4:12pm: Risk of a recession remains, says UBS exec
The Dow closed Friday down 403 points, 1.3%, at 29,635, the Nasdaq Composite dropped 328 points, 3.1%, to 10,321 and the S&P 500 declined 87 points, 2.4%, to 3,583.
US markets couldn't sustain Thursday's major rally, which saw the benchmarks each gain more than 2%.
“With core CPI still moving in the wrong direction and the labor market strong, the conditions are not in place for a Fed policy pivot, which would be one of the conditions for a sustained rally in the equity market,” UBS global wealth management chief investment officer Mark Haefele wrote Friday, per CNBC. “Moreover, as inflation remains elevated for longer and the Fed hikes further, the risk increases that the cumulative effect of policy tightening pushes the US economy into recession, undermining the outlook for corporate earnings.”
Investors were also reacting to the Michigan consumer sentiment index, which rose to 59.8 from 58.6, slightly above the consensus of 58.8. The five to 10-year inflation outlook rose to 2.9% from 2.7%.
12.05pm: US investors remain pessimistic
US indices made a turn downward at midday, as traders reacted to a University of Michigan survey showing year-ahead inflation expectations went up in early October and the long-term outlook also rose.
At midday, the S&P 500 was down by 1.4% at 3,617, while the Nasdaq Composite was down by 2% at 10,432 and the Dow Jones fell by 0.7% to 29,835 points.
The Michigan consumer sentiment index rose to 59.8 from 58.6, slightly above the consensus of 58.8. The five to 10-year inflation outlook rose to 2.9% from 2.7%.
Ian Shepherdson, chief economist with Pantheon Macroeconomics, said the uptick in sentiment and inflation expectations wasn't sustainable.
“The increase in headline sentiment was due entirely to a 5.6-point jump in the current conditions index, which tends to track the path of layoffs; jobless claims fell last month," Shepherdson wrote in a report. "But the expectations component, which is more sensitive to gasoline and stock prices, fell by 1.8 points, and likely will drop further next month, allowing for the usual short lags."
"Sentiment remains depressed, but households have the financial wherewithal, thanks to pandemic savings, to tell surveys that they are miserable and then go straight to the mall,” Shepherdson continued.
He noted that the uptick in inflation expectations is probably a response to the increase in gas prices in recent weeks, in which case it won’t continue.
“Still, on the heels of the September inflation data this rebound – reversing the drop last month – does not look good, given how closely policymakers appear to track the measure,” he wrote.
The major movers at midday saw Wells Fargo & Company and JPMorgan Chase up by 2.8% and 2.7% respectively, both down from session highs earlier in the day.
On the downside, First Republic Bank slid over 14%, despite reporting 3Q earnings per share of US$2.21, but missing on analyst expectations on revenue.
Kroger dropped by 4.5% on news of the grocery chain’s US$24.6 billion deal to buy rival Albertsons.
9.35am: Big banks lift the mood
Wall Street rallied on Friday morning after a tough week amid a flurry of mixed earnings reports from financial heavy hitters.
Just after the market opened, the Dow Jones Industrial Average had added 180 points or 0.6% at 30,218 points, the S&P 500 edged up 24 points or 0.7% at 3,694 points, and the Nasdaq Composite had gained 96 points or 0.9% at 10,745 points.
After posting quarterly results that exceeded expectations JPMorgan Chase & Co was up about 4.1%. Wells Fargo & Company was up about 4.9% on stronger-than-expected quarterly revenue despite reporting an earnings miss.
On the other hand, Morgan Stanley was down about 1.3% after reporting a 3Q profit drop of 30%.
Forex.com market analyst Joshua Warner noted, although rising interest rates were helping boost profitability for banks, the uncertain outlook and threat of a recession has prompted them to start building their reserves in fear more people and businesses will struggle to pay their loans.
“This means all of them will report sharp falls in earnings in the third quarter, with eyes on how the US economy is shaping up as we head deeper into the fourth,” he said.
Meanwhile, Beyond Meat Inc was up about 2.5% following reports the plant-based food company is reducing its staff by 19%, including the removal of an executive who allegedly bit someone’s nose last month.
6.30am: Falls to resume
US stocks are expected to open lower on Friday as caution returns ahead of quarterly earnings figures from key banks, retreating after yesterday’s dramatic gains despite news that inflation remains stubbornly high.
Futures for the Dow Jones Industrial Average were down 0.1% in pre-market trading, while those for the S&P 500 were 0.1% lower, and contracts for the Nasdaq-100 lost 0.3%.
Up for release today are earnings from Citigroup, JPMorgan Chase, Wells Fargo, and Morgan Stanley. The figures from the big banks will likely set the tone for trading but the after-effects from yesterday’s higher-than-expected CPI inflation figures are also likely to be felt.
Trading is expected to remain volatile as investors consider the prospect of further interest rate hikes for the world’s biggest economy with the Federal Reserve’s previous increases yet to dampen down runaway inflation. US rate-setters have delivered three 75-basis point hikes this year and are expected to vote for more aggressive increases.
In data out on Thursday, US headline inflation came in at 8.2% for September but even more startling was the surge in the core inflation rate, which strips out more volatile items, to 6.6%. Service sector inflation also rose sharply.
“Movement from goods inflation to services inflation is a real headache as it makes it even harder to get down as it’s just that bit stickier,” noted Neil Wilson, chief market analyst at markets.com.
“The labor market is just too strong to stop the inflation in services – rates usually need to exceed core inflation by around 2% to get on top of it,” he added.
On Thursday, stocks bounced back sharply after an initial wobble following the release of the inflation data with the S&P 500 rising 2.6% to snap a six-day losing streak, while the Dow Jones finished 2.8% higher.
“It was a remarkable turnaround – one of the widest intraday swings – about 5% - for the S&P 500 in history,” noted Wilson.
“Was that the moment of capitulation? Maybe ... but I don’t think so. Things looked pretty heavily oversold with the S&P 500 at 3,500, but when you get that kind of vicious rip against the data points it’s not a sign of strength. Undoubtedly dip buyers sniffed that as their opportunity – at 3,500 it was screaming to bounce back at least a bit. And shorts were covered,” he explained.
The sharp movements underscore the level of volatility in the market and suggest that share prices could go south again, Wilson concluded.
Contact the author at jon.hopkins@proactiveinvestors.com