Reuters
2022.09.23 04:14

LIVE MARKETS-Wall Street slumps as Fed funk lingers

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All 3 major U.S. stock indexes end red; Nasdaq down most

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Cons disc weakest S&P 500 sector; healthcare leads gainers

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Dollar, gold slip; crude, bitcoin advance

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U.S. 10-Year Treasury yield surges to ~3.70%

Sept 22 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at

WALL STREET SLUMPS AS FED FUNK LINGERS (1605 EDT/2005 GMT)

Wall Street nursed its Fed bruises on Thursday, extending its slide in the wake of Powell & Co’s rising implied terminal interest rate and its gloomier economic outlook. (.N)

All three major U.S. stock indexes closed in the red as investors absorbed the likelihood of a prolonged period of hawkishness, a hawkishness that appears to be globalized.

Half a dozen interest rate hikes from the Fed and its world peers prompted a chorus of recession worries.

Rate sensitive growth mega-caps Tesla (TSLA.O) , Apple

(AAPL.O) and Amazon.com (AMZN.O) were among the S&P 500’s heaviest burdens. Economically sensitive chips (.SOX) , transports (.DJT) , small-caps (.RUT) and consumer discretionary

(.SPLRCD) suffered the biggest percentage drops.

It’s a state of affairs that, perversely, has market participants hoping for downbeat data to show the Fed’s economic poison pill is working, and might provide the central bank room to switch to a more dovish policy.

But Thursday’s reports - jobless claims, current account and leading indicators - showed fewer unemployment applications, a narrowing CA gap and an LEI that showed only minimal economic deceleration.

On Friday, S&P Global/Markit releases its “flash” PMI readings for September.

Next week’s economic roster includes durable goods, home prices, consumer confidence, new and pending home sales, inventories and a final stab at second-quarter GDP.

But the headliner plays last. Investors have already circled a week from tomorrow on their calendars, when the Commerce Department is due to release its wide-ranging PCE report for August, which covers income, spending, saving and most significantly, inflation.

Here’s your closing snapshot:

(Stephen Culp)


BIG BANKS LIFT ESTIMATES FOR U.S. POLICY RATES (1352 EDT/1752 GMT)

There is market turmoil in the wake of the Wednesday’s 75-basis point Fed rate hike. Additionally, the Fed’s broadly hawkish economic projections showed an increased risk of a hard landing and 125 basis points (bps) of more hikes this year.

This, of course, has a bunch of big banks, including Goldman Sachs, raising their estimates for U.S. policy rates on Thursday.

Goldman revised their forecast for rate hikes to 75bps in November, 50 bps in December, and 25 bps in February, for a peak funds rate of 4.5-4.75%, versus 4-4.25% previously.

BofA Securities and Morgan Stanley are also weighing in on the Fed’s actions.

BofA Securities now expects hikes of 75bps and 50bps in November and December followed by two 25bp hikes by next March. Their new terminal is 4.75%-5.0%.

According to BofA, Chair Powell was noncommittal on the near-term outlook for rate hikes. However, they note he also reinforced that the Fed will be data dependent and that the Committee will make decisions one meeting at a time.

BofA adds that Powell also signaled that the Fed wishes to get real rates into positive territory across the yield curve.

“Given the revisions to the median dot, we think it should accomplish this goal. This will likely serve to put downward pressure on labor demand and in turn inflation and help the Fed restore price stability over time,” BofA analysts write.

Meanwhile, Morgan Stanley (MS) analysts say that the higher the peak the Fed aims for, the greater the risk of recession.

“We are already moving through sustained below-potential GDP growth. Now, we would need to see job gains slow materially to take pressure off the pace of policy tightening,” Morgan Stanley analysts write.

MS expects the market to drift toward higher terminal rates and flatter curves, and with this, they expect the USD to gain broadly as market pricing moves in the direction of the Fed’s forecasts.

Of note, the U.S. Dollar index (=USD) is flirting with more than 20-year highs, while the U.S. 10-Year Treasury yield

(US10YT=RR) is hitting more than 11-year highs.

The S&P 500 index (.SPX) , which is now down more than 21% from its January record close, sits less than 3% from its June bear-market low close.

(Terence Gabriel)


INVESTORS MAY BE PEERING INTO A WINDOW OF OPPORTUNITY -STIFEL (1215 EDT/1615 GMT)

The S&P 500 index (.SPX) finds itself back in rough waters.

Barry B. Bannister, Stifel’s chief equity strategist, believes the benchmark index is in a bottoming process. He sees positive catalysts from the fourth-quarter of 2022 to the first-quarter of 2023.

According to Bannister, the S&P 500 has been pressured by the rising 10-year real (TIPS) yield, which he says directly pressures the S&P 500 P/E ratio.

However, he believes that the S&P 500’s P/E is bottoming, and that process will only be negated if the Fed becomes incrementally more hawkish in November/December, causing a further 10-year TIPS yield rise.

“We see lower inflation, the 10-Y TIPS yield pulling back and 4,400 for the S&P 500 by 4Q-2022/1Q2-2023.” (Note - 4,400 is roughly 17% above current SPX levels)

As for recession risk, Bannister does not expect a “classical” U.S. recession until around the 3rd-quarter of 2023. He argues that the SPX in the post-WW2 period has only tended to plunge a month before recessions begin, which to him means another plunge may not occur until mid-2023. Thus, he thinks this would create a window of opportunity for investors in the 4Q-2022 to 1Q-2023 time frame.

With this view, he says that cyclical growth (big tech), with some cyclical value (early cyclicals such as retailing, homebuilding and banks) are his preferred equity trades into 2023.

“Still, we see the S&P 500 as flat/range-bound with oscillating moves throughout the 2020s, which is good for active over passive.”

(Terence Gabriel)


STOXX BELOW 400 (1150 EDT/1550 GMT)

European shares ended down sharply on Thursday after a host of central banks from the UK to Switzerland raised interest rates again, following the Fed in a fight against inflation, and stoking fears of a global recession.

Losses in Europe deepened toward the final auction of the day, sending the pan-European STOXX 600 (.STOXX) equity benchmark below the 400 points threshold for the first time since February 2021. The index was last down 1.8%.

(Danilo Masoni)


CATASTROPHES AND INSURERS IN 2022 (1125 EDT/1525 GMT)

For a while weather observers had been noting how quiet the storm season was this year. But hurricane Fiona - growing in strength and heading toward Bermuda and Nova Scotia after wreaking havoc on Puerto Rico and Dominican Republic - is one stark reminder that the season isn’t over until its over, which is, in theory, not until mid-November.

Meanwhile, insurance companies had already been looking at a big year for catastrophe claims, according to the latest data from the Insurance Information Institute (III).

For example, for the first half of 2022, there were $38 billion (bln) of U.S. insured losses from catastrophes. To be sure that’s lower than 2021’s $49 bln first half losses, which included a record $15 bln winter storm loss. But the 2022 number is above the 10-year average of $34 bln, according to Mark Friedlander at the III.

Catastrophe losses have soared in recent decades, according to Friedlander who noted that the average annual loss from 1980 to 1989 was $7.6 bln compared with $20.7 bln for 1990 to 1999 and $35.8 bln for the years 2000 through 2009. The average then shot up to $52.4 bln from 2010 to 2019.

While III obviously only has data for the first two years of the current decade, the average at the end of 2021 stood at $88.4 bln.

So what does all of this mean for insurers? Typically insurance stocks rally toward the end of the year, after the storm season is done, according to Piper Sandler analyst Paul Newsome who notes that investors don’t like the volatility that sometimes comes with storm season.

But this year, the S&P 500 insurance index (.SPXIN) has already outperformed the broader market, down 4.8% so far in 2022 compared with the S&P 500’s (.SPX) 21.2% decline.

And aside from the large claim losses, investors also have concerns about whether margins won’t improve because of inflation, according to Newsome.

(Sinéad Carew)


DATA THROUGH FED GOGGLES: JOBLESS CLAIMS, LEADING INDEX, CURRENT ACCOUNT (1053 EDT/1453 GMT)

Wednesday, Fed watchers got what they were expecting and then some - the baked-in 75 basis point interest rate hike came wrapped in a more hawkish than expected dot plot with a side of gloomy economic projections.

Whether those alarming dots come to fruition largely depends on economic data, three of those indicators graced investors’ screens on Thursday.

The number of U.S. workers filing first-time applications for unemployment benefits (USJOB=ECI) crept higher last week to 213,000, a 2.4% increase.

The Labor Department’s print landed 5,000 short of consensus.

The labor market remains, in a word, tight. Employers are facing difficulties finding qualified personnel, and there are still about two job vacancies for every unemployed worker.

It’s this tightness which has added steel to the Fed’s rate hike resolve, for not only does this state of affairs signal ongoing wage inflation, it also suggests the employment market can withstand a few buckets of cold water dumped on the demand side of the jobs equation.

“While overall economic activity is expected to slow, leading to a mild recession in H1 2023, the low level of claims is a reminder that labor market conditions remain extremely tight,” writes Nancy Vanden Houten, lead economist at Oxford Economics (OE). “The imbalance between the supply and demand for workers is key factor behind the Fed’s plans to continue aggressively raising interest rates.”

Ongoing claims (USJOBN=ECI) , reported on a one-week lag, eased by 1.6% to 1.379 million slipping further below the pre-pandemic 1.7 million level.

Next, economic signals from August suggest economic contraction.

The Conference Board’s (CB) Leading Economic index (LEI)

(USLEAD=ECI) , which aggregates a basket of ten forward-looking indicators, including jobless claims, ISM new orders, core capital goods, building permits and stock prices, to name a few.

The August number came in at -0.1%, marking the LEI’s sixth straight month in negative territory, a potential sign of recession according to Ataman Ozyildirim, CB’s senior director of economics.

“Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months,” notes Ozyildirim, adding that “a major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures.”

The graphic below pits the LEI against the “expectations” component of CB’s consumer confidence series:

Finally, the Commerce Department’s Bureau of Economic Analysis released its Current Account data (USCURA=ECI) for the second quarter, which showed the deficit narrowed by 11.1% to $251.1 billion.

The series tracks the trade balance of goods and services, foreign investment and transfers, which include some things as foreign aid and remittances.

The gap shrinkage is due, in large part, to a bump in exports, which helped mitigate the 0.6% GDP contraction in the April to June period.

”(The Fed’s) restrictive stance, as well as a weakening economic backdrop abroad, will dampen trade flows through the remainder of the year,” says Matthew Martin, U.S. economist at OE.

Of course, any data that harkens back to the second quarter is ancient history, economically speaking.

Wall Street seemed intent on extending Wednesday’s retreat in morning trading.

All three major U.S. stock indexes are red, with the tech-laden Nasdaq - and, notably, chips (.SOX) leading the declines.

Interest rate sensitive market leaders Tesla (TSLA.O) , Apple

(AAPL.O) and Amazon.com (AMZN.O) are doing the most damage to the main indexes.

(Stephen Culp)


CAN U.S. STOCKS STEM THE RED TIDE? (0944 EDT/1344 GMT)

Wall Street’s main indexes are in the red early on Thursday as investors assess the impact on U.S. economic growth from the Federal Reserve’s unwavering focus to rein in inflation through aggressive interest rate hikes. (.N)

This, after a wave of selling and near-3% two-day slide for the S&P 500 index (.SPX) through Wednesday’s close.

Goldman Sachs, Barclays and a bunch of investment banks raised their estimates for U.S. policy rates on Thursday.

Goldman revised their forecast for rate hikes to 75 basis points (bps) in November, 50 bps in December, and 25 bps in February, for a peak funds rate of 4.5-4.75%, versus 4-4.25% previously.

Meanwhile, the Japanese yen strengthened on Thursday after authorities intervened in the foreign exchange market to shore up the battered currency for the first time since 1998.

The U.S. dollar index (=USD) , after hitting its highest level since June 2002, is dipping.

And the U.S. 10-Year Treasury yield (US10YT=RR) hit 3.6542%, which is its highest level since February 2011.

Here is a snapshot of where markets stood shortly after Thursday’s open:

(Terence Gabriel)


NASDAQ COMPOSITE: THIS IS SO WEAK, IT MAY BE A POSITIVE (0900 EDT/1300 GMT)

The Nasdaq Composite (.IXIC) stands down 30% on a closing basis from its November 2021 record-high.

Meanwhile, one measure of internal strength, on a monthly basis, has been fantastically weak. It is now nearing its record low, suggesting the potential that the Nasdaq’s protracted and brutal decline may be especially ripe for a turn:

The Nasdaq New High/New Low index is on a record monthly losing streak. It is now on pace to fall for a 19th straight month. Its previous record losing streak was a 14-month run of losses in 2007-2008.

With the current decline, the measure has plunged to 15%, or its lowest level since a 14.9% reading in April 2009. This measure’s record low was at 10.3% in March 2009. That marked the end of what was a 54% Nasdaq collapse on a closing basis from what was then its October 2007 record high.

Looking at this measure’s behavior over time, periods of divergence have warned of the risk of a major top. For example, most recently, this measure peaked in February 2021 at 83.5%. It ended November 2021 at 62.9%, the month of the Nasdaq’s record high.

Admittedly, dealing with lows appears somewhat trickier. However, it has tended more toward V-bottoms, and has not shown a tendency to flat line. That said, it could always break 10.3%, and fall closer to zero.

However, as this measure flirts with its record low, traders will be watching for any uptick. Based on its history, slicing up through the descending 10-month moving average, now at 32.8%, would signal building internal strength that could potentially lead to a multi-month IXIC consolidation phase, or a major advance.

(Terence Gabriel)


FOR THURSDAY’S LIVE MARKETS’ POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE:

IXIC09222022

earlytrade09222022

Jobless claims

Leading indicators

Current account

EU close

Closing snapshot

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

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