Stocks Struggled With No End In Sight For Rate Hikes

Barry Adams
22 Feb, 2023
New York City

Stocks lacked direction as investors mulled the amount of future interest rate hikes after the release of the Fed minutes. 

Fed policymakers supported an increase of target range for fed funds by 25 basis points at the monetary policy meeting held in February. 

All participants supported that the rates may have to be revised higher for some time until the inflation showed a sustained decline towards the target rate of 2%. 

The minutes showed that inflationary pressures have moderated but acknowledged price growth remains well above the 2% target set by the central bank, with tight labor market conditions fueling upward pressures on wages and prices.

Policymakers are set to meet for a two-day meeting starting on March 21 and investors are anticipating a rate hike of 25 basis points with some anticipating an increase of 50 basis points. 

Rising bond yields have kept markets on the edge as investors are still uncertain about how high rates have to go to cool elevated inflation. 

Despite eight interest rate hikes over the last twelve months, inflation is far above the Fed's preferred rate of 2% and goods price inflation has spread to services and acceleratred wage inflation. 

The yield on 10-year Treasury notes is approaching 4% reached last year for the first time in fourteen years, threatening a 3-month old stock market rally. 

 

U.S. Indexes and Yields  

Stocks were under pressure a day after the worst single-day decline in 2023 and investors shifted focus to the latest batch of earnings.  

Toll Brothers surpassed expectations and expressed confidence in the strength of the housing demand highlighting demographic and migration trends to the South and the company's land portfolio. 

Palo Alto Networks jumped 11% after the company revised higher its full-year outlook and Coinbase fell despite the cryptocurrency exchange exceeding revenue expectations. 

CoStar Group plunged as much as 15% in early trading after the real estate marketplace operator forecasted revenue growth in fiscal 2023 of 13%, slightly higher than the previous fiscal year's growth rate of 12%. 

Intel Corporation declined 1% to $25.81 after the chipmaker announced a cut of 65.7% for its quarterly dividend to 12.5 cents from 36.5 cents, a first cut in dividend since 2000. 

The dividend is payable on June 1 to stockholders of record on May 17. 

The company also reaffirmed its 2023 first quarter adjusted earnings outlook of 15 cents and did not provide full-year guidance citing economic uncertainties.  

The S&P 500 index increased 1.81 points to 3,999.15 and the Nasdaq Composite index advanced 19.95 points to 11,512.26. 

The yield on 2-year Treasury notes edged lower to 4.66%, 10-year Treasury notes edged higher to 3.91% and 30-year Treasury bonds hovered near 3.92%.

Crude oil decreased $1.64 to $74.71 a barrel and natural gas futures increased 11 cents to $2.19 a thermal unit. 

 

U.S. Movers 

Toll Brothers Inc increased 3.7% to $57.77 after the luxury home builder reported better-than-expected earnings. 

Home sales in the fiscal first quarter ending in January increased 4% to $1.7 billion. 

In the quarter, the company delivered 1,826 homes, 5% fewer homes than in the previous year.

Net income increased to $191.5 million from $151.9 million and diluted earnings per share rose to $1.70 from $1.24 a year ago. 

Backlog value of homes fell 21% to $8.6 billion and the number of homes in the backlog dropped 32% to 7,733. 

The company reaffirmed its full-year fiscal 2023  guidance of an adjusted gross margin of 27.0% and $8.00 to $9.00 of earnings per share. 

 The homebuilder repurchased approximately 187,300 shares at an average price of $49.95 per share for a total purchase price  of approximately $9.4 million. 

CoStar Group Inc dropped 5.2% to $72.30 after the online real estate marketplace operator and information provider's current year outlook disappointed some investors. 

Revenue in the fourth quarter increased 13% to $573 million and net income increased 34% to $124 million from $94 million a year ago. 

Diluted earnings per share increased to 31 cents from 24 cents a year ago. 

The real estate company expects revenue in the range of $2.46 billion to $2.48 billion for the full-year of 2023, representing an increase of 13% from the previous year at the midpoint of the range. 

Revenue in the first quarter in the range of $575 million to $580 million, representing an increase of 12% from the previous year at the midpoint of the range.

The company also confirmed that it is no longer in discussion with News Corp regarding the purchase of Realtor.com. 

 

European Markets Lacked Direction 

European markets closed mixed after a day of lackluster trading. 

Market sentiment was dominated by the latest corporate earnings releases with the lingering worries of rate hikes and state of consumer spending. 

Investors were cautious ahead of the release of the U.S. Fed's latest minutes of meeting. 

The minutes released after the close of market hours showed all policymakers supported the rate increase of 25 basis points and anticipated rates to continue to rise in future until the inflation is on the path towards a target rate of 2%.  

Inflation reports from Germany and Italy showed that prices are expected to rise at elevated levels for some time but indicators of manufacturing and businesses showed improvements. 

 

Germany's Business Climate Index Notched Up 

Germany's IFO Business Climate Index increased to an eight-month 91.1 in February from a revised 90.1 in January, the data from the Munich-based Ifo showed Wednesday. 

 

France's Manufacturing Confidence Improved 

France's manufacturing confidence index increased for the third month in a row in February on the back of rising new orders, the statistical office Insee said Wednesday. 

 

Italy's Inflation Eased In January

Italy's consumer price inflation in January eased to 10.0% from 11.6% in December, ISTAT report released on Wednesday showed. 

Core inflation, which excludes energy and unprocessed food prices, accelerated to 6.0% in January from 5.8% in December. 

The sharp decline in energy price inflation dragged the overall inflation rate in January. 

Prices of regulated energy declined 12.0% in January from a whopping 70.2% surge in December, while those of non-regulated energy increased at a slower pace of 59.3%.

Service inflation increased to 4.2% in January from 4.1% in the previous month. 

  

Germany's January Consumer Inflation Accelerated 

Germany's consumer price inflation accelerated in January as previously estimated, the Federal Statistics Office Destatis confirmed today. 

Consumer price inflation increased to 8.7% in January from the downwardly revised 8.1% in December. 

 

Europe Indexes and Yields 

The DAX index increased 2.27 points to 15,399.89, the CAC-40 index declined 9.39 points to 7,299.26 and the FTSE 100 index fell 0.6% or 47.12 points to 7,930.63. 

The euro inched lower to $1.0603, the British pound held at $1.204 and the Swiss franc inched higher to 93.15 U.S. cents. 

The yield on 10-year German Bunds increased to 2.53%, French bonds edged higher to 3.01%, the UK Gilts to 3.61% and Italian bonds edged up to 4.47%. 

Brent crude oil decreased to $2.59 to $80.45 a barrel and the Dutch TTF natural gas spot price rose 4% to Є50.57 per MWh. 

 

Europe Movers 

Danone SA increased 4.5% to €54.66 after the French yogurt maker reported the fastest sales increase in more than a decade in 2022. 

Revenue in the fourth quarter increased 12.3% to Є7.0 billion and comparable sales rose 7% and volume mix growth declined 4.4%. 

In the full-year 2022, revenue increased 13.9% to 27.7 billion and comparable sales increased 7.8% and volume mix growth declined 0.8%. 

Sales in North America increased 20.6% to €6.7 billion, in Europe increased 5.2% to €8.7 billion and rest of the world excluding China and North Asia increased 18.7% to €8.7 billion.   

Net income in the full-year 2022 declined to €1.0 billion from €1.9 billion in 2021 or 1.48 from 2.94 a share respectively. 

Lloyds Banking Group PLC decreased 2.6% to 49.62 pence after the British banking and insurance company reported flat annual income in 2022. 

Total income in 2022 increased 14% to £18 billion from £15.7 billion and after-tax income declined 6% to £5.6 billion from £5.9 billion a year ago and diluted earnings per share fell to 7.3 pence from 7.50 pence a share respectively. 

The financial services company announced its plan of a final dividend of 1.60 pence a share resulting in a total dividend of 2.40 pence and announced a new stock buyback plan in 2023 of £2 billion matching the repurchase in 2022 and 2021. 

Rio Tinto plc declined 1.7% to  6,096.19 pence after the mining company cut its annual dividend and it reported a 38% decline in annual profit in 2022.

The Anglo-Australian mining company reiterated its unit production cost estimate for iron ore in 2023 between $21.0 and $22.50, slightly higher than $21.0 in 2022. 

Pilbara iron ore production in 2023 is estimated to increase between 322 million tons and 335 million tons, higher than 320 million tons in 2022.  

Consolidated revenue in 2022 declined to $55.6 billion from $63.5 billion and net income dropped to $13 billion from $22.6 billion and diluted earnings per share fell to $7.62 from $12.95 in the previous year. 

Mining companies traded lower after metals prices weakened on the worries that the rebound in China's manufacturing activities may be slower than anticipated. 

Glencore, Anglo American and Antofagasta declined between 2% and 3%. 

Fresenius Medical SE & Co increased 7.4% to €39.8 after the dialysis services provider reported better-than-expected fourth quarter results. 

Revenue in the fourth quarter increased 7% to €10.6 billion and net income fell 15% to €445 million. 

In 2022, revenue increased 9% to €40.8 billion and net income fell 7% to €1.7 billion. 

The company said it plans to separate its medical care company and continue to hold 32% stake in the newly separated company after the shareholder approval. 

The medical care company will focus on medical care, biopharmaceuticals and medical technology units. 

The company guided 2023 operating earnings in constant currency is expected to "remain broadly flat  or decline up to a mid-single-digit percentage rate."

Stellantis NV rose 2.2% to €16.22 after the parent of Chrysler and Fiat posted better-than-expected annual results and announced a new stock repurchase plan. 

Revenue in 2022 increased 18% to €179.6 billion and net profit rose 26% to €16.8 billion. 

The company announced a stock repurchase program of €1.5 billion to be completed before the end of 2023 and €4.2 billion of ordinary dividend corresponding to €1.34 per share. 

Industrial free cash flow in 2022 increased 78% to €10.8 billion from €6 billion in the previous year. 

The automotive company estimated sales in North America, Europe and India and Middle East to increase by 5% in 2023. 

Sales in South America are estimated to rise 3% and in China by 2% in 2023. 

Vehicle sales in Europe to 2.6 million from 2.86 million and in North America slightly edged up to 1.86 million from 1.82 million in 2021.