U.S. stocks declined, trimming a strong start to 2023, as investors prepared for a busy week full of earnings data, economic reports, and monetary policy decisions. The Fed is expected to raise rates by a decelerated 25-bp rate hike later this week, and the European Central Bank and Bank of England are anticipated to increase their benchmark rates by 50 bps. Equity news was light to begin the week, and the economic calendar was quiet today before heating up, with the most notable report being the Dallas Fed Manufacturing Index, which improved but remained in contraction territory. Treasury yields were higher, and the U.S. dollar increased, while crude oil prices fell, and gold declined. Asian stocks were mixed as China returned to action following the week-long Lunar New Year holiday break, and markets in Europe also diverged amid some caution ahead of the data and monetary policy decisions.
The Dow Jones Industrial Average decreased 261 points (0.8%) to 33,717, the S&P 500 Index fell 53 points (1.3%) to 4,018, and the Nasdaq Composite tumbled 228 points (2.0%) to 11,394. In moderate volume, 3.7 billion shares of NYSE-listed stocks were traded, and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.78 to $79.68 per barrel. Elsewhere, the gold spot price declined $7.60 to $1,921.80 per ounce, and the Dollar Index increased 0.3% to 102.27.
Equity news was light to begin the week that will see Q4 earnings season shift into a higher gear, courtesy of results from mega-cap stocks such as Dow member Apple Inc. (AAPL $143), Google's parent Alphabet Inc. (GOOGL $97), and Amazon (AMZN $101). Out of the 145 S&P 500 companies that have reported thus far, about 51% have topped revenue forecasts, and 69% have exceeded earnings forecasts, per data compiled by Bloomberg. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Helpless? Recession Risks Abound, how leading indicators continue to point toward further economic weakness, making it difficult and premature to determine whether the labor market can maintain its relative strength. You can follow Liz Ann on Twitter: @LizAnnSonders.
With the February 1 monetary policy decision approaching, the Fed is expected to continue to downshift to a 25-basis point (bp) rate hike after following up four 75-bp rate increases with a 50-bp rise in December. However, the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.
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Treasury yields rose as heavy week of earnings and economic data looms
Treasury rates were higher, as the yield on the 2-year note was up 5 bps to 4.26%, while the yields on the 10-year note and the 30-year bond increased 2 bps to 3.54% and 3.65%, respectively.
Bond yields have seen heightened volatility lately but remain solidly higher over the past 12 months as the markets react to aggressive Fed monetary policy actions. 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. You can follow Kathy on Twitter: @KathyJones.
The Dallas Fed Manufacturing Index improved more than expected but remained in contraction territory—a reading below zero—for January. The index rose to -8.4 from the negatively revised -20.0 in December, and compared to the Bloomberg consensus estimate calling for an increase to -15.0. Production and capacity utilization both jumped, while new orders improved but remained in negative territory. Employment growth accelerated but prices paid for raw materials increased and prices received for finished goods decelerated slightly.
Tomorrow’s economic calendar will come in heavy, with a report on the Q4 Employment Cost Index, which is expected to increase 1.1% versus the previous quarter’s 1.2% gain, and the Conference Board's January Consumer Confidence Index, forecasted to rise to 109.0 from December's 108.3 reading. Additionally, we will get a read on the S&P CoreLogic Case-Shiller Home Price Index, with home prices in the 20-city composite estimated to decline to a 6.8% y/y growth rate versus the prior report’s 8.6% rise, and be down 0.6% on a seasonally-adjusted month-over-month basis. More manufacturing data will be released, courtesy of the Chicago PMI for January, which is expected to remain at the previous month’s 45.1 figure. A reading below 50 denotes a contraction in manufacturing activity.
European stocks mixed following data
Stocks in Europe were mixed as the markets digested some lackluster economic data in the region, while appearing cautious ahead of this week's monetary policy decisions from the Fed in the U.S., the Bank of England (BoE) and the European Central Bank (ECB). A 25-bp rate increase is expected out of the U.S., though the ECB and BoE are forecasted to raise their benchmark rates by 50 bps. Spain's January preliminary consumer price inflation unexpectedly accelerated year-over-year, Germany's preliminary Q4 GDP growth surprisingly contracted quarter-over-quarter, but Eurozone economic confidence for January unexpectedly improved.
European markets have experienced a strong start to 2023, as stocks have been buoyed by signs that warmer-than-expected winter weather may help the region avoid an energy crisis, as well as China’s reopening, and expectations that global central bank aggressive tightening may cool off. These positive developments have countered uncertainty regarding the ultimate implications of aggressive monetary policy tightening around the world on the global economy and financial conditions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Go With the Flow, how volatility waves and changing-news tides elicit short-term market moves; economic currents tend to affect longer-term market shifts which may now favor international stocks. You can follow Jeff on Twitter: @JeffreyKleintop. The euro was unchanged versus the U.S. dollar, and the British pound declined slightly, while bond yields in the Eurozone and the U.K. were higher.
The U.K. FTSE 100 Index was up 0.3%, and Switzerland's Swiss Market Index gained 0.4%, while France's CAC-40 Index and Germany's DAX Index decreased 0.2%, Spain's IBEX 35 Index declined 0.1%, and Italy's FTSE MIB Index traded 0.4% lower.
Asia begins the week mixed
Stocks in Asia finished mixed, with mainland Chinese markets ticking higher in a return to action following the week-long Lunar New Year holiday break. Investors treaded cautiously ahead of this week's monetary policy decisions out of the U.S., the Eurozone, and the U.K. Aggressive monetary policy tightening has caused volatility in the currency and bond markets but most markets in the region have seen solid year-to-date gains, led by the Hong Kong markets, aided by China’s reopening, the potential for eased regulatory crackdowns on the Technology sector, and expectations that central banks across the globe, including the Fed in the U.S., may be set to slow down monetary policy tightening.
Optimism of China’s reopening has countered uncertainty regarding the ultimate impact of the aggressive monetary policy tightening from most central banks around the world. In his 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.
Japan's Nikkei 225 Index gained 0.2%, with the yen holding onto gains versus the U.S. dollar. China's Shanghai Composite Index ticked 0.1% higher, though the Hong Kong Hang Seng Index fell 2.7% with technology and property-related issues leading the way. South Korea's Kospi Index declined 1.4%, Australia's S&P/ASX 200 Index decreased 0.2%, and India's S&P BSE Sensex 30 Index rose 0.3%.
Tomorrow’s international economic calendar will be busy, with reports of note including China’s industrial profits, and manufacturing and services PMI, as well as Japan’s industrial production, unemployment rate, retail sales, and household confidence. Additionally, we will get reads on Australia’s retail sales, and South Korea’s industrial production and retail sales. Out of Europe, the Eurozone will release GDP figures, while Germany will provide data on its CPI, Import Price Index, retail sales, and unemployment rate. To round out the docket, we will get the U.K.’s consumer credit, Italy’s unemployment rate and GDP, along with France’s consumer spending, Q4 GDP, CPI, and PPI.
