Bulls Just Can't Get a Break
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After looking as if U.S. equities may get a reprieve from the recent selloff, the markets turned lower midday to finish in the red in volatile trading in the wake of another hotter-than-expected consumer price inflation report. Although the headline figure came in higher than anticipated, prices did moderate slightly from the 41-year high posted in the month prior. The markets also grappled with the monetary policy implications of the report, as well as the omnipresent worries over higher interest rates, the strong dollar, and slowing economic growth. Moreover, the ongoing war in Ukraine remained a drag on sentiment, while the lockdowns in China continue to cloud the global economic outlook. Treasuries were mixed following the inflation data, and the U.S. dollar was little changed in choppy action. Crude oil prices rebounded from yesterday's drop, and gold gained ground. Earnings remained in focus, with Electronic Arts rising after topping earnings estimates, while Coinbase and Wendy's fell after missing expectations. Asia finished mixed and Europe showed some resiliency in the face of the aforementioned headwinds to end mostly higher.
The Dow Jones Industrial Average fell 327 points (1.0%) to 31,834, the S&P 500 Index decreased 66 points (1.7%) to 3,935, and the Nasdaq Composite declined 373 points (3.2%) to 11,364. In heavy volume, 5.8 billion shares of NYSE-listed stocks were traded, and 6.0 billion shares changed hands on the Nasdaq. WTI crude oil jumped $5.95 to $105.71 per barrel. Elsewhere, the gold spot price traded $12.70 higher to $1,853.70 per ounce, and the Dollar Index was flat at 103.98.
Electronic Arts Inc. (EA $121) reported adjusted fiscal Q4 earnings-per-share (EPS) of $1.46, above the $1.43 FactSet estimate, as net bookings grew 17.5% year-over-year (y/y) to $1.8 billion, roughly in line with the Street's forecast. EA said it finished the year with another strong quarter of revenue and profit growth, driven by its live services business which was 85% of its net bookings in Q4. The company's full-year EPS guidance had a midpoint just shy of expectations, while its bookings outlook was roughly in line with estimates. However, EA announced a 12.0% increase of its quarterly dividend to $0.19 per share. Shares were higher.
Coinbase Global Inc. (COIN $54) posted a Q1 loss of $1.98 per share, much wider than the $0.01 per share shortfall that was anticipated, as revenues fell 27.1% y/y to $1.2 billion, south of the estimated $1.5 billion. COIN's monthly transacting users and trading volume both were lower quarter-over-quarter and the company said Q1 continued a trend of both lower crypto asset prices and volatility that began in late 2021, which directly impacted its results. Shares were down over 25%.
Wendy's Company (WEN $16) announced adjusted Q1 EPS of $0.17, one penny below the Street's forecast, as revenues rose 6.2% y/y to $489 million, below the estimated $497 million. The fast food chain saw its U.S. same-store sales slow to a 1.1% gain from the 13.5% rise seen in 2021, while its company-operated restaurant margin fell by 540 basis points (bps) due to higher commodity and labor costs, customer count declines, and investments to enter the U.K. market. The company said these headwinds were partially offset by a higher average check, and the net favorable impact of the acquisition and disposition of restaurants in 2021. WEN lowered its full-year earnings outlook. Shares fell.
Q1 earnings season remained in full force and of the 452 S&P 500 companies that have reported thus far, roughly 67% have topped sales expectations and about 77% have bested profit projections, per data compiled by Bloomberg. So far, y/y sales growth is up 14.2%, and earnings growth is 9.9% higher.
Schwab's Chief Investment Strategist Liz Ann Sonders discusses the volatile market action in her latest article, When the Levee Breaks, Panic Is Not a Strategy. She notes that April was the worst month for the S&P 500 since March 2020, and that it's been a mixed-to-weaker bag in terms of macro drivers and we expect significant bouts of volatility to persist. She concludes that this is not a time for investors to take on risk outside the parameters of their strategic asset allocations. It is a time for investors to employ traditional disciplines around diversification (across and within asset classes), to focus on quality in terms of stocks' fundamentals, and to stay in gear via periodic rebalancing. You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.
Consumer price inflation tops forecasts, mortgage applications rise for a second week
The Consumer Price Index (CPI) (chart) rose 0.3% month-over-month (m/m) in April, above the Bloomberg consensus estimate calling for a 0.2% gain, and compared to March's unrevised 1.2% increase. The core rate, which strips out food and energy, increased 0.6% m/m, topping forecasts of a 0.4% rise and compared to March's unadjusted 0.3% increase. Compared to last year, prices were 8.3% higher for the headline rate, above estimates of an 8.1% increase but a deceleration from the prior month's unrevised 8.5% rise. The core rate was up 6.2% y/y, north of projections of a 6.0% gain, and down from March's unrevised 6.5% rise.
The Bureau of Labor Statistics (BLS) said increases for shelter, food, airline fares, and new vehicles were the largest contributors to the hotter-than-expected report. However, energy prices declined, along with prices for apparel, communication, and used vehicles.
The MBA Mortgage Application Index rose 2.0% last week, following the prior week's increase of 2.5%. The second-straight weekly increase came as a 2.0% drop in the Refinance Index was more than offset by 4.5% gain in the Purchase Index. The average 30-year mortgage rate resumed its jump, rising 17 basis points (bps) to 5.53%, up 242 bps versus a year ago.
Treasuries were mixed after a spike in yields following the inflation data and as the markets brace for tighter Fed monetary policy following last week's 50 bp rate hike, which Schwab's Liz Ann Sonders discusses in her latest article, 50 Ways to Leave Your Mark.
Amid this backdrop, check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes, where they provide their insight into some of the most frequently asked questions they have received this year.
The yield on the 2-year Treasury note increased 2 bps to 2.65%, while the yields on the 10-year note and the 30-year bond fell 9 bps to 2.92% and 3.04%, respectively.
More inflation data is on deck on tomorrow's economic calendar, with the Producer Price Index (PPI) forecasted to show prices at the wholesale level rose 0.5% m/m, while excluding food and energy, the core rate is estimated to have increased 0.6% m/m. As well, initial jobless claims for the week ended May 7 are also on tap, expected to show 192,000 first-time unemployment applications were filed.
Europe mostly higher as markets digest U.S. inflation report
European equities were mostly higher, rebounding for a second day from recent weakness that has come from uncertainty and uneasiness regarding monetary policy tightening implications after last week's rate increases from the Fed and the Bank of England. The markets showed some resiliency in the face of rising inflation pressures, along with increasing interest rates and the recent rally in the U.S. dollar. The inflation backdrop remained troublesome as consumer price inflation in the U.S. came in hotter than expected for April, while German consumer price inflation was unrevised at a record high pace for last month. Stocks have seen pressure as global economic growth uncertainty remains palpable, exacerbated by the COVID-related lockdowns in China, as well as the ongoing war in Ukraine, which has fostered concerns about food and energy supplies and amplified inflation worries. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest commentary, Hedging Stocks Against Rising Rates. Jeff notes how investors should consider hedging the possible risk of higher interest rates with the addition of short duration stocks, a potential way to manage risk while remaining invested in the markets. You can follow Jeff on Twitter: @JeffreyKleintop. The euro edged higher versus the U.S. dollar, and the British pound was little changed, while bond yields in the Eurozone and the U.K. saw gains.
The U.K. FTSE 100 Index was up 1.4%, France's CAC-40 Index rose 2.5%, Germany's DAX Index and Spain's IBEX 35 Index advanced 2.2%, and Italy's FTSE MIB Index was 2.8% higher, while Switzerland's Swiss Market Index ticked 0.1% to the downside.
Asia mixed ahead of inflation data out of U.S., China continues rebound
Stocks in Asia finished mixed, with the markets remaining skittish regarding the aggressive monetary policy tightening in the U.S. to combat persistent inflation pressures, ahead of today's key inflation report out of the world's largest economy of the U.S. Moreover, the markets continued to grapple with concerns regarding the global economic impact of the COVID-induced lockdowns in the world's second largest economy of China. However, recent pledges from the Chinese government regarding stimulus measures seemed to provide support for the markets in mainland China and Hong Kong. Schwab's Jeffrey Kleintop discusses in his latest article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. The Chinese markets continued to rebound despite the lockdown uncertainty and data showing the country's producer price and consumer price inflation for April both came in hotter than expected.
Japan's Nikkei 225 Index increased 0.2%, with the yen gaining ground late in the session after a recent drop versus the U.S. dollar, and China's Shanghai Composite Index rose 0.8%. The Hong Kong Hang Seng Index advanced 1.0%, and Australia's S&P/ASX 200 Index ticked 0.2% higher. However, South Korea's Kospi Index traded 0.2% lower, and India's S&P BSE Sensex 30 Index declined 0.5%.
A slew of economic data out of the U.K. will dominate tomorrow's international economic calendar, including construction output, March and Q1 GDP, industrial/manufacturing production, and trade data, while other reports of note include the trade balance from India, and PPI from Switzerland.