Stocks Sag, Bonds Flag After Fed-Fueled Whiplash Thursday Sell-Off, with Tomorrow's Jobs Report Now in Focus

(Thursday Market Open) Yesterday’s whiplash sell-off after Federal Reserve Chairman Jerome Powell’s hawkish rate decision comments apparently kept many investors on the sidelines this morning. Major indexes fell in premarket trading.

Powell indicated the central bank had no plans to pause tightening after yesterday’s record-setting fourth 75-basis-point rate hike in a row, though he did indicate that the size of future hikes could be smaller. The Fed’s benchmark rate now sits between 3.75% and 4%, the highest level in more than 15 years as the central bank presses even harder in its fight against stubborn inflation.

After yesterday’s disappointing finish, the only things up this morning are investments bulls would prefer going down—specifically, Treasury yields. The U.S. 10-year Treasury yield (TNX) jumped a huge 13 basis points this morning to 4.18%, near recent 14-year highs. The 2-year yield climbed even more, to 4.7%. Also up this morning are borrowing costs in the U.K., as the Bank of England followed the Fed and raised rates 75 basis points.

For more salt in the market’s wounds, let’s go to China, which reaffirmed its “zero-COVID” policy after all. So much for rumors earlier this week that the end might be in sight. As Chicagoans say on certain winter days, “It’s brutal out there.”

Even the earnings picture, which looked decent enough a few days ago, seems to be turning south. Both Roku ROKU and Qualcomm QCOM disappointed with their outlooks yesterday after the close, sending shares of both much lower ahead of the open.

Where Things Stand

As discouraging as yesterday’s late retreat felt, the Cboe Volatility Index® (VIX) suggests things could have been worse. It’s still hanging out in the mid-20’s, which might confirm ideas that the recent rally we saw end yesterday might not have had much conviction behind it. Yesterday’s selling appeared to be ordered, not a panicked, run-for-the-hills type of event. Those quick to leave yesterday were likely the speculative-but-hopeful crowd that didn’t have much conviction as the day advanced. There wasn’t wholesale capitulation going on.

Looking at technicals, the S&P 500 Index® (SPX) broke below support at 3735 on the way down yesterday. At this point, 3730 is an interesting level, so let’s see if the SPX can hold that today. Otherwise, 3700 is the big round number to watch below the market. Weakness so far this morning likely represents follow-on selling from yesterday.

Potential Market Movers

• Starbucks (SBUX) is expected to report after the close today, and investors could be watching for its holiday season forecast and any issues the company might be having with its China business.
• Initial weekly jobless claims were 217,000, a bit below the 222,000 consensus estimate. That’s one number that would likely need to rise for the Fed to feel better about easing the brakes.
• Factory Orders for September are due soon after the market opens. Consensus is for a 0.3% rise.
• Tomorrow brings the October Nonfarm Payrolls report, so trading might be a bit subdued today ahead of the data. The Wall Street consensus is for jobs creation of 220,000, down from 263,000 the previous month. Wage growth is expected to be 0.3%, the same as a month earlier. See our primer below on how to analyze the numbers when they arrive.

While We Slept

Here’s our quick take on a few things we learned before the open:

• Qualcomm (QCOM) earnings: The company forecasted revenue and earnings for fiscal Q1 that failed to match Wall Street’s expectations. One analyst told Yahoo Finance it was “the worst guide in years” from QCOM. Unfortunately for investors, QCOM is one of those companies that many investors watch as a possible industry indicator due to its business’s broad reach. A miss from QCOM is historically a poor sign for the economy.
• Roku (ROKU) earnings: This streaming firm also missed analysts’ expectations on outlook, though its influence is far less than that of QCOM. Still, streaming problems aren’t a good sign ahead of Walt Disney DIS earnings later this month. DIS shares fell slightly this morning.

 

Investors and Inflation

In a market where both stocks and bonds find themselves giving in to higher rates, investors often turn to cash, commodities, high-yield corporate bonds, or even further afield, perhaps toward emerging markets. The old “TINA” acronym (There Is No Alternative) that people gave the stock market back when rates were bargain basement two years ago no longer applies. But alternatives aren’t clear either. If you’re a long-term investor with no need to access much of your investments anytime soon, you might want to consider being cautious about making any big moves when things are so opaque.

Why is the Fed still hawkish? It’s quite simple.

• Inflation shows little signs of easing, as Powell made clear in his press conference. It may not have been what investors wanted to hear, but Powell made the point that if the Fed pauses its rate tightening too soon, things could get even worse.
• He also noted that if the Fed makes the mistake of raising rates too high, it has many tools to stimulate the economy, including lowering rates. It’s a lot harder to put the inflation genie back into the bottle if the Fed pauses and inflation isn’t truly vanquished.
• Core Personal Consumption Expenditure (PCE) prices excluding food and energy are up more than 5% over the last year, Powell noted, though inflation expectations remain “well grounded.”
• Still, Powell worries long-term inflation can cause inflation expectations to become entrenched, when consumer expectations of higher prices can become a self-fulfilling prophesy. Powell pointed out that housing prices has begun to respond to the Fed’s medicine, but a persistently strong job market sustaining higher wages and prices hasn’t, at least not yet. We could know more after tomorrow’s October jobs report.

In the wake of the Fed rate hike, the CME FedWatch Tool now is evenly divided between chances of a 50-basis point or a 75-basis point hike next month. And interest rate traders apparently took Powell at his word that rates might need to go higher in 2023 than the Fed previously had thought. The FedWatch tool now shows better than an 80% chance of rates being at 5% or above by next June. A month ago, the odds of 5% rates by next June were zero.

Looking Ahead to 2023

We haven’t seen rates at the 5% crossroads since 2006, but the market now signals we could get there next year. So far, the higher rates are hitting the most rate-sensitive sectors like real estate very hard, but consumer demand for travel, eating out, and entertainment options like casinos doesn’t seem to be dying down. Neither do wages, nor the number of available job openings based on this week’s data so far.

Meanwhile, China’s zero-COVID policy and the Russian invasion of Ukraine mean supply chains remain uncertain. Commodity prices spiked again this week after Russia temporarily pulled out of a deal to allow Ukrainian grain shipments. WTI Crude (/CL) prices remain near $90 per barrel. None of this eases price pressure, to say the least.

Reviewing the Market Minutes

The Dow Jones Industrial Average® ($DJI) fell more than 500 points, or 1.55%, to close at 32,147.76 on Wednesday. The Nasdaq® ($COMP) fell a steep 3.36%, and the SPX slipped 2.5% to 3759.69. The early post-Fed statement rally faded very quickly as Powell spoke. The 10-year Treasury yield (TNX) climbed to 4.09% after touching 4% earlier in Wednesday’s session.

Stocks retreated the last few days even before the rate hike, hurt in part by weakness in some of the mega-cap companies whose shares make up a large percentage of the SPX. When shares of companies like Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT) head lower, it can have an outsized impact on major indexes. The concern dogging those stocks and others is that customers may pull back on spending due to inflation and higher borrowing costs.

Three Things to Watch

Could Friday’s Jobs Data Further Pressure the Fed? There’s no rest for the market after yesterday’s FOMC decision. Tomorrow morning brings the October Nonfarm Payrolls Report, and analysts think it could look hotter than the Fed would likely prefer. Wall Street’s consensus for the headline jobs number is 220,000. That’s down from 263,000 in September but probably not a significant slowing and still historically high. Prior to the pandemic, any jobs number above 200,000 was generally considered solid growth, but right now, the Fed (and any bullish investors) would rather see growth slow. No one wants people to lose their jobs, but the current rate of growth could be creating wage inflation, which in turn can cause prices to rise around the economy and tighten the vise on corporate profit margins. Analysts believe wages rose 0.3% in October, according to consensus from Briefing.com, which would be flat compared with September.

Jobs Report Primer:Wednesday’s ADP private sector jobs report showed big job gains in Leisure and Travel but fewer in Manufacturing. That’s significant, and if it also plays out in Friday’s Nonfarm Payrolls Report, it could be a sign of slowing wage growth that the Fed hopes to see. That’s because manufacturing jobs generally pay more than those in travel. Another data point to watch will be labor force participation, which held steady at 62.3% in September. If October’s number goes higher, it could mean more people venturing back into the job market, which could give employers more leverage over pay levels than they’ve recently had. One more thing to watch is the number of long-term unemployed, which stood at 1.1 million in September. If that number drops, it’s a sign that more people competing in the job market could potentially cool future wage gains.

 

Cracks in the Job Market: Here’s something a lot of folks haven’t seen in a while. “The economy is beginning to see more job cut activity in Q4, and that’s historically when the bulk of cuts occur, as companies finalize budgets and plans,” said Andrew Challenger, senior vice president of Challenger, Gray & Christmas. Many companies are anticipating a downturn, and with a still-tight labor market and the Fed’s rate hikes, more cuts will be on the way as we enter 2023, he added. People may look at job cut announcements in coming weeks and see it as a sign of economic activity flagging, but it is typical Q4 behavior. The seasonality effects could be something to keep in mind when assessing the labor market dynamics, and it’s likely something the Fed is focused on, too.

Notable Calendar Items

Nov. 4: October Nonfarm Payrolls Report and expected earnings from Hershey (HSY), Cardinal Health (CAH), and Duke Energy (DUK)

Nov. 7: September Consumer Credit and expected earnings from Palantir (PLTR), Lyft (LYFT), and BioNTech (BNTX)

Nov. 8: Election Day and expected earnings from DuPont (DD), AMC Entertainment (AMC), Occidental (OXY), Walt Disney (DIS), and Wynn Resorts (WYNN)

Nov. 9: September Wholesale Inventories and expected earnings from D.R. Horton (DHI), Wendy’s (WEN), and Rivian (RIVN)

Nov. 10: October Consumer Price Index (CPI) and expected earnings from Ralph Lauren (RL), AstraZeneca (AZN), and Dillard’s (DDS)

Nov. 11: Preliminary November University of Michigan Consumer Sentiment

Nov. 14: October Producer Prices, November Empire State Manufacturing, and expected earnings from Tyson Foods (TSN)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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