The stock market took a tumble overnight, with the Dow Jones futures falling around 0.2% along with the S&P 500 and Nasdaq futures, as investors braced for further interest rate hikes from the Federal Reserve at the conclusion of its two-day policy meeting today.
Advanced Micro Devices (AMD) was in focus in after-hours trading last night, with its stock seesawing after the chipmaker beat Q3 earnings estimates but gave disappointing Q4 guidance.
Earlier yesterday, stocks had posted modest gains, bouncing back after opening lower. The Dow rose 0.4%, the S&P 500 gained 0.65% and the Nasdaq edged up 0.5%.
But optimism faded as the Fed meeting loomed. All eyes are on whether the central bank will signal a slowdown in its aggressive rate hike path that has battered markets this year.
Fed Poised to Deliver Another Big Rate Hike
Most economists expect the Fed to announce a 0.75 percentage point increase at 2 p.m. ET today, the fourth straight mega-hike. This would push the benchmark federal funds rate to a range of 3.75% to 4%, the highest since 2008.
Fed Chair Jerome Powell’s comments at 2:30 p.m. will be parsed for any hints on whether policymakers might pull back in December. Markets are betting on a smaller 0.5 point hike then.
But persistent inflation hovering near 40-year highs means the Fed can’t take its foot off the brakes yet.
“We expect Powell to push back against the idea that the Fed is almost done with this tightening cycle,” said Wells Fargo economist Michael Brown. “Inflation remains well above the Fed’s target, and officials have more work to do.”
With rates set to rise further, investors are bracing for ongoing volatility and pressure on risky assets.
Stocks Battle as Earnings Pour In
It was a busy day for corporate earnings yesterday, with big names like AMD and Airbnb reporting after the close.
AMD initially fell 5% on disappointing Q4 guidance before paring losses. The chipmaker raised its 2022 revenue outlook, but cited softening PC demand.
Among other notable movers, Airbnb jumped over 13% as strong travel demand drove a beat on Q3 profit and revenue. Payment giant PayPal plunged 24% on a cut to its full-year outlook.
During Tuesday’s session, stocks mounted a turnaround after starting deep in the red.
A California jury ruled in favor of Tesla, finding that its Autopilot driver assistance system was not to blame in a fatal 2019 crash. Tesla shares rose 1.8%.
Networking firm Arista Networks surged 14% on upbeat earnings results, making it the top S&P 500 gainer.
But market breadth remained lackluster overall, with decliners still outpacing advancers. The S&P 500 and Dow are down nearly 20% for the year so far.
10-Year Treasury Yield Still Ascending
In another worrying sign for stocks, the 10-year Treasury yield rose back up toward 5% as bonds sold off.
The benchmark yield hit a 15-year high of 4.338% on Oct. 21 and has climbed over 30 basis points in October alone. This signals that investors expect more Fed hikes and inflation to stick around.
Higher long-term yields make future earnings of growth stocks less valuable today, prompting price declines. Rate-sensitive tech stocks have been hammered as yields surged this year.
The 2-year Treasury yield, which more closely tracks Fed policy, also rose 4 basis points to around 4.48% ahead of the meeting.
Oil Prices Retreat From Recent Rebound
Oil prices tumbled yesterday, with U.S. crude futures settling down 1.6% at $84.50 per barrel. The commodity had rebounded last week on OPEC’s plans to cut output, but gave back some gains as supply concerns eased.
Rising Covid cases and China’s worsening economic activity also dampened the demand outlook. November West Texas Intermediate futures lost 4.5% in October, their first monthly decline since July.
The pullback in oil prices is a welcome relief for consumers dealing with high inflation and could take some pressure off the Fed if sustained.
Market Outlook Remains Murky
After posting strong gains in October, stocks have stumbled this week heading into the Fed announcement.
The recent rally attempt is now looking precarious, with major indexes still below key moving averages.
While markets are hoping for a Fed pivot on rate hikes, Powell has consistently reiterated his focus on curbing price pressures.
Investor sentiment also remains depressed, with the latest [AAII survey] showing bullishness at just 19%.
Until inflation shows clear signs of abating, the central bank is likely to maintain its hawkish stance. This could lead to further choppy trading in the near term.
As Crossmark Global Investments’ Victoria Fernandez warns, “Volatility is likely to remain elevated in coming months until either the Fed pauses or inflation comes down substantially.”
– Dow Jones futures fell overnight along with the major indexes, signaling more losses ahead.
– The Fed is widely expected to deliver a fourth straight 0.75 point rate hike at 2 p.m ET today.
– Comments from Fed Chair Jerome Powell at 2:30 p.m. will drive the market’s reaction.
– Stocks mounted a modest rebound Tuesday, but market internals remain weak overall.
– Persistently high inflation means the Fed still has a way to go in tightening policy.
– Rising long-term Treasury yields continue to pressure stocks, especially high-growth tech names.
With the Fed resolute on fighting inflation and volatility likely to remain high, investors should brace for more choppy trading in the coming months.
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