Interest rate spread and manufacturing new orders components were essentially unchanged in November, confirming a lack of economic growth momentum in the near term.”
The December Kansas City Fed Manufacturing Activity Index fell further into contraction territory (a reading below zero). The index dropped to -13 from November’s -10 reading.
Treasury rates are mixed, as the yield on the 2-year note is rising 2 basis points (bps) to 4.24%, while the yields on the 10-year note and 30-year bond are declining 2 bps to 3.66% and 3.73%, respectively.
The markets continue to digest last week's monetary policy decision from the Fed, which delivered a 50-bp rate hike, a deceleration from the previous string of 75-bp rate hikes. Schwab's Liz Ann Sonders discusses the decision in her commentary, Listen to the (More Hawkish Fed) Music, where she notes how while progress has been made on inflation, Fed Chair Powell noted it is too early to declare victory.
Although coming well off highs, Treasury yields and the U.S. dollar remain higher for the year amid this backdrop and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years.
Europe lower as markets remain jittery
European stocks declined following yesterday's solid gains, as the markets continued to grapple with aggressive monetary policy tightening from the Fed, European Central Bank (ECB), Bank of England (BoE), and Swiss National Bank. The moves by the Fed and ECB were less aggressive than their recent 75-bp rate increases, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Central Banks Stepping Down, how central banks seem to be stepping down from aggressive rate hikes, and this could lead to a year-end "Santa Pause" rally for stocks. Also, this week's surprising action from the Bank of Japan to tweak its bond yield target continues to be digested and foster volatility in the currency and bond markets globally.
In economic news, U.K. Q3 GDP was revised to a slightly larger contraction than initially estimated and solidifying the first decline since Q1 of 2021. The euro and British pound were lower versus the U.S. dollar, while bond yields in the Eurozone and the U.K. gained ground.
The U.K. FTSE 100 Index and Spain's IBEX 35 Index lost 0.4%, France's CAC-40 Index declined 1.0%, Germany's DAX Index fell 1.3%, Italy's FTSE MIB Index decreased 1.2%, and Switzerland's Swiss Market Index traded 0.7% lower.
Asia mixed while Hong Kong markets rally
Stocks in Asia finished mixed as markets in the region continued to react to this week's Bank of Japan (BoJ) decision to widen its cap on the 10-year Japanese Government Bond yields, in a move intended to improve market functioning while maintaining accommodative financial conditions. This action has sparked global volatility in the currency and bond markets, and comes after a host of monetary policy tightening measures across the globe. As a result, the yen has maintained its strength versus the U.S. dollar. Hong Kong markets led the way, rallying amid strength in property and technology issues, while yesterday's strong advance in the U.S. seemed to provide a positive lead in. However, mainland Chinese equities dipped as the markets remained jittery as COVID cases continue to rise in China, dampening optimism regarding progress on a reopening. In his latest article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening. In light economic news in the region, Japan's October leading indicators were revised lower but slightly improved from September's level.
Japan's Nikkei 225 Index rose 0.5%, and China's Shanghai Composite Index declined 0.5%. The Hong Kong Hang Seng Index rallied 2.7%, Australia's S&P/ASX 200 Index gained 0.5%, South Korea's Kospi Index traded 1.2% higher, and India's S&P BSE Sensex 30 Index declined 0.4%.
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