Higher-Rates-Longer and Weakening Earnings Reality Drive Indexes Lower

Barry Adams
24 Feb, 2023
New York City

Stocks accelerated decline on the final day of the week and benchmark indexes reported the worst weekly loss in 2023.

The familiar worry of rate-path drove the market sentiment after the personal consumption expenditure price index accelerated in January from the previous month and from a year ago. 

The PCE index gets an outsized attention because of the Federal Reserve's use of this alternative measure of inflation. 

The index generally understates by a wide margin the inflation experienced by most urban households and the increase in this index only suggested that inflationary pressures are stronger than previously estimated. 

Benchmark indexes dropped between 1% and 2% on the worries that interest rates are likely to go higher and stay elevated for a longer duration. 

Moreover, the Federal Reserve may have to raise rates to restrictive levels which may drive the economy into a recession. 

Steel, tobacco, software developers and commercial real estate stocks fell between 2% and 3%. 

Microsoft declined 2.2%, Apple Ind fell 1.8, Amazon.com, Inc eased 2.4% and Alphabet Inc declined 1.9%. 

 

New Home Sales Rebounded In January 

The sale of single-family new homes increased 7.2% from the previous month in January to a seasonally adjusted annual rate of 670,000, the U.S. Census Bureau and Department of Housing and Urban Development reported Friday. 

Home sales declined 19.4% from a year ago in January. 

The median sales price of new houses sold in January was $427,500, lower than $430,000 a year ago and the  average sales price was $474,400, lower than $501,200 a year ago.    

The seasonally‐adjusted estimate of new homes for sale at the end of January was 439,000, representing a  supply of 7.9 months at the current sales rate.

 

Personal Income and Spending Increased in January

Personal income increased 0.6% in January and disposable personal income 2.0% and personal consumption expenditures or PCE 1.8%, according to estimates released by the Bureau of Economic Analysis on Friday. 

The closely watched consumption price index, a measure of inflation tracked by the Federal Reserve, rose at a faster pace from the previous month. 

The increase was the largest since August. 

The PCE price index and core index excluding food and energy both accelerated to 0.6% in January compared to 0.2% and 0.4% increases in December. 

On an annual basis the PCE index and core index accelerated to 5.2% and 4.7% from 5.3% and 4.6% respectively. 

Personal spending jumped 1.8% in January from the previous month, rebounding from a downwardly revised 0.1% fall in December. 

Personal spending jumped the most since March of 2021.  

After adjusting for inflation or price changes, real personal spending jumped 1.1%, rebounding from a 0.3% decrease in December. 

 

Bond Yields Advanced, Stock Indexes Dipped

The S&P 500 index decreased 1.05% to 3,970.05 and the Nasdaq Composite index declined 1.7% to 11,394.94. 

For the week, the S&P 500 index close down 2.8% and the Nasdaq Composite index fell 3.2% and book a second weekly loss in the last three weeks.   

The yield on 2-year Treasury notes increased to 4.81%, 10-year Treasury notes rose to 3.95% and 30-year Treasury bonds 3.94%. 

Crude oil increased $1.09 to $76.46 a barrel and natural gas futures added 13 cents to $2.56 a thermal unit. 

 

U.S. Stock Movers 

Carvana Company plunged 20.5% to $8.05 after the used car dealer reported a sharp fall in revenue and a surge in loss in its latest quarter. 

Carvana said operating revenue in the fourth quarter plunged 24% to $2.8 billion from $3.7 billion in the previous year.

Net loss in the period surged to $809 million from $89 million or diluted loss per share rose to $7.61 from $1.02 a year ago.  

Wayfair Inc fell 1.7% to $37.69 after the company reported a decline in sales and larger loss in its latest quarter. 

Wayfair said revenue in the fourth quarter decreased 4.6% to $3.1 billion and net loss expanded to $351 million from $202 million and diluted loss per share rose to $3.26 from $1.92 a year ago. 

 

Boeing Halted 787 Dreamliners Deliveries Again 

Boeing Co fell 4.8% after the aerospace company temporarily halted delivery of its 787 Dreamliners to fix a fuselage issue, according to statements from the company and the aviation regulator.

"While near-term deliveries will be impacted, at this time we do not anticipate a change to our production and delivery outlook for the year,” said the company in a statement.

Boeing plans to continue building planes during the current pause in delivery after the completed the delivery of 34 787 Dreamliners in the six months to January of this year.

The aerospace and defense company was forced to halt deliveries between May of 2021 and July of 2022 to fix quality problems during its assembly operations.  

 

European Markets Turned Lower After U.S. Inflation Measure Accelerated

Stocks dropped, bond yields rose and currencies looked down in Europe after inflation worries accelerated U.S. market decline. 

Stocks accelerated decline in Europe after the latest report on a measure of inflation accelerated in January. 

The closely watched consumption price index, a measure of inflation tracked by the U.S. Federal Reserve, rose at a faster pace from the previous month.  The increase was the largest since August. 

 On the inflation news, market indexes in New York fell as much as 2% and darkened the mood in Europe. 

Moreover, Germany's fourth quarter economic decline was revised to a deeper correction than previously estimated, negatively impacting market sentiment. 

Investors overlooked the improvement in the forward looking consumer confidence for March in Germany  for the fifth month in a row and a slight rebound in consumer confidence in February to its highest level in more than a year in the UK. 

The research group GfK said British consumer confidence increased by seven points to -38, the highest since April 2022, and Germany's confidence index improved to -30.5 in March from -33.8 in February.  

The French consumer confidence index fell slightly in February, according to the data released by the statistical office INSEE. 

The index decreased to 82 in February from 83 in January, reflecting moderate weakness in the financial outlook of households. 

 

Larger Decline in Germany's Economy In Fourth Quarter

Germany's gross domestic product shrank more-than-expected in the fourth quarter, the Federal Statistics Office or DeStatis said in a report. 

Gross domestic product in the fourth quarter declined 0.4% from the previous quarter compared to the previous estimate of 0.2% fall in a preliminary report. 

The German economy expanded in each of the first three quarters when measured from the previous three month period. 

Economy expanded 0.8% in the first quarter, slowed to 0.1% in the second quarter and regained momentum in the third quarter to 0.5%. 

The latest decline was the worst since the first quarter of 2021, when the economy shrank 1.5% following the Covid-19 pandemic.  

For the full-year 2022, the economy expanded 1.8% and when adjusted for calendar shift rose 1.9%, the statistical office noted. 

 

European Bond Yields Advanced, Currencies Weakened 

The DAX index declined 1.7% to 15,209.74, the CAC-40 index dropped 1.8% and the FTSE 100 index fell 0.4% to 7,878.66. 

For the week, the DAX index decreased 1.5%, the CAC-40 index declined 1.8% and the FTSE 100 index fell 1.2%. 

The yield on 10-year German Bunds increased to 2.52%, French bonds to 3.00%, the UK gilts to 3.65% and Italian bonds to 4.43%. 

The euro edged lower to $1.05, the British pound decreased to $1.194 and the Swiss franc edged lower to 94.03 cents. 

Brent crude oil advanced 96 cents to $83.19 a barrel and the Dutch TTF natural gas increased 41 cents to Є51.01 per MWh. 

 

Europe Stock Movers 

Compagnie de Saint Gobain SA increased 4.8% to €55.93 after the French building materials maker reported record annual revenues. 

In addition, the French glass maker plans to set aside "at least €400 million" for its stock repurchase program in 2023. 

International Consolidated Airlines Group declined 3.7% to 159.34 pence after the parent of British Air and Iberian Air announced a deal to acquire the remaining stake Air Europa it did not own. 

BASF SE declined 7.8% to €48.07 after the German chemical maker reported a loss in the fourth quarter and halted its stock repurchase program. 

The chemical company also plans to eliminate 2,600 positions or about 2% of its staff.