S&P 500 Index and Nasdaq Composite Surged 2% as Bond Yields Recede

Barry Adams
02 Nov, 2023
New York City

The stock market soared for the second day in a row after the Federal Reserve held rates steady, encouraging investors to increase stock exposure.

In a widely anticipated decision, the Federal Reserve held the fed funds rate range between 5.25% and 5.5%, a 22-year high as the central bank battles to cool inflation to the target rate of 2%.

After the Fed's action, the yield on 10-year Treasury bonds edged lower by 12 basis points and turned lower after rising above 5% only about two weeks ago.

Between March 2022 and July 2023, the Federal Reserve raised interest by 500 basis points in eleven increments before pausing for two consecutive meetings in September and November.

After the Fed's forceful actions over the 14-month period, inflation has cooled from the peak above 9% but has stayed near 4%, significantly higher than the Fed's target rate of 2%.

Investors are divided into two camps, with one group of investors estimating that policymakers may have to hold rates higher or increase them in 2024 because of the rebound in energy prices and the rising federal budget deficit contributing to inflationary forces.

In the second group, investors are hoping that inflation will continue to cool in the months ahead, largely because of weaker wage growth and a higher base effect.

In today's trading, investors in the second group stepped up buying and drove market indexes higher for the second day in a row after the Fed's decision to pause.

The Federal Reserve's battle to cool the economy and labor market and slow wage growth got some support from the latest jobless data and labor cost productivity report.

 

Weekly Jobless Claims Edged Higher 

Initial claims for jobless benefits increased from 5,000 to 217,000 in the week ending October 28, a two-month high, the U.S. Department of Labor reported Thursday.

The four-week moving average, which removes week-to-week volatility, edged up 2,000 to 210,000.

Moreover, continuing claims rose by 35,000 to 1.818 million in the previous week, the highest since April, indicating that job hunters are struggling to find work.

 

Labor Costs Declined In Third Quarter

U.S. nonfarm business sector unit costs declined by 0.8% in the third quarter, following an upwardly revised 3.2% increase in the previous quarter, according to the U.S. Bureau of Labor Statistics.

Unit labor costs declined for the first time since the fourth quarter of 2022, after hourly compensation increased by 3.9% and productivity advanced by 4.7%.

Unit labor costs rose by 1.9% from a year ago in the third quarter, the slowest pace of increase since the second quarter of 2021.

 

U.S. indexes and Yields

The S&P 500 index increased 1.9% to 4,317.78, and the Nasdaq Composite advanced 1.8% to 13,294.19. 

The yield on 2-year Treasury notes decreased to 4.99%, 10-year Treasury notes inched lower to 4.67%, and 30-year Treasury bonds edged down to 4.82%.

Crude oil increased $1.90 to $82.31 a barrel, and natural gas prices rose 1 cent to $3.43 a thermal unit.

Gold increased $3.19 to $1,985.28 an ounce ahead of the Fed's interest rate decision later in the day.

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 105.96. 

 

U.S. Stock Movers

Airbnb Inc. increased 0.9% to $120.50 after the vacation rental platform reported higher-than-expected third-quarter revenue but forecasted weaker-than-expected fourth-quarter revenue.

Qualcomm Inc. jumped 6% to $118.0 after the advanced communication chip designer reported better-than-expected quarterly revenue and earnings.

The mobile communication chip maker also forecast higher-than-expected revenue in the fourth quarter, signaling a possible recovery in the microchip industry.

SolarEdge Technologies Inc. dropped 10.5% to $67.65 after the company reported weaker-than-expected sales in the third quarter and forecasted more weakness in the fourth quarter.

Revenue in the third quarter declined to $725 million and loss per share was 55 cents, and the company guided fourth quarter sales to drop in the range between $275 million and $320 million.

The demand for home solar installations nosedived on rising interest rates after California cut the compensation rate for solar incentive programs in April.

California is expected to announce similar compensation cuts for multifamily, farm, and school buildings, which could further dampen the demand.

Peloton Interactive Inc. dropped 6.5% to $4.50 after the company reported a wider-than-expected loss.

Revenue in the quarter fell 3% to $595.1 million from $616.5 million; net loss shrank to $159.1 million from $408.5 million; and diluted loss per share shrank to 44 cents from $1.20 a year ago.

The company forecasted revenue in the fiscal 2024 second quarter ending December in the range of $715 million and $750 million, a decrease of 8% from the midpoint of $793 million a year ago.

 

 

European Markets Extend 4-day Rally

Benchmark indexes across Europe jumped more than 1% on interest rate optimism after the U.S. Federal Reserve's rate decision.

Popular indexes in Frankfurt, Paris, and London advanced for the fourth day in a row and jumped 1% after the Fed kept its short-term interest rate range unchanged between 5.25% and 5.5%.

The Bank of England kept its key lending rate at a 15-year high of 5.25% and held rates for the second time in a row.

The Monetary Policy Committee, in a 6-3 vote, decided to leave rates unchanged, and the central bank reiterated that rates are likely to remain restrictive for a while until inflation drops to the 2% level.

Market participants bid up stocks in the hope that the central banks are likely to pause rates for a while.

Higher interest rates lower the value of the future earnings stream, especially for high-growth and tech companies where most of the earnings are in the future, and higher short-term rates drive long-term bond yields higher, providing an attractive alternative to stock investing.

On the economic front, Germany's seasonally adjusted jobless rate increased to 5.8% in October from 5.7% in September, the Federal Statistics Office reported Thursday.

Manufacturing surveys across the eurozone showed persistent growth weakness.

HCOB's final eurozone manufacturing Purchasing Managers' Index fell to 43.1 in October from 43.4 in September, S&P Global reported Thursday.

Manufacturing weakness intensified in Italy and Spain due to challenging economic conditions in the currency union.

The manufacturing index in Italy fell to 44.9 in October from 46.8 in September, and in Spain it eased to 45.1 from 47.7 in September, separate reports from S&P Global showed.

 

Europe Indexes and Yields

The DAX index increased 1.5% to 15,143.60, the CAC-40 index advanced 1.9% to 7,060.69, and the FTSE 100 index edged up 1.4% to 7,446.53.

The yield on 10-yetrar German bonds decreased to 2.70%, French bonds traded lower to 3.32%, the UK gilts edged up to 4.41%, and Italian bonds inched lower to 4.48%.

The euro rebounded to $1.062, the British pound at $1.212, and the U.S. dollar at 90.33 Swiss cents.

Brent crude increased $2.33 to $86.94 a barrel, and the Dutch TTF natural gas edged higher by €0.81 to €48.56 per MWh.

 

Europe Stock Movers

BT Group Class A jumped 6.4% to 118.19 pence after the UK-based broadband and mobile services provider reported better-than-expected quarterly results.

Shell plc jumped 2.2% to 2,711.05 pence after the oil company reported a third-quarter profit of $6.2 billion and launched a $3.5 billion stock repurchase plan.

Trainline Plc soared 8.2% to 284.22 pence after an online train travel information provider and ticketing platform reported positive results in the first half.

Net rail ticket sales in the first half increased by 23% to £2.6 billion, following the post-pandemic rebound in travel.

Revenue in the first half increased 19% to £197 million from £165 million, operating profit advanced 36% to £23 million from £17 million, and basic earnings per share rose to 2.9 pence from 2.6 pence a year ago.

The company revised its estimated full-year revenue growth range to between 17% and 22% from the previous range of between 13% and 22%.

The company also tightened its full-year revenue growth range between 15% and 20%, from the previous range between 13% and 22%.

Hikma Pharmaceuticals Plc declined 3.5% to 1,847.0 pence despite the company forecasting core operating margin growth for its generic at the upper end of its previous announced range.

Alstom SA jumped 4.6% to €13.39 after the French-rail service company won an eight-year services contract extension of €950 million from CrossCountry trains, part of Arriva Group, in the United Kingdom.

Schneider Electric SE added 3.5% to €150.22 after the company said it finalized the acquisition of EcoAct SAS, a climate consulting and net zero solutions provider.

Hugo Boss AG increased 5.7% to €58.58 after the fashion apparel company reported positive third-quarter earnings and reiterated its full-year 2023 outlook.