The Market Today
Markets Swing Wildly as Uncertainty Hangs Heavily
by Craig Dismuke, Dudley Carter
Fed Begins Meeting with Inflation Pressure High: The Fed begins its two-day meeting today. The general consensus has evolved to expect policymakers to foreshadow a rate hike in March, raise the possibility of four hikes in 2022 (up from three in their December SEP), and allow their taper process to follow the current schedule ending in mid-March. After a barrage of criticism that they are behind the curve, officials may elect to make more aggressive changes. The most plausible divergence would be ending asset purchases earlier than March. However, officials may view the risks to financial market stability as too high to be overly aggressive at this point, particularly given the apparent supply chain impact of Omicron and elevated geopolitical risks.
U.S. Puts Troops on Alert: Geopolitical tensions remain high as the U.S. put 8,500 troops on “high alert” for potential deployment to Eastern Europe as tension continues to increase with Russia. The situation is adding uncertainty for markets that are already grappling with choppy waters.
Home Prices and Consumer Confidence: The FHFA and S&P CoreLogic home price reports for November are both scheduled for release at 8:00 a.m. CT. At 9:00 a.m., the Conference Board’s January report on consumer confidence is expected to decline from 115.8 to 111.1. In context of the University of Michigan’s report which is now at its second lowest level of the pandemic, the risk for confidence is to the downside. Also at 9:00, the Richmond Fed will release its January report on regional manufacturing activity.
Corporate Earnings – MSFT: It is a busy day for corporate earnings reports. Already this morning General Electric disappointed expectations, citing challenges from the supply chain disruptions on GE Healthcare. 3M, Lockheed, Raytheon, and Johnson & Johnson all beat expectations. Reporting after the close today will be Microsoft.
OTHER ECONOMIC NEWS
Markit PMIs Pull Back in January: Omicron’s economic impact was more severe than expected in January according to Markit’s preliminary PMIs. The U.S. Composite PMI fell from 57.0 to 50.8, indicating the slowest expansion of activity since July 2020. The manufacturing index dipped from 57.7 to 55.0, its lowest level since October 2020. While inflation pressures eased, supplier delays persisted and many activity indicators softened, including the first contraction for employment since July 2020. The Services PMI deteriorated more severely, from 57.6 to 50.9, despite signs of relatively resilient demand. Markit said, “Soaring virus cases…brought the US economy to a near standstill at the start of the year,” but added that “output has been affected by Omicron much more than demand.” As a result, “robust growth of new business inflows hint[s] that growth will pick up again once restrictions are relaxed.” After pointing out some easing of supply issues and pricing pressures, Markit concluded that, “despite the survey signaling a disappointing start to the year, there are some encouraging signals for the near-term outlook.”
Stocks Post Strongest Rebound in More than 13 Years in Wild Day on Wall Street: A rebound from last week’s equity sell-off appeared hopeless early Monday as the major indices careened lower at the opening bell to eye-popping intraday losses around noon. The Dow sank more than 1,100 points at its lowest point, a loss of more than 3.2%. The S&P 500 slumped nearly 4%. Still worse, tumbling tech shares dragged the Nasdaq down by as much as 4.9%. The early slide extended a string of losses that handed the Nasdaq and S&P 500 their worst weekly performances since March 2020. However, the recovery in the second half of Monday’s session was as impressive as the initial slump. After rallying sharply, the Nasdaq closed 0.6% higher while the Dow and S&P 500 both added 0.3%. October 2008 marked the last time the Nasdaq and S&P 500 posted equally large intraday declines before closing in positive territory. While the size of the intraday swings were quite the spectacle, a bounce from technically stretched levels after such a poor showing last week was not completely a surprise. Treasury yields also swung, but were comparatively calm. The 2-year yield slipped 3.0 bps to 0.97%, among the larger declines during the post-pandemic era. The 10-year yield recovered to close up 1.3 bps at 1.77% and fell only 5.3 bps at its low. From 2010 to 2019, 31 intraday declines of at least 3% for the S&P 500 were accompanied by average intraday declines for the 10-year Treasury yield of around 14 bps.
Market Volatility Continues as U.S. Futures Reverse Course Again, Paring Monday Afternoon Recovery: Global markets are mixed Tuesday and volatility remains evident in large swings across world indices. Despite the stunning recovery for U.S. equities Monday afternoon, stocks in Asia posted sizable declines Tuesday that dragged the MSCI Asia Pacific Index down more than 1.5% to a 14-month low. Europe’s Stoxx 600, however, rose 0.7%. The index closed down 3.8% Monday with Wall Street still in a steep decline on the way to the worst levels of the day. U.S. futures pulled back overnight, pointing to another uncertain domestic session. S&P 500 futures fell 1.6%, splitting a 2.2% decline for the Nasdaq and a 0.8% decline for the Dow. Investors’ attention continues to be spread over multiple fronts. In addition to the volatile market undercurrents, global corporate earnings continue to pour in, the situation at Ukraine’s border with Russia remains worrisome, and the Fed begins its two-day meeting today. Treasury yields had moved higher initially at the start of European trading but pulled back and were lower at 7:30 a.m. CT. The 2-year yield dipped 0.4 bps to 1.00%, the 5-year yield edged 0.7 bps lower to 1.54%, and the 10-year yield fell 1.2 bps to 1.76%.