On a morning that is rather light on economic data, but certainly not on corporate earnings news (more on each topic below), the attention of Wall Street is clearly on the latest decision by the Federal Open Market Committee (FOMC). At 2:00 P.M. (EDT) yesterday, we learned that Federal Reserve policymakers decided to keep the federal funds rate in the range of 5.25% to 5.50%. This was not unexpected, as was commentary that the central bank plans to keep interest rates high for a longer period to effectively fight inflation, which has proven to be quite sticky.
Treasury market yields fell on the FOMC statement and Federal Reserve Chairman Jerome Powell’s commentary that the central bank is strongly committed to bringing price growth down to its target goal of 2.0%, but will proceed carefully in doing so. The “carefully” term did not raise the odds of another interest-rate hike at the next few FOMC meetings and, if anything, may have pushed the possibility of another interest-rate hike further out. Not surprisingly, equities rallied on the commentary, led by the technology dominated NASDAQ Composite. The valuation of technology stocks, which takes into account projected revenues well into the future, depends significantly on interest rate expectations. The equity futures are presaging a continued rally this morning, as the yield on the 10-year Treasury note is hovering around 4.70% after touching 5.00% in late October.
Earlier today, we received a few reports that were to be monitored by the Fed. In two separate releases, the Labor Department reported that initial jobless claims for the week ending October 28th totaled 217,000 which was up 5,000 from the previous week’s revised figure, and nonfarm productivity in October came in at 4.7%, the best reading since the third quarter of 2020. Unit labor costs fell 0.7%, versus the consensus forecast of a 0.8% increase. Better productivity is a positive for the Federal Reserve, as it may put downward pressure on salaries and aid the central bank in its battle to tame inflation. These reports come ahead of tomorrow’s much-anticipated data on October employment and unemployment. Our sense is that a better-than-expected reading on job creation would actually not be good news for stocks and bonds, as it would likely put upward pressure on Treasury market yields.
On the earnings front, we received a few key reports from Corporate America since the close of trading yesterday afternoon. Of note, semiconductor producer Qualcomm (QCOM) beat fiscal first-quarter sales and profit forecasts and raised its prognostications. The technology company said the sales of Qualcomm-powered smartphones, which declined earlier this year, are starting to improve and noted that a renewed contract with Apple is boosting the company’s outlook. Likewise, fellow chipmaker Super Micro Computer (SMCI) posted better than expected top- and bottom-line results and raised its near-term expectations. Shares of both companies are trading higher in pre-market action. Meantime, the news was mixed in the healthcare space, as shares of Moderna (MRNA) and Eli Lilly (LLY) are trading lower in pre-market action after reporting quarterly results, while the stock of obesity drug maker Novo Nordisk (NVO) is pointing upward after the drug company reported a surge in earnings per share.
Overall, the earnings news for the S&P 500 companies has been quite good, with nearly 80% of the companies beating profit forecasts thus far. However, the prognostications from the companies have failed to impress Wall Street (the consensus for S&P 500 fourth-quarter earnings has come down a bit), and this is leading to both some daily and intra-day volatility in the stock market. After today’s closing bell, Wall Street’s focus will be on the latest quarterly results from technology behemoth Apple (AAPL).
Turning back to the Federal Reserve, Chairman Powell noted that the rising yields in the Treasury market and the resultant increased borrowing costs are helping do the work for the lead bank in its attempt to slow demand for goods and services and eventually put downward pressure on prices. The central bank said both financial and credit conditions are tightening, which investors took to mean that the Fed may be done with raising rates, but at the same time keeping them high for an extended period. There also is a belief that the ongoing quantitative tightening (monthly selling of $95 billion of Treasury notes and mortgage backed securities) that is removing liquidity from the financial system will keep rates higher. In his post-decision press conference, Fed Chairman Powell said there still is a bias to hike interest rates, but he didn’t sound incredibly excited about that possibility.
We also think that even with the annualized 4.9% GDP advance during the third quarter, the noted tighter credit and financial conditions, along with the drop in manufacturing activity last month and the recent struggles of the housing market amid higher mortgage rates, are likely giving the Fed some pause about increasing rates further.
Looking beyond the domestic economy, there was weakness yesterday amongst those companies that are heavily reliant on China for business. That is because concerns about economic weakness in China have grown. Stocks like Yum Brands China (YUMC) with major exposure to China were under significant selling pressure. This morning, Starbucks (SBUX) confirmed this thinking with its latest quarterly results, which showed a moderation in China-based sales growth. That said, the coffee giant’s overall results were quite good, and the stock is up nicely in pre-market action. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
