Stocks | October 6, 2022

Schwab Market Update

Stocks Were Lower in Anticipation for Tomorrow’s Key Labor Report

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U.S. stocks declined, giving back some of the gains from earlier this week as the volatility in the currency and bond markets continued to be a major source of uneasiness for investors. On the economic front, jobless claims accelerated slightly more than expected. The economic calendar will continue to heat up tomorrow, with the highly anticipated September nonfarm payroll report slated for release. Treasury yields increased, and the U.S. dollar gained ground. Crude oil prices rose as investors digested yesterday's OPEC+ oil production cut, and gold turned higher. In earnings news, Constellation Brands and Conagra traded lower even as both companies topped earnings estimates. Additionally, Costco Wholesale released data which showed that net sales were lower than the previous month’s read, but remained positive year-over-year. Asian stocks finished mostly higher, and European stocks were lower as the markets in the region continued to grapple with the implications of monetary policy actions from central banks around the world.

The Dow Jones Industrial Average declined 347 points (1.2%) to 29,927, the S&P 500 Index decreased 39 points (1.0%) to 3,745, and the Nasdaq Composite went down 75 points (0.7%) to 11,073. In moderate volume, 4.2 billion shares of NYSE-listed stocks were traded, and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.69 higher to $88.45 per barrel. Elsewhere, the gold spot price increased $1.80 to $1,722.60 per ounce, and the Dollar Index rose 1.1% to 112.20.

Constellation Brands Inc. (STZ $233) reported adjusted fiscal Q2 earnings-per-share (EPS) of $3.17, topping the $2.82 FactSet estimate, with revenues rising 12.0% year-over-year (y/y) to $2.7 billion, north of the Street's $2.5 billion forecast. The parent of Modelo and Corona beers said it saw continued strength in these businesses, while its wine and spirits unit also grew, driven by U.S. shipment volume growth. Shares of STZ traded lower.

Conagra Brands Inc. (CAG $33) posted adjusted fiscal Q1 EPS of $0.57, above the projected $0.52, with revenues rising 9.5% y/y to $2.9 billion, roughly in line with estimates. The consumer food company said it saw an unfavorable impact from foreign exchange, while its organic sales—excluding divestitures, acquisitions, and foreign exchange—rose 9.7% y/y. CAG reaffirmed its full-year guidance, which includes expected supply chain inefficiency and some incremental volume weakness tied to the new inflation-driven pricing that went into effect early in the quarter. Shares turned to the downside.

Costco Wholesale Corporation (COST $482) reported that its September net sales rose 10.1% y/y to $21.5 billion, which is slightly lower than the 11.4% y/y increase reported last month. The membership-only retail store corporation noted that its September comparable sales were up 8.5% versus the same period last year, but when excluding changes in gasoline prices and foreign exchange, comparable sales rose 8.6%. Shares were slightly higher.

Despite yesterday and today’s dip, the S&P 500 Index remains higher for the week after rallying on Monday and Tuesday, bouncing back from a string of weekly declines that took the index to levels not seen since 2020. Inflation pressures have persisted, forcing the Fed to aggressively tighten monetary policy and boosted concerns about the economy as discussed in the article, Stock Market Volatility: Recession Worries Flare. Meanwhile, as the markets gear up for the start of Q3 earnings season next week, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Jobless claims accelerated more than expected

Weekly initial jobless claims (chart) came in at a level of 219,000 for the week ended October 1, above the Bloomberg consensus estimate of 204,000 and the prior week's downwardly revised 190,000 level. The four-week moving average ticked higher by 250 to 206,500, and continuing claims for the week ended September 24 rose by 15,000 to 1,361,000, north of estimates of 1,350,000. The four-week moving average of continuing claims fell by 10,250 to 1,370,750.

Treasury yields were higher, as the yield on the 2-year Treasury note gained 9 basis points (bps) to 4.22%, the yield on the 10-year note rose 3 bps to 3.81%, and the 30-year bond rate went up 2 bps to 3.79%.

Bond yields and the U.S. dollar have been bolstered as of late by the Fed's aggressive monetary policy actions as discussed by Schwab's Chief Fixed Income Strategist Kathy Jones in her article, With Inflation Offsides, the Fed Keeps Hiking. The Fed has hiked rates by 75 bps for three-straight meetings, downgraded economic growth forecasts, and increased the unemployment rate outlook, as inflation remains the Central Bank's primary concern. You can follow Kathy on Twitter: @KathyJones.

Schwab’s Liz Ann Sonders discusses the impact of the greenback’s recent rise in her latest article, Ripple(s) From Surging Dollar, discussing how while a spike in global market volatility has prompted some investors to think a Fed response is imminent, we caution against thinking that intervention is a bullish development.

Tomorrow, investors will a get a look at the highly anticipated September labor report. Nonfarm payrolls are expected to add 250,000 jobs from August’s 315,000 jobs gain. Private sector payrolls, on the other hand, is projected to show a growth of 275,000 additional jobs, versus last month’s 308,000 gain. The unemployment rate is estimated to remain at the prior month's 3.7% reading, and average hourly earnings are forecasted to match August’s 0.3% m/m rise and be up 5.1% y/y. Additionally, we will get the final look at wholesale inventories for August, estimated to have increased 1.3% m/m. Later in the day, consumer credit will hit the tape, with forecasts calling for consumer borrowing in August to come in at $25.0 billion, down from July's $23.8 billion print.

Europe ended lower as volatility continues

Stocks in Europe traded lower as the currency and bond markets remained volatile. The British pound continued to drop versus the U.S. dollar, and the euro also declined against the greenback. Bonds yields in the U.K. rose noticeably, and yields in the Eurozone were higher. The choppiness has come from recent monetary policy tightening from central banks around the world, led by the Fed, while the Bank of England said it will buy long-term bonds to try to stabilize its financial markets and the U.K. government scrapped plans to cut taxes for the highest income earners recently to add to the volatility. The markets also digested yesterday's oil production cut of 2 million barrels per day by OPEC+, along with the festering inflation backdrop that has seen pricing pressures remain elevated. In economic news, German factory orders fell much more than expected for August, Eurozone retail sales declined in line with estimates for August, and U.K. construction output returned to expansion territory for September.

The worrisome inflation picture is being exacerbated by an ensuing energy crisis in the region due to the ongoing war in Ukraine. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios. You can follow Jeff on Twitter: @JeffreyKleintop.

The U.K. FTSE 100 Index, France's CAC-40 Index, and Switzerland's Swiss Market Index declined 0.8%, Germany's DAX Index was down 0.4%, Italy's FTSE MIB Index decreased 1.0%, and Spain's IBEX 35 Index traded 0.9% lower.

Asia mostly higher despite host of headwinds

Stocks in Asia finished mostly higher even as the U.S. markets dipped yesterday after a two-day rally. The global markets appeared to continue to find support from the prospect of a deceleration in monetary policy tightening from central banks across the globe. Last week the Bank of England announced that it will purchase longer-term bonds, and earlier this week the Reserve Bank of Australia (RBA) raised its benchmark interest rate by a smaller amount than expected. The tightening monetary policies has caused financial conditions to firm up across the globe. The equity markets showed some resiliency in the face of volatility in the currency and bond markets across the globe, with the U.S. dollar regaining some momentum after dropping sharply earlier in the week. The Japanese yen and China's currency of late have fallen to exacerbate global recession concerns, along with a spike in global bond yields. Adding further downside pressure on currencies in Japan and China, the Bank of Japan and China's central bank have bucked the trend, as China even loosened policy to try to boost the world's second-largest economy that has also been hampered by the impact of COVID-related lockdowns, regulatory crackdowns, real estate issues, and elevated geopolitical tensions with the U.S. The energy markets moved higher after yesterday's OPEC+ decision to cut production by 2 million barrels, while Technology stocks helped lead the markets higher.  

Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics including inflationary concerns, currency movements, government policies, and more. In economic news in the region, Australia's export growth rebounded in August.

Japan's Nikkei 225 Index increased 0.7%, with the yen remaining soft versus the U.S. dollar, continuing to sit near multi-decade lows versus the greenback given the divergence of monetary policies. Australia's S&P/ASX 200 Index was little changed, and South Korea’s Kospi Index gained 1.0%. The Hong Kong Hang Seng Index cooled off a bit, declining 0.4% after yesterday's near 6.0% jump, and India's S&P BSE Sensex 30 Index traded 0.3% higher. Volume remained lighter than usual as markets in mainland China remained closed for the Golden Week holiday.

Tomorrow’s international calendar will introduce Germany’s Import Price Index, retail sales, and industrial production. Out of Asia, we will get reads on Japan’s leading index and household spending.

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