Major stock indexes extended gains and Treasury yields fell as the market baked in lower chances of future Fed rate hikes following yesterday's Fed decision to pause. Apple earnings await after the close, followed by the October jobs report tomorrow expected to show 180,000 new positions.
10-year Treasury yield sinks to two-week lows as investors dial in less chance of future rate hikes
Roku, Palantir shares jump double-digits in premarket trading as investors digest earnings
Apple earnings ahead, followed by Friday’s October jobs report seen adding 180,000 new positions
(Thursday market open) The World Series is over, but Wall Street remains in the thick of this week’s triple play of a Fed meeting, Apple (AAPL) earnings and Friday’s October jobs report. So far, stocks are building up a lead as worries lessen about future Federal Reserve rate hikes.
Investors appeared to like much of what they heard (or didn’t hear) from Fed Chairman Jerome Powell in his press conference yesterday after the Fed left rates on pause for the second consecutive meeting. While things could change as data roll in ahead of the Fed’s mid-December meeting, from what he said the bar appears to be high for another hike. Treasury yields fell as Powell spoke.
“If the economic data to come between now and the next FOMC meeting shows deterioration and/or disinflation persists, the likelihood of the July rate hike being the final hike in this cycle will move higher,” says Liz Ann Sonders, chief investment strategist at Schwab. “However, neither the current labor market nor economic backdrop supports the market-based view that rate cuts could start by the mid-point of next year.”
Technology, communication services and utilities were among the strongest sectors Wednesday as the market extended this week’s string of positive performances. Major U.S. indexes finished Wednesday at one-week highs, and the S&P 500® Index (SPX) flirted with its 200-day simple moving average (SMA) near 4,243 after falling under it in October.
Apple’s earnings later draw attention to the largest U.S. stock as analysts expect the fourth straight quarter of lower year-over-year revenue. Tomorrow’s Nonfarm Payrolls report is expected to show 180,000 jobs created in October.
Yesterday’s quarterly refunding announcement from the Treasury department highlighted a tweak in issuance toward shorter-duration securities in response to recent yield moves. That led to a slight retreat in the 10-year Treasury yield. Weak U.S. manufacturing data and the Fed meeting appeared to add to pressure on yields later in the session and into today.
Weekly Initial jobless Claims of 217,000 topped the Briefing.com consensus of 214,000 and rose from last week, but remain not far above recent nine-month lows. Any early signs of a slowing job market would likely show up in this data set. A sudden sharp rise or a long trend higher are things to monitor, not a specific number.
Fed redux: Powell made clear the Fed could raise rates again and hasn’t achieved its goals, but he also cited progress fighting inflation. He reinforced views on Wall Street that recent rising Treasury yields may be doing some of the Fed’s job to slow the economy, which could imply less need for additional rate hikes.
While Powell warned that jobs and economic growth could possibly soften, there’s been much more resilience than the Fed had expected, he said, possibly because it underestimated how much dry powder households and businesses had on hand following the pandemic.
“We’ve come very far with this rate hiking cycle,” Powell said. “The belief in September was we were close to the end of the cycle. We’re proceeding carefully because we can proceed carefully. Monetary policy is restrictive.”
All this could mean that Powell thinks the Fed’s 525-basis points of rate hikes since early last year are doing their job and that the Fed can afford to be patient because things are trending in the right direction.
Data, including Friday’s jobs report and October inflation numbers due out later this month, could quickly change Wall Street’s sentiment on rates. Progress can be “bumpy,” Powell reminded, and the Federal Open Market Committee (FOMC) hasn’t spent any time discussing possible rate cuts.
Apple ahead: Earnings loom this afternoon for Apple (AAPL), with initial iPhone 15 sales and the company’s China business, services margins, and new chips likely in focus. Apple’s revenue is down year-over-year the past three quarters, and analysts expect quarterly revenue to fall more than 6% from a year ago. Two major investment banks pulled back their Apple stock price forecasts as earnings approached, and Bloomberg reported that iPhone 15 sales in China were slow.
Investors have punished info tech companies that expressed caution this earnings season, so the tone of Apple’s call might influence the sector in days ahead. As a reminder, Apple stopped giving guidance when the pandemic began, making it harder to get under the hood.
Other major companies reporting today include ConocoPhillips (COP), Eli Lilly (LLY), Marriott International (MAR), Shopify (SHOP), and Starbucks (SBUX).
Shares of streaming company Roku (ROKU) jumped 18% in premarket trading after it reported better-than-expected revenue and saw what executives called a “solid rebound” in ads. Two analysts upgraded the stock after its earnings report. Data analytics company Palantir (PLTR) also posted double-digit gains in premarket trading after it shared revenue guidance that surpassed analysts’ estimates.
Payroll predictions: Analysts expect the following numbers from tomorrow’s jobs report, according to Trading Economics:
The breakdown is worth checking. Manufacturing continues to show weakness, and analysts believe that sector lost jobs in October. Also, monitor any revisions to the last few reports. One trend this year is initial high estimates that get revised downward. The FOMC noted in its statement yesterday that jobs growth has “moderated,” but another figure like September’s 336,000 might call that into question. The 12-month average is 267,000, high historically.
Wednesday’s September job openings and October ISM Manufacturing data helped set the table for payrolls, with manufacturing taking an unexpected dip and job openings still elevated.
Judging from the market’s reaction, investors seemed to put more emphasis on the ISM number, with the 10-year Treasury note yield falling below 4.8% yesterday after the report hinted at a slowing economy. October’s ISM of 46.7 was below September’s 49, the 12th-straight reading below the expansion level of 50.
Early today, futures trading pegged chances at 85% of the FOMC holding its benchmark funds rate at the current 5.25% to 5.50% target range following the December 12-13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30-31 meeting are 76%. The market builds in a better than 50% chance of a rate cut by next June.
Talking technicals: “The next key resistance level for the SPX is the 200-day SMA of 4,243,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “A re-test of this level and fail would be a bearish ‘pull back.’ The SPX has been in a well-defined downtrend since the beginning of August, so net-net it’s a bearish take right now.” He sees the next near-term support levels at 4,117 and 4,103, the closing and intraday lows from October 27 where buyers stepped in.
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Halftime show: With earnings season more than 50% complete, it’s time for a checkup. The blended growth rate for Q3 earnings per share (EPS) was 4.3% at the start of the week, with drags from materials, health care and energy. Excluding energy, the blended growth rate was close to 10%, say Liz Ann Sonders and Kevin Gordon, Schwab’s chief investment strategist and senior investment strategist. Still, much of the recent EPS jump reflected earnings from just three large firms: Alphabet (GOOGL), Amazon (AMZN) and Intel (INTC). Without those, blended growth through last week would have been only 2.6%. “Interestingly, alongside the pop higher in Q3 estimates, the opposite was occurring for Q4 estimates, which have fallen to the lowest in a year,” they noted. Get more earnings insights from their most recent posting.
Four-peat? Stocks fell in August, September, and October. That doesn’t mean they can’t fall again this month, but a “four-peat” would be rare. The last time that happened was in 2011, a monster shakedown when the SPX declined every month from May through September amid concerns about European and U.S. debt. Washington, D.C., remains a concern for Wall Street 12 years later, with just over two weeks for Congress to agree on a budget or continuing resolution before funding runs out.
Shutdown fallout: A shutdown could keep bears prowling, as investors might fret about its potential impact on Gross Domestic Product (GDP). Another shutdown-associated worry is the potential impact on U.S. credit, which ratings agencies have downgraded during past government hiccups. Those downgrades often hurt U.S. Treasuries, which move the opposite direction of their yields.
Nov. 3: October Nonfarm Payrolls, October ISM Non-Manufacturing Index, and expected earnings from Cardinal Health (CAH).
Nov. 6: No major earnings or data expected.
Nov. 7: September Consumer Credit and September Trade Balance, and expected earnings from D.R. Horton (DHI), Uber (UBER), Zimmer Biomet (ZBH), eBay (EBAY), and Rivian (RIVN).
Nov. 8: September Wholesale Inventories and expected earnings from Biogen (BIIB) and Walt Disney (DIS).
Nov. 9: Expected earnings from Illumina (ILMN) and Becton Dickinson (BDX).
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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