U.S. equities are solidly higher in afternoon action, paring some of the losses that have plagued the start of 2023. Treasury yields continue to drop, and the U.S. dollar is giving back some of yesterday's rally, but off the worst levels of the day. Crude oil prices are extending a decline and gold is trading to the upside. Equity news remains sparse, with Dow member Salesforce announcing plans to cut its workforce by about 10%, while Alibaba is rallying on signs China may be easing its clampdown on the tech sector. The economic calendar offered some lackluster data points, as manufacturing activity remained in contraction territory for the second-straight month, and mortgage applications fell for a second-consecutive week as interest rates jumped, while job openings came in above forecasts. However, the headlining event will come in afternoon action, courtesy of the Fed's minutes from its December monetary policy meeting, where it continued to aggressively tighten policy though at a decelerated pace. Asia finished mixed, and Europe added to yesterday's solid start to 2023.
At 12:50 p.m. ET, the Dow Jones Industrial Average is up 0.7%, while the S&P 500 Index and the Nasdaq Composite are gaining 1.2%. WTI crude oil is dropping $3.12 to $73.81 per barrel, and Brent crude oil is falling $3.26 at $78.84 per barrel. The gold spot price is trading $15.80 higher to $1,861.90 per ounce, and the Dollar Index is decreasing 0.4% to 104.14.
Dow member Salesforce Inc. (CRM $140) announced that it plans to cut its workforce by approximately 10% as part of its restructuring program aimed at reducing operating costs, improving operating margins, and continuing to advance its ongoing commitment to profitable growth. CRM also said its plan includes select real estate exits and office space reductions within certain markets. Shares are trading higher.
Alibaba Group Holding Ltd. (BABA $103) is rallying amid signs that Chinese regulators may be easing their clampdown on the tech sector in the country. Regulators approved Ant Group Co's fundraising plan which could potentially pave the way for a restarted initial public offering process of the financial technology firm that had been scrapped in 2020, per Bloomberg. BABA owns a stake in Ant Group.
Equity news remains in short supply as 2023 begins, and on the heels of the near 20% drop for the S&P 500 in 2022. The markets continue to wrestle with the ultimate impact of aggressive Fed actions to try to combat inflation after downshifting in December 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.
Manufacturing activity contracts for second month ahead of a look at December Fed decision
The December Institute for Supply Management (ISM) Manufacturing Index (chart) showed that manufacturing activity remained in contraction territory (a reading below 50). The index declined to 48.4 from the prior month’s unrevised 49.0 reading, and versus the Bloomberg consensus estimate calling for a dip to 48.5. The manufacturing sector contracted for a second-straight month as new orders fell further below 50, and production dropped into contraction territory, while employment increased to expansion territory. Additionally, inventories grew at an accelerated pace, and supplier deliveries improved. Inflation pressures continued to ease, with the Prices Index falling 3.6 points to 39.4 from 43.0.
The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed a decline to 10.46 million jobs available to be filled in November, above estimates of 10.05 million, and versus October's upwardly revised level of 10.51 million. The report showed the hiring rate was 3.9%, down from October's 4.0% level, and total separations—includes quits, layoffs, discharges, and other separations—remained at October's 3.8% rate. The quit rate for November increased to 2.7% from the prior month's 2.6% pace.
The MBA Mortgage Application Index fell 10.3% last week, following the prior week's 3.2% decline. The index decreased for a second week in a row as a 4.4% slide in the Refinance Index was met with a 12.0% fall for the Purchase Index. The downturn came as the average 30-year mortgage rate moved 16 bps higher to 6.58% and is up 325 bps versus a year ago.
Treasury yields moved higher in 2022 amid 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.
Treasury rates are lower, as the yield on the 2-year note is dipping 2 bps to 4.35%, the yield on the 10-year note is dropping 8 bps to 3.71%, and the 30-year bond rate is falling 7 bps to 3.82%.
Europe adds to gains to start the year
Stocks in Europe were higher for a third session to begin 2023, with investors in the region continuing to react to unusually warm winter weather that has eased energy crisis concerns and yesterday's cooler-than-expected German inflation figures that has tempered monetary policy worries. More positive inflation data hit the tape today, with French consumer prices declining month-over-month in December and coming in below estimates compared to the same period a year ago. A plethora of December Services PMI reports in the region were released, with Eurozone activity being revised higher than initially reported but remaining in contraction territory for the fifth-straight month.
The markets have shown some resiliency this week amid economic uncertainty as high inflation has fostered aggressive tightening of monetary policies around the world, and as the war in Ukraine continues. Also, optimism of the reopening in China has been tempered by COVID cases recently climbing sharply in the country.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses his Top Global Risks of 2023, highlighting our top five risks that may define the global markets, considering that a new year almost always brings surprises of one form or another. The euro and British pound rose versus the U.S. dollar. Bond yields in the Eurozone and the U.K. were broadly lower.
The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index rallied 2.3%, Germany's DAX Index rose 2.1%, Italy's FTSE MIB Index advanced 1.7%, Spain's IBEX 35 is increased 1.9%, and Switzerland's Swiss Market Index traded 1.5% higher.
Asia mixed as markets get to full strength for first time in 2023
Stocks in Asia finished mixed, as markets in Japan fell in a return to action following an extended holiday break. The global markets continue to digest a host of recent PMI reports that showed output in China and Japan contracted in December. Weaker demand and the recent surge in COVID cases in China has likely weighed on production. Optimism surrounding China's reopening has tempered, with investors fretting about a larger-than-expected drag on near-term economic growth due to the rise in COVID cases. 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. However, manufacturing continued to expand in Australia and India. The markets awaited today's release of the minutes from the Fed's December monetary policy meeting as they try to gauge how aggressive the U.S. central bank could remain.
Japan's Nikkei 225 Index dropped 1.5%, with the yen choppy versus the U.S. dollar on the heels of global monetary policy tightening and last month's change in the Bank of Japan's bond purchase program. China's Shanghai Composite Index increased 0.2%, and the Hong Kong Hang Seng Index led to the upside, rallying 3.2% amid strength in technology, healthcare, and real estate issues. India's S&P BSE Sensex 30 Index declined 1.0%, Australia's S&P/ASX 200 Index gained 1.6%, and South Korea's Kospi Index advanced 1.7%.
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