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U.S. equities ended the day lower in a choppy trading session, adding to yesterday's selloff that brought the major indices back to their lowest levels of the year. The markets dealt with a volatile week that closed out Q3 with a third-straight weekly loss. Investors sifted through a host of economic data that showed personal income matched expectations, and spending doubled forecasts, but inflation readings came in a bit hotter than expected. Meanwhile, manufacturing activity in the Chicago region tumbled, and consumer sentiment was revised lower. Treasury yields were higher, while the U.S. dollar was slightly lower. As well, crude oil prices declined, and gold prices were little changed. In equity news, NIKE bested the Street's forecasts but said gross margins will be squeezed amid a swell in inventories, while Micron Technology beat earnings estimates but offered a dismal outlook. Shares of Carnival Corporation fell sharply after posting a larger net loss than estimated and offering disappointing Q4 guidance. Asia finished mixed and Europe traded higher in the wake of yesterday's global selloff.
The Dow Jones Industrial Average decreased 500 points (1.7%) to 28,726, the S&P 500 Index fell 55 points (1.5%) to 3,586, and the Nasdaq Composite went down 162 points (1.5%) to 10,576. In moderate volume, 5.4 billion shares of NYSE-listed stocks were traded, and 4.5 billion shares also changed hands on the Nasdaq. WTI crude oil lost $1.74 to $79.49 per barrel. Elsewhere, the gold spot price was unchanged at $1,668.60 per ounce, and the Dollar Index declined 0.1% to 112.18. Markets ended lower for the week, as the DJIA and S&P 500 dropped 2.9%, and the Nasdaq Composite declined 2.7%.
Dow member NIKE Inc. (NKE $83) reported fiscal Q1 earnings-per-share (EPS) of $0.93, a penny ahead of the FactSet estimate, with revenues rising 3.6% year-over-year (y/y) to $12.7 billion, north of the Street's forecast of $12.3 billion. NKE said sales in North America, its largest market, grew 13% y/y, while receipts in China were down 16% y/y due to disruption surrounding the continued COVID-induced lockdowns in the nation. However, the footwear and apparel maker said delivery times and consumer demand rose this year, and as a result retailers responded earlier than usual, leading to an increase in inventories. As such, NKE said it will need to accelerate its promotional activity to clear inventory, which along with an expected increase in freight and logistics costs and foreign exchange impacts, it sees lower gross margins going forward. Shares fell over 10%.
Micron Technology Incorporated (MU $50) posted adjusted fiscal Q4 EPS of $1.45, above the forecasted $1.37, with revenues falling 19.7% y/y to $6.64 billion, just shy of the projected $6.73 billion. The chipmaker warned of tough times ahead, as it said it will reduce capital expenditures, with investments in fiscal 2023 expected to be around $8 billion, down over 30% from a year ago, according to the company's President and CEO. For fiscal Q1, MU said it sees revenues of $4.25 billion, well below the $5.62 billion estimate, and EPS to be $0.04, plus-or-minus $0.10, far short of the $0.64 Street consensus. MU traded slightly higher.
Carnival Corporation (CCL $7) announced an adjusted Q3 net loss of $688.0 million, noticeably wider than the estimated $102.1 million loss, as revenues rose 80% quarter-over-quarter (q/q) to $4.31 billion, south of the forecasted $4.90 billion. The cruise operator company noted that a portion of its fleet being in pause status for part of the year, the cost of maintaining enhanced health safety protocols, and the impacts of inflation and supply chain disruptions offset its improvements in adjusted cruise costs. CCL stated, “Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels.” Given the seasonality of its business, the company expects a net loss for Q4. Shares fell over 20%.
The S&P 500 Index tumbled this week, dropping to levels not seen since 2020. The moves have given investors new reasons to worry about the triple threat of inflation, surging interest rates, and recession, as discussed in the Schwab Center for Financial Research's latest article, Stock Market Volatility: Recession Worries Flare. Meanwhile, as the markets gear up for the start of Q3 earnings season in a couple weeks, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.
Personal income/spending upbeat, inflation hotter than expected, Chicago PMI tumbles
Personal income (chart) rose 0.3% month-over-month (m/m) in August, matching the Bloomberg consensus forecast and July's upwardly revised increase. Personal spending increased 0.4%, double the Street's expectations, and compared to the prior month's downwardly adjusted 0.2% decline. The August savings rate as a percentage of disposable income was 3.5%, matching July's downwardly revised rate.
The PCE Deflator rose 0.3% m/m, versus expectations of a 0.1% rise, and following July's unadjusted 0.1% dip. Compared to last year, the deflator was 6.2% higher, above estimates of a 6.0% gain, and compared to the prior month's upwardly adjusted 6.4% rise. Excluding food and energy, the PCE Core Price Index rose 0.6% m/m, north of expectations of a 0.5% increase and versus July's downwardly adjusted flat reading. The index was 4.9% higher y/y, compared to estimates of a 4.7% increase after July's positively revised 4.7% rise.
The Chicago PMI declined during September, falling into contraction territory (a reading below 50). The index fell to 45.7 from 52.2 in August—the lowest since June 2020—versus forecasts of a slight decline to 51.8. The larger-than-expected fall came as new orders contracted at a faster pace, while production and employment both moved back into contraction territory. Prices paid rose at a slower pace but remained elevated, and supplier deliveries moved further into expansion territory.
The final University of Michigan Consumer Sentiment Index (chart) for September was revised lower to 58.6, from the preliminary 59.5 figure, where it was expected to remain. The downward revision came as the current conditions component of the survey was revised modestly higher from the preliminary estimate, while the expectations component of the survey was surprisingly revised lower. The 1-year inflation forecast was adjusted higher to 4.7% from the preliminary estimate of 4.6%, where it was expected to remain, and down from August's 4.8% rate. The 5-10 year inflation forecast was revised slightly lower to 2.7%, from the preliminary read of 2.8%, where it was expected to remain, and below August's 2.9% rate.
Treasury yields were higher, as the yield on the 2-year note rose 6 basis points (bps) to 4.23%, and the yields on the 10-year note and the 30-year bond rate gained 7 bps to 3.82% and 3.77%, respectively.
Bond yields and the U.S. dollar have been elevated as of late, bolstered by the Fed hiking rates by 75 bps for a third-straight meeting last week. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the Fed's decision in her latest article, With Inflation Offsides, the Fed Keeps Hiking, which included downgraded economic growth forecasts and an increased unemployment rate outlook, as inflation remains the Central Bank's primary concern. She also provides analysis of the greenback in her commentary, The Strong Dollar: Can It Continue? You can follow Kathy on Twitter: @KathyJones.
Europe traded higher after yesterday's tumble
Stocks in Europe traded higher as the markets bounced back from the recent global selloff. Investors continued to digest Wednesday's announcement from the Bank of England (BoE) that it will buy long-term bonds in an attempt to try to stabilize its financial markets. The weakness in the currency markets on this side of the pond remained a concern, as the British pound was mostly unchanged versus the U.S. dollar, remaining near multi-decade lows, and as the euro declined versus the greenback. After a recent spike in bond yields in the region, rates in the Eurozone and the U.K. fell.
The inflation picture remains troublesome, as consumer prices in the Eurozone hit a new record high of 10% y/y in September, up from the 9.1% y/y rise posted last month and above the 9.7% estimate. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios. You can follow Jeff on Twitter: @JeffreyKleintop. Elsewhere, Q2 GDP in the U.K. surprisingly expanded both on a m/m and y/y basis. The energy crisis in the region persists, as earlier this week the Nord Stream pipeline system—which transports Russian gas throughout the region—suffered damage that has led to several gas leaks in the Baltic Sea. The damage has solidified concerns that Europe may have to survive the winter without significant Russian gas flows, prompting an emergency meeting between European Union (EU) leaders that ended with an agreement to address high electricity prices.
The U.K. FTSE 100 Index was up 0.2%, France's CAC-40 Index and Italy's FTSE MIB Index climbed 1.5%, Germany's DAX Index gained 1.2%, Spain's IBEX 35 Index increased 0.9%, and Switzerland's Swiss Market Index rose 1.4%.
Asia mixed following U.S. market losses
Stocks in Asia finished mixed in the wake of yesterday's selloff on Wall Street, with tech stocks leading to the downside. Focus continued to be on the currency markets amid the sharp rise in the U.S. dollar, which has weighed on the Japanese yen and China's currency. Central banks in North America, the Eurozone, and the U.K. have moved to make monetary policies restrictive to fight persisting inflation pressures. The actions have been led by the ultra-aggressive measures out of the U.S., boosting the U.S. dollar's rally to fresh multi-decade highs. Adding further downside pressure on currencies in Japan and China, the Bank of Japan and China's central bank have bucked the trend, as China even loosened policy to try to boost the world's second-largest economy that has also been hampered by the impact of COVID-related lockdowns, regulatory crackdowns, real estate issues, and elevated geopolitical tensions with the U.S. 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 economic news in the region, China's official manufacturing PMI unexpectedly grew for this month, while a measure reported by Caixin showed activity contracted, and the services PMI slowed more than expected. Industrial production in South Korea declined more than forecasts, with chip output falling for the first time in over four years. In central bank action, the Reserve Bank of India upped its benchmark interest rate by 50 bps, which was widely expected.
Japan's Nikkei 225 Index lost 1.8%, with the yen gaining modest ground on the U.S. dollar. The yen remains near multi-decade lows versus the greenback given the divergence of monetary policies. Australia's S&P/ASX 200 Index fell 1.2%, South Korea's Kospi Index moved 0.7% lower, and China's Shanghai Composite Index declined 0.6%. However, the Hong Kong Hang Seng Index increased 0.3%, and India's S&P BSE Sensex 30 jumped 1.8%.
Markets close out Q3 with another week of losses
The U.S. equity markets posted a third-straight week of losses, with a solid mid-week rally unable to provide any sustenance for the bulls. The Dow fell into bear territory, and the S&P 500 tumbled to levels not seen since 2020, while the continued malaise in Tech stocks pushed the Nasdaq past a 30% year-to-date loss. The moves came amid continued angst surrounding the aggressive paths of monetary policy across the globe in an effort to tamp down persistent inflation pressures. However, volatility was the key word for the week, particularly in the currency and bond markets, amplified by a mid-week announcement from the Bank of England (BoE) that it will buy long-term bonds to try to stabilize its financial markets. Bloomberg noted that the BoE took the actions after warnings from investment banks and fund managers of the stress caused by the dramatic moves in the bond and currency markets, as the British pound and the euro have dropped sharply this year, with the former hitting near 40-year lows, and bond yields in the region have surged. As a result, Treasury yields soared, particularly on the short end of the yield curve, and the U.S. dollar continued to rally. Economic news was mixed for the week, with the continued decline in mortgage applications and a dip in pending home sales taking the luster of an upbeat new home sales report. Meanwhile, crude oil prices saw a modest rise, boosted in part by Hurricane Ian making landfall on Florida, and gold saw choppy trading for the week.
Next week's economic calendar will have a number of data points from the labor front that will likely garner heightened attention, and how it may play into how aggressive the Fed will remain in its rate hike campaign. The ADP Employment Change report will be joined by the Job Openings & Labor Turnover report, as well as the weekly look at initial jobless claims to precede the highly anticipated September labor report. A look at both sides of the economy are also in store, with manufacturing and services reads coming from the ISM and S&P Global. Other reports of note include factory orders, wholesale inventories, and consumer credit.
The international calendar next week will also bring a host of manufacturing and services PMIs from across the globe. Other reports worth a mention include: Australia—the Reserve Bank of Australia's monetary policy decision. Japan—Q3 Tankan Survey of manufacturing sentiment, and the Leading Index. Eurozone—PPI and retail sales, along with German trade data, retail sales and industrial production.
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