U.S. stocks are extending a late last-week rally, with Q4 earnings season set to shift into high gear. Also, the markets are looking to next week's Fed monetary policy decision, with the Central Bank expected to slow down on their tightening campaign, bolstered by a tenth-straight monthly decline in the Leading Economic Index. Treasury yields are mostly rising, and the U.S. dollar is nudging higher. Crude oil prices are gaining ground and gold is seeing some pressure. Equity news is relatively light before the week’s earnings storm, with Elliott Investment Management reportedly taking a multi-billion dollar stake Dow member Salesforce, and Evoqua Water Technologies agreeing to be acquired by Xylem Inc. for roughly $7.5 billion. Asia finished higher though several markets were closed for the Lunar New Year holiday, and Europe remains mostly in the green.
At 10:51 a.m. ET, the Dow Jones Industrial Average is up 0.7%, the S&P 500 Index is gaining 1.0%, and the Nasdaq Composite is rallying 1.5%. WTI crude oil is increasing $0.46 to $82.10 per barrel, and Brent crude oil is advancing $0.81 at $88.44 per barrel. The gold spot price is trading $7.20 lower to $1,921.00 per ounce, and the Dollar Index is ticking 0.1% higher to 102.10.
Dow member Salesforce Inc. (CRM $157) is rising after reports that hedge fund Elliott Investment Management has taken a multi-billion dollar stake in the enterprise software company. Bloomberg reported that Elliott said it looks forward to working constructively with Salesforce to realize the value befitting a company of its stature.
Evoqua Water Technologies Corp. (AQUA $46) is rallying after agreeing to be acquired by Xylem Inc. (XYL $100) in an all-stock transaction that reflects an implied enterprise value of about $7.5 billion. Shares of XYL are trading solidly lower.
Q4 earnings season is expected to shift into high gear this week and investors continue to grapple with the ultimate impact of aggressive Fed actions to try to combat rising prices. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in our latest Schwab Market Perspective: Slowdown or Recession?, how although it's possible the Federal Reserve will guide the economy to a "soft landing," evidence has been pointing toward recession.
With the February 1 monetary policy decision approaching, the Fed is expected to continue to downshift to a 25-basis point (bp) rate hike after following up four 75-bp rate increases with a 50-bp rise in December. However, the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.
Leading indicators drop for tenth-straight month
The Conference Board's Leading Economic Index (LEI) for December fell 1.0% month-over-month (m/m), worse than the Bloomberg consensus estimate calling for a 0.7% decline, and compared to November's negatively revised 1.1% drop. The index recorded its tenth consecutive monthly loss. ISM new orders, consumer expectations, average workweek, jobless claims, building permits, credit conditions, and the yield curve were the negative contributors, while consumer goods and capital spending figures were roughly flat.
The Conference Board noted in its report, "The U.S. LEI fell sharply again—continuing to signal recession for the U.S. economy in the near term…There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead."
Treasury rates are mostly higher, as the yield on the 2-year note is little changed at 4.21%, while the yield on the and 10-year note is gaining 3 bps to 3.51%, and the 30-year bond is rising 4 bps to 3.69%.
Bond yields have seen heightened volatility lately but remain solidly higher over the past 12 months as the markets react to aggressive Fed monetary policy actions. 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.
This week, Q4 earnings season shifts into a higher gear and will likely be the focus. However, the economic docket will be a busy one and offer a number of reports that could garner interest. More housing data will be released, courtesy of the S&P CoreLogic Case-Shiller Home Price Index for November, new home sales and pending home sales for December, as well as the weekly read on the MBA Mortgage Applications Index. The first look (of three) at Q4 Gross Domestic Product (GDP) is also on tap, as well as durable goods orders for last month, preliminary data on January manufacturing and services activity from S&P Global, and initial jobless claims for the week ended January 21. Rounding out the docket will be a look at the consumer, via personal income and spending for the month of December, as well as the final read on the University of Michigan's Consumer Sentiment Index for January.
Europe mostly higher to usher in new week
Stocks in Europe are mostly higher in late-day action, adding to Friday’s gains and continuing the strong start to 2023. The markets have been buoyed by signs that warmer-than-expected winter weather may help the region avoid an energy crisis, as well as China’s reopening, and expectations that global central bank aggressive tightening may cool off. Meanwhile, the markets are awaiting next week’s monetary policy decision from the Fed in the U.S. as well as this week’s ramped-up earnings season. However, the markets continue to wrestle with the ultimate implications of aggressive monetary policy tightening around the world on the global economy and financial conditions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Go With the Flow, how volatility waves and changing-news tides elicit short-term market moves; economic currents tend to affect longer-term market shifts which may now favor international stocks. The euro is ticking higher versus the U.S. dollar and the British pound is trading lower. Bond yields in the Eurozone are rising, while rates in the U.K. are dipping.
The U.K. FTSE 100 Index and Spain's IBEX 35 Index are up 0.2%, France's CAC-40 Index is gaining 0.4%, Germany's DAX Index is advancing 0.3%, and Switzerland's Swiss Market Index is trading 0.7% higher, while Italy's FTSE MIB Index is little changed.
Asia higher to begin week but volume was light
Stocks in Asia finished higher as the new week kicked off, but volume was lighter than usual as several markets were closed for the Lunar New Year holiday. The markets added to Friday’s gains amid optimism regarding China’s reopening and expectations that central banks across the globe, including the Fed in the U.S., may be set to slow down monetary policy tightening. Economic news was also light, with South Korea’s trade data being the lone report released, showing that its exports continued to drop in January.
Optimism of China’s reopening has countered uncertainty regarding the ultimate impact of aggressive monetary policy tightening from most central banks around the world. 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.
Japan's Nikkei 225 Index finished 1.3% higher, with the yen holding onto Friday’s losses versus the U.S. dollar. Australia's S&P/ASX 200 Index ticked 0.1% higher, and India's S&P BSE Sensex 30 Index advanced 0.5%. Markets in mainland China, Hong Kong, and South Korea were closed for the holiday.
© Charles Schwab
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