U.S. stocks are rising in pre-market action in the first trading session of the week following the long holiday weekend. The markets are reacting to a host of economic data that was released, as home prices decreased on a seasonally adjusted basis, the trade deficit narrowed much more than expected, and wholesale inventories increased. After the opening bell, we will get a report on Dallas’ manufacturing activity. Equity news is light following the long holiday as shares of Southwest Airlines are declining after the U.S. Department of Transportation said that it would examine the mass flight cancellations and delays. Treasury yields are rising, and the U.S. dollar is mostly unchanged, while crude oil and gold prices are gaining ground. Asian equities increased, led by mainland Chinese stocks, after the Chinese government announced that it would put an end to quarantine restrictions for inbound travelers effective early January. Markets in Europe are also advancing following improved market sentiment amid this news.
As of 9:04 a.m. ET, the March S&P 500 Index future is 23 points above fair value, the Nasdaq Index future is 41 points north of fair value, and the DJIA future is 188 points ahead of fair value. WTI crude oil is increasing $0.18 to $79.74 per barrel, and Brent crude oil is gaining $0.19 to $84.69 per barrel. The gold spot price is rising $10.90 to $1,815.10 per ounce. Elsewhere, the Dollar Index is mostly unchanged at 104.27.
Shares of Southwest Airlines Company (LUV $36) are declining after the U.S. Department of Transportation (USDOT) said that it would examine mass flight cancellations and delays by the airline. This came amid a powerful winter storm that resulted in airlines cancelling thousands of flights over the three-day holiday weekend. The Transportation Department stated that they are “concerned by Southwest's unacceptable rate of cancellations and delays and reports of lack of prompt customer service. The Department will examine whether cancellations were controllable and if Southwest is complying with its customer service plan.”
The equity markets have been volatile as of late, with the S&P 500 and the Nasdaq posting a third-straight week of losses. The uncertainty comes amid worries over the economic impact of aggressive monetary policy tightening from the Fed, which has caused recession worries and volatility in the markets to ratchet higher. 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.
Home prices decreased, trade deficit narrowed, wholesale inventories increased
The 20-city composite S&P CoreLogic Case-Shiller Home Price Index for October showed an 8.6% year-over-year (y/y) gain in home prices, above the Bloomberg consensus estimate of an 8.2% rise, and versus the prior month's unrevised 10.4% increase. Home prices were down 0.5% month-over-month (m/m) on a seasonally adjusted basis, compared to forecasts calling for a 1.1% decline, and versus the prior month's negatively revised 1.3% decrease.
A preliminary look at the advance goods trade balance for November showed that trade deficit narrowed much more than expected to $83.35 billion, versus forecasts calling for it to shrink slightly to $96.90 billion from October's unrevised $98.80 billion deficit.
Preliminary wholesale inventories rose 1.0% m/m for November, above the expected 0.4% gain, and versus October’s downwardly revised 0.6% increase.
Treasury rates are higher, as the yield on the 2-year note is up 6 basis points (bps) to 4.37%, the yield on the 10-year note is gaining 7 bps to 3.82%, and the 30-year bond rate is rising 10 bps to 3.91%.
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.
Later this morning, the economic calendar will bring the release of the Dallas Fed Manufacturing Index for December.
Europe higher in a quiet session amid upbeat news out of Asia
Stocks in Europe are rising in afternoon action after the Christmas holiday, as markets in the region are getting a boost from news out of Asia. Market sentiment seems to be improving after the Chinese government announced overnight that it will end quarantine restrictions for inbound travelers starting in early January. Despite the upbeat news, European markets are trading in a quiet session as the economic calendar in the region is void of any notable releases.
However, the markets continue to grapple with the recent aggressive monetary policy tightening with moves from the European Central Bank (ECB), the Bank of England (BoE), and Swiss National Bank following in the footsteps of the Fed in the U.S. The moves by the Fed and ECB were milder than the 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. The euro is slightly lower versus the U.S. dollar, while bond yields in the Eurozone are losing ground.
Spain's IBEX 35 Index is up 0.4%, France's CAC-40 Index is rising 1.1%, Italy's FTSE MIB Index is gaining 0.3%, Germany's DAX Index is increasing 0.8%, and Switzerland's Swiss Market Index is advancing 0.7%. Markets in the U.K. are closed for the Christmas holiday.
Asia higher as China continues to dismantle zero-COVID policy
Stocks in Asia ended the day higher after China officially announced overnight that it will end quarantine for inbound travelers on January 8. This move symbolizes an end to its zero-COVID policy, which the Chinese government has held for nearly three years. Mainland Chinese equities gained solid ground due to the loosening quarantine restrictions, despite a continued climb in COVID cases in the country, which has dampened optimism regarding progress on a smooth 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.
Additionally, a host of Japanese economic data was released. Core CPI in the island nation increased more than expected y/y, while retail sales declined much more than anticipated versus a year prior, and core retail sales went up versus the prior month’s decline. As well, Japan’s unemployment rate dipped slightly as predicted, while housing starts unexpectedly fell y/y. The reports put more focus on the Bank of Japan (BoJ) after last week's decision by the central bank to widen the cap on the 10-year Japanese Government Bond yields, in a move intended to improve market functioning while maintaining accommodative financial conditions. This action sparked global volatility in the currency and bond markets and comes after a host of monetary policy tightening measures across the globe. BoJ Governor Kuroda maintains that this yield target policy tweak is not a step towards an exit with regards to its monetary easing strategy. In other economic news, South Korea’s consumer confidence went up in December, and China’s industrial profit declined 3.6% year-to-date in November.
Japan's Nikkei 225 Index increased 0.2%, with the yen pulling back from recent strength versus the U.S. dollar that has come following the BoJ's actions. Elsewhere, China's Shanghai Composite Index rose 1.0%, South Korea's Kospi Index gained 0.7%, and India's S&P BSE Sensex 30 Index traded 0.7% higher. Markets in Hong Kong and Australia were closed for holidays.
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