U.S. Market Averages Skidded After Powell Comments Suggested Higher-for-Longer Rates Ahead

Barry Adams
19 Oct, 2023
New York City

Market indexes turned sharply lower after investors reviewed the latest comments from the Federal Reserve Chairman Jerome Powell. 

Fed Chair Powell stressed that interest rates are still not "restrictive enough" and higher rates may be needed if inflation fails to cool to the target rate of 2%. 

In an unusual admission, Powell said that inflation was driven higher not only by distortions in supply chains but also in demand. 

Demand surged during the pandemic era between 2020 and 2022 after the Federal Reserve  revved up its printing presses and pumped money into the economy through various government stimulus measures and the U.S. Treasury bonds purchases. 

Powell added that despite the recent cooling of inflation as measured by the core PCE Index, inflation is still hovering at 3.7%, ahead of the Fed target rate. 

Monetary policy may not be restrictive enough and may need more tightening, and below-trend economic growth rate and additional softening in labor market conditions, Chairman Powell stressed in comments delivered at a gathering in New York. 

Investors appeared divided about the future direction of interest rate in the short-term, but interest rates are likely to stay higher through 2024. 

The S&P 500 index and the Nasdaq Composite index extended weekly losses to 2.4% and 3.2% respectively as investors debated the Fed's next move and rate path and level after the policy meeting at the end of this month. 

The yield on 10-year Treasury notes edged higher and hovered near 5% level and investors increased the likelihood of a rate hike at the end of the next policy meeting on November 1. 

In stock trading, market indexes accelerated decline and rate sensitive stocks led the losers after Chairman Powell stressed the need for restrictive rates. 

Investors reacted positively after Netflix reported a surge in net paid subscribers in the third quarter and forecasted revenue growth to sustain in the fourth quarter. 

Tesla faced headwinds after the electric vehicle maker reported a sharp drop in quarterly  earnings and a decline in gross margin after the company offered larger-than-usual discounts. 

 

Weekly Jobless Claims Fell 

On the economic front, the initial jobless claims declined 14,000 to 198,000 for the week ending on October 14, the U.S. Department of Labor reported Thursday. 

The weekly jobless claims dropped to the lowest level since January, confirming the tight labor market conditions. 

 

Existing Home Sales Dropped to a 13-year Low Annual Rate 

Existing home sales continued to decline confirming housing market trends reported by recent releases. 

Existing home sales in September decreased 2.0% from August and dropped 15.4% from a year ago to a seasonally adjusted annual rate of 3.98 million. 

Rising mortgage rates and elevated home prices discouraged first-time home buyers from seeking homes, and the share of first-time home buyers dropped to 27% from 29%. 

The number of home transactions dropped to a 13-year low largely because homeowners locked with low interest mortgage rates struggled to justify new purchases. 

"As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales," said NAR Chief Economist Lawrence Yun. 

Home prices advanced for the third month in a row, confirming that demand for housing is still strong. 

The median existing-home price for all housing types in September increased 2.8% to $394,300, and prices rose in all four U.S. regions.

 

U.S. Indexes & Yields 

The S&P 500 index decreased 0.9% to 4,278.0 and the Nasdaq Composite fell 1.0% to 13,186.28. 

The yield on 2-year Treasury notes increased to 5.16%, 10-year Treasury notes inched higher to 4.99% and 30-year Treasury bonds edged up to 5.11%. 

Crude oil decreased $0.89 to $87.46 a barrel and natural gas prices fell 2 cents to $3.07 a thermal unit. 

The dollar index edged higher to 106.29, the level last seen in November 2022 and extended gains from the low of 99.85 on July 13, 2023.  

 

U.S. Stock Movers 

Tesla  Inc decreased 7.5% to $224.30 after the electric vehicle maker reported a sharp decline in its quarterly profits and weaker margins. 

Revenue in the third quarter increased 9% to $23.4 billion from $21.5 billion and net income attributable to shareholders plunged 44% to $1.9 billion from $3.3 billion and diluted earnings per share dropped to 53 cents from 95 cents a year ago. 

Moreover, free cash flow plunged to $848 million from $3.3 billion as the company continued its investment in Artificial Intelligence based products, autonomous vehicles and its much delayed Cybertruck vehicle. 

Netflix Inc soared 15% to $397.60 after the video streaming platform operator reported sharply higher revenue and earnings growth and added that the company is likely to exceed its annual free cash flow estimate.   

Revenue in the third quarter increased 7.8% to $8.5 billion from $7.9 billion and net income surged to $1.7 billion from $1.4 billion and diluted earnings per share advanced to $3.73 from $3.10 a year ago. 

Global streaming paid members increased by 8.76 million to 247.15 million, an increase of 10.8% from a year ago.

Free cash flow soared to $1.9 billion from $472 million a year earlier. 

The streaming platform estimated revenue in the fourth quarter to jump 11% to $8.7 billion and paid net additions to match the increase in the third quarter. 

 

Rising Bond Yields Pushed Stock Market Indexes Down In Europe

Market indexes in Europe extended weekly losses after weak corporate results and rising bond yields compounded market anxieties. 

The yields on government bonds advanced after the yield on 10-year U.S. Treasury notes approached 16-year high of 5%. 

The yields on German bonds, French bonds and Italian bonds inched forward and hovered near the levels last seen in 2011. 

Moreover, rising tensions in the Middle East also added to market jitters on the worries that Israel's aggressive response to Hamas-led attack and kidnappings may widen the conflict in the Middle East. 

Widespread protests in Turkey, Iran, Iraq, Lebanon, Egypt and Malaysia and in Washington D.C and London called for immediate ceasefire and also put additional pressures on diplomats seeking a peaceful solution. 

Palestinians feared that Israel's call for evacuation in north Gaza will be followed by a ground invasion and then confiscation of their land, the root cause of the seven-decade long conflict. 

On the earnings front, weak results from Nokia, Nestle, Renault also weighed on the market sentiment. 

 

Euro Area Surplus Expanded 

The Euro Area current account surplus expanded in August after trade surplus rose, the European Central Bank reported Thursday. 

The current account surplus increased to €28 billion from €21 billion in the previous month. 

International goods trade surplus in the month rose to €35 billion from €25 billion but the service surplus narrowed to €6 billion from €10 billion in the previous month.  

In the twelve months to August, the current account surplus rose to €126 billion, or 0.9% of the euro area GDP, from €12 billion surplus or 0.1% of GDP a year ago.

 

Europe Indexes & Yields

The DAX index decreased 0.3% to 15,045.23, the CAC-40 index fell 0.4% to 6,921.37 and the FTSE 100 index fell 1.2% to 7,499.53.

The yield on 10-year German bonds increased to 2.93%, French bonds traded higher to 3.55%, the UK gilts edged up to 4.70% and Italian bonds eased to 4.99%.

The euro hovered near a three-month low to $1.055, the British pound to $1.212 and the U.S. dollar fetched 89.72 Swiss cents.

Brent crude increased $1.11 to $92.61 a barrel and the Dutch TTF natural gas edged lower by €0.66 to €50.17 per MWh.

 

Europe Stock Movers

Nestle SA decreased 2.2% to CHF 99.89 after the Swiss food company's nine-month sales growth disappointed investors. 

Nokia Oyj dropped 6.0% to €3.07 after the company reported weaker-than-expected third quarter results and the company also said it plans to trim its workforce. 

Hargreaves Lansdown PLC fell 4.5% to 704.50 pence after the retail financial services provider said client acquisition growth declined in the fiscal first quarter. 

McBride Plc soared 19.5% to 38.86 pence after the U.K.-based household products maker said market momentum of the second-half fiscal 2023 continued in the fiscal 2024 first quarter. 

Merck KGaA jumped 2.4% to €149.0 after the German pharmaceutical company forecasted sales growth to return in the fiscal 024 and the growth is expected to continue beyond 2025. 

Sartorius AG decreased 1.2%to €208.0 after the German biotech company reported results for the first nine months of the year.  

Pernod Ricard SA jumped 4% to €164.90 after the French wine and spirits maker forecasted higher sales in the fiscal 2024. 

Renault SA dropped 6.7% to €33.74 after the French automaker said currency weakness in Turkey and Argentina weighed heavily on its sales growth in the third quarter.