U.S. stocks continue to oscillate around the unchanged mark. Volume remains subdued in the waning days of a dismal 2022, with the equity front offering little in terms of news. However, Southwest Airlines continues to be troubled by mass flight cancellations. The economic calendar delivered another drop in pending home sales, while Richmond manufacturing activity unexpectedly moved into expansion territory. Treasury yields are mixed after yesterday's solid gains, and the U.S. dollar is nearly unchanged. Crude oil prices are dropping, and gold is pulling back from Tuesday's rise. Asia finished mixed and Europe is also diverging as the global markets wrestle with China's reopening and uncertainty regarding the ultimate impact of aggressive monetary policy tightening across the globe.
At 10:44 a.m. ET, the Dow Jones Industrial Average is dipping 0.1%, while the S&P 500 Index and the Nasdaq Composite are declining 0.2%. WTI crude oil is dropping $1.95 to $77.58 per barrel, and Brent crude oil is falling $1.79 at $82.89 per barrel. The gold spot price is trading $13.80 lower to $1,809.30 per ounce, and the Dollar Index is little changed at 104.21.
Shares of Southwest Airlines Company (LUV $33) continue to decline amid mass flight cancellations and delays by the airline, exacerbated by the recent powerful winter storm in most parts of the Nation. The Transportation Department stated that they are "concerned by Southwest's unacceptable rate of cancellations and delays and reports of lack of prompt customer service. The Department will examine whether cancellations were controllable and if Southwest is complying with its customer service plan."
Equity news is light in the final days of 2022, which has the S&P 500 tracking for a decline of nearly 20% for the year. Although the index is down for the month of December, it is still solidly higher for the quarter, which would be the first quarterly advance since Q4 2021. However, the Nasdaq is heading toward a Q4 drop. The markets continue to wrestle with the ultimate impact of aggressive Fed actions to try to combat inflation after earlier this month downshifting from a string of four-straight 75-basis point (bp) rate hikes to a 50-bp increase. The deceleration remained unusually aggressive, and the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.
Schwab's Chief Investment Strategist Liz Ann Sonders discusses in our latest, Schwab Market Perspective: When Will the Fed Brake?, how inflation trends are moving in a favorable direction, but the change is likely too slow for the Fed to take its foot off the brake anytime soon.
Pending home sales fall, regional manufacturing output unexpectedly jumps into expansion
Pending home sales dropped 4.0% month-over-month (m/m) in November, compared to the Bloomberg consensus estimate of a 1.0% decrease and following October's negatively revised 4.7% drop. Sales tumbled 38.6% y/y on the heels of October's unadjusted 36.7% fall. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, as properties typically go under contract a month or two before the contract is closed.
The Richmond Fed Manufacturing Activity Index surprisingly moved into expansion territory (a reading above zero). The Index rise to 1 in December from -9 in November, and compared to the expected decline to -10. Shipments and employment moved from contraction to expansion, and growth in wages accelerated.
Treasury rates are mixed, as the yield on the 2-year note is down 6 basis points (bps) to 4.37%, while the yield on the 10-year note is ticking 1 bp higher to 3.86%, and the 30-year bond rate is rising 2 bps to 3.97%.
Treasury yields are higher for the year as the markets react to the aggressive monetary policy tightening by the Fed and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years.
Europe diverging
Stocks in Europe are mixed in late-day action as the markets continue to grapple with uncertainty regarding the implications of aggressively tightening monetary policies around the world, and the ongoing war in Ukraine, although both sides have hinted at potential peace talks. Also, the markets are reacting to the economic and inflation impacts of the reopening in China as it eases COVID restrictions despite rising cases. European markets are trading in another quiet session as the economic calendar in the region is void of any notable releases. U.K. markets are returning to action following a long holiday break.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses his Top Global Risks of 2023, highlighting our top five that may define the global markets, considering that a new year almost always brings surprises of one form or another. The euro is dipping versus the U.S. dollar, while the British pound is gaining ground. Bond yields in the Eurozone are mixed, and rates in the U.K. are moving higher.
The U.K. FTSE 100 Index is up 0.3%, France's CAC-40 Index and Italy's FTSE MIB Index are down 0.5%, Germany's DAX Index is declining 0.3%, Switzerland's Swiss Market Index is decreasing 0.2%, and Spain's IBEX 35 Index is dipping 0.1%.
Asia mixed as markets grapple with China's changing COVID policy
Stocks in Asia finished mixed as the markets continue to adjust to easing COVID policies in China and in Hong Kong, while also dealing with uncertainty regarding the recent surge in cases in China. Hong Kong stocks led to the upside after announcing further easing of COVID measures in the city. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening. Volatility remained as the markets grappled with the global economic impact of aggressive monetary policy tightening across the globe, which was joined by the recent announcement from the Bank of Japan (BoJ) to tweak its bond purchase program. All of these actions have boosted volatility in the global currency and bond markets. Also, geopolitical concerns remained, with tensions rising between South Korea and North Korea. In economic news, Japan's preliminary November industrial production continued to decline but at a smaller pace than anticipated, while South Korea's manufacturing and non-manufacturing sentiment for January deteriorated.
Japan's Nikkei 225 Index decreased 0.4%, with the yen continuing to pull back from recent strength versus the U.S. dollar that has come following the BoJ's actions. Elsewhere, China's Shanghai Composite Index declined 0.3%, and the Hong Kong Hang Seng Index jumped 1.6% in a return to action following a long holiday break. South Korea's Kospi Index fell 2.2%, India's S&P BSE Sensex 30 Index was little changed, and Australia's S&P/ASX 200 Index traded 0.3% lower, following an extended holiday break.
© Charles Schwab
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