U.S. stocks soared to begin Q4, bouncing back after last week’s fall that sent the S&P 500 to its lowest levels of the year. The economic calendar kicked off with mixed reports on manufacturing activity from the ISM and S&P Global, with the former hitting a low not seen since May 2020, and the latter being revised higher. In light equity news, shares of Tesla fell after reporting that its Q3 deliveries fell short of expectations. Bond yields declined, and the U.S. dollar also moved lower. The decline in the greenback followed a rise in the British pound that came as the U.K. government reversed its decision to cut taxes for high income earners. Crude oil prices rallied ahead of this week's OPEC meeting, with reports suggesting production cuts may be in the offing, and gold traded to the upside. Asian stocks finished mixed, with markets in mainland China and South Korea closed for holidays, while European stocks traded higher following the U.K.'s tax cut pivot, and despite continued banking sector liquidity concerns.
The Dow Jones Industrial Average soared 765 points (2.7%) to 29,491, the S&P 500 Index climbed 93 points (2.6%) to 3,678, and the Nasdaq Composite advanced 240 points (2.3%) to 10,815. In moderate volume, 4.7 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil rallied $4.14 to $83.63 per barrel. Elsewhere, the gold spot price increased $37.10 to $1,709.10 per ounce, and the Dollar Index decreased 0.4% to 111.71.
Tesla Inc. (TSLA $242) reported that its Q3 deliveries were 343,000, which came in below the FactSet estimate of 364,660 units. The electric vehicle maker said as its production volumes continue to grow, it is becoming increasingly challenging to secure vehicle transportation capacity and at a reasonable cost during these peak logistics weeks. The company added that in Q3, it began transitioning to a more even regional mix of vehicle builds each week, which led to an increase in cars in transit at the end of the quarter. Shares were noticeably lower.
The S&P 500 Index rebounded after dropping six out of the last seven weeks to levels not seen since 2020 with inflation pressures persisting and forcing the Fed to aggressively tighten monetary policy as discussed in the article, Stock Market Volatility: Recession Worries Flare. Meanwhile, as the markets gear up for the start of Q3 earnings season next week, 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.
ISM manufacturing data falls more than expected as week begins
The September Institute for Supply Management (ISM) Manufacturing Index (chart) showed manufacturing growth (a reading above 50) decelerated more than expected and hit the lowest level since May 2020. The index fell to 50.9, versus the consensus Bloomberg estimate of a decrease to 52.0 from August's 52.8 level. The softer-than-expected report came as new orders dropped back into contraction territory, though production growth nudged higher, and inventories accelerated. Employment also fell into contraction territory, and supplier delivery times shortened. Inflation pressures continued to ease, with the Prices Index falling to 51.7 from 52.5.
The ISM said, "The U.S. manufacturing sector continues to expand, but at the lowest rate since the pandemic recovery began. Following four straight months of panelists' companies reporting softening new orders rates, the September index reading reflects companies adjusting to potential future lower demand."
The final September S&P Global U.S. Manufacturing PMI Index was revised higher to 52.0, compared to estimates calling for an unrevised 51.8 level. The index was slightly above August's reading of 51.5, with a reading above 50 denoting expansion. S&P Global's report differs from the ISM as it surveys a more diverse range of companies regarding size.
Construction spending (chart) declined 0.7% month-over-month (m/m) in August, versus projections of a 0.3% decrease and compared to July's negatively revised 0.6% drop. Residential spending fell 1.0% m/m, while non-residential spending declined 0.4%.
Treasury yields were lower, as the yield on the 2-year note declined 8 basis points (bps) to 4.12%, the yield on the 10-year note fell 14 bps to 3.65%, and the 30-year bond rate decreased 7 bps to 3.69%.
Bond yields and the U.S. dollar are pulling back after being bolstered as of late by the Fed's aggressive monetary policy actions as discussed by Schwab's Chief Fixed Income Strategist Kathy Jones in her article, With Inflation Offsides, the Fed Keeps Hiking. The Fed has hiked rates by 75 bps for three-straight meetings, downgraded economic growth forecasts, and increased unemployment rate outlook, as inflation remains the Central Bank's primary concern. Kathy also provides analysis of the greenback in her commentary, The Strong Dollar: Can It Continue? You can follow Kathy on Twitter: @KathyJones.
Tomorrow's economic calendar will introduce factory orders, expected to be unchanged during August. Additionally, we will get August’s final read on durable goods orders and durable goods ex transportation, expected to remain at the preliminarily reported levels of a 0.2% decline and a 0.2% rise, respectively. As well, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—will also be released. In labor data, the Job Openings and Labor Turnover Survey (JOLTS) for August is forecasted to decrease to 11,088,000 from the prior month’s 11,239,000 read.
Europe higher as markets reacted to U.K. tax cut reversal and banking worries
Stocks in Europe traded higher as the markets digested today's announcement that the U.K. will reverse its decision to cut taxes for the highest income tax bracket. The announcement of the tax cuts last week caused U.K. bond yields to spike and the British pound to fall to an all-time low versus the U.S. dollar, forcing the Bank of England to announce plans to buy long-term bonds. The pound traded higher versus the U.S. dollar today, and the euro traded slightly to the upside. Bond yields in the Eurozone and the U.K. moved solidly to the downside. The global markets continued to wrestle with recent monetary policy tightening actions from central banks on both sides of the pond that has caused bond yields and the U.S. dollar to rise noticeably. The inflation picture remains worrisome and has forced the central bank actions, exacerbated by an ensuing energy crisis in the region due to the ongoing war in Ukraine. Further complicating the energy crisis, last 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. Additionally, some uneasiness stemmed from ongoing liquidity concerns toward Credit Suisse Group AG (CS $4) after its Chief Executive Officer offered comments to try to calm market fears about its capital position. Liquidity worries have risen recently in the form of a surge in the cost to insure the cost of the company's bonds again default. In economic news, the S&P Global Eurozone Manufacturing PMI for September was revised to a larger pace of contraction than initially reported, along with the U.K. Manufacturing PMI.
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.
The U.K. FTSE 100 Index and Switzerland's Swiss Market Index traded 0.2% higher, France's CAC-40 Index was up 0.6%, Germany's DAX Index advanced 0.8%, Spain's IBEX 35 Index gained 1.3%, and Italy's FTSE MIB Index rose 1.6%.
Asia mixed to begin the week
Stocks in Asia finished mixed as the new week, month and quarter began. The global markets continue to grapple with the recent sharp rise in the U.S. dollar, which has weighed on the Japanese yen and China's currency. Moreover, bond yields around the globe have moved solidly higher to exacerbate sentiment and concerns about a global recession. The tightening world financial conditions have come as central banks in North America, the Eurozone, and the U.K. have moved to make monetary policies restrictive to fight persisting inflation pressures. 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. Later this week, the Reserve Bank of Australia is set to announce its monetary policy decision and is expected to hike rates by 50 bps, while late last week, the Reserve Bank of India raised its benchmark interest rate by 50 bps. In economic news in the region, Japan's Q3 Tankan survey of manufacturing sentiment showed an unexpected deterioration, and South Korean export growth slowed more than expected.
Japan's Nikkei 225 Index rose 1.1%, with the yen softening versus 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 declined 0.3%, the Hong Kong Hang Seng Index decreased 0.8%, and India's S&P BSE Sensex 30 fell 1.1%. Volume was lighter than usual as markets in mainland China and South Korea were closed for holidays.
Tomorrow’s international economic calendar will introduce several noticeable reports, including inflation data out of the Eurozone, and the Reserve Bank of Australia’s monetary policy decision. Additionally, we will get Tokyo CPI data out of Japan and manufacturing PMI out of South Korea.
