Schwab Market Update: Stocks Finished Lower Amid Wholesale Price Inflation Report

December 9, 2022
U.S. equities closed out the week in the red following a slightly higher-than-expected read on wholesale price inflation.

Published as of: December 9, 2022 4:15 PM ET

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U.S. equities closed out the week in the red following a slightly higher-than-expected read on wholesale price inflation. The recent choppiness has come amid uncertainty regarding the ultimate economic impact of aggressive rate hikes, of which inflation has been a primary driver of the tightening. More key inflation data is on tap next week, courtesy of the Consumer Price Index (CPI) and the Import Price Index. These reports will lead up to the Federal Open Market Committee’s (FOMC) long-awaited monetary policy decision that will be released on Wednesday. In other economic news, a preliminary look at consumer sentiment surprised to the upside. On the equity front, Lululemon Athletica beat top and bottom line estimates but lowered its guidance, RH also bested forecasts though warned of worsening demand moving forward, Broadcom posted upbeat results and increased its dividend, and Microsoft is now facing a U.S. government antitrust lawsuit in its attempt to acquire Activision Blizzard. Treasury yields rose following the wholesale price data, and the U.S. dollar gained modest ground, while crude oil prices dipped, and gold increased. Asian stocks finished higher with Hong Kong markets leading the way, and European stocks gained ground as the global markets absorbed inflation data out of the U.S. and China.

The Dow Jones Industrial Average decreased 305 points (0.9%) to 33,476, the S&P 500 Index went down 29 points (0.7%) to 3,934, and the Nasdaq Composite declined 77 points (0.7%) to 11,005. In moderate volume, 3.8 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares also changed hands on the Nasdaq. WTI crude oil lost $0.44 to $71.02 per barrel. Elsewhere, the gold spot price went up $5.60 to $1,807.10 per ounce, and the Dollar Index gained 0.2% to 104.96. Markets ended lower for the week, as the DJIA descended 2.8%, the S&P 500 fell 3.4%, and the Nasdaq Composite dropped 4.0%.

Lululemon Athletica Inc. (LULU $326) reported adjusted Q3 earnings-per-share (EPS) of $2.00, slightly ahead of the $1.97 FactSet estimate, as revenues rose 28.7% year-over-year (y/y) to $1.86 billion, which topped the Street's forecast of $1.81 billion. The athletic apparel maker said that while it delivered another quarter of strong results, it continues to see a dynamic operating environment. As such, LULU said it sees Q4 EPS in a range of $4.20 to $4.30, and sales of between $2.61 billion and $2.66 billion, compared to the analysts' expectations of $4.30 and $2.65 billion, respectively. Shares of LULU fell over 10%.

RH (RH $274) posted adjusted Q3 EPS of $5.67 per share, well above the $4.70 FactSet estimate, on a 13.6% y/y decrease in revenues to $869.1 million, but above the forecasted $839.8 million. The home furnishings retailer formerly known as Restoration Hardware said it expects to see a deterioration in business trends over the next few quarters, and possibly longer, amid continued weakness in the housing market. Shares were higher.

Broadcom Inc. (AVGO $545) reported a fiscal Q4 profit of $10.45 per share, compared to the FactSet estimate of $10.28, as revenues jumped 20.6% y/y to $8.93 billion, nearly matching the Street's forecast. The technology company cited the sales increase to strong demand from hyperscale, service providers, and enterprise, with President and CEO Hock Tan saying that, "growth was driven by our strong partnerships with customers and accelerated adoption of our next generation technologies." Additionally, AVGO upped its quarterly dividend by 12.2% to $4.60 per share. Shares gained ground.

The Federal Trade Commission (FTC) said it has filed an antitrust lawsuit against Dow member Microsoft Corporation (MSFT $245) in an attempt to block the tech giant's bid to acquire videogame maker Activision Blizzard Inc. (ATVI $75). The move comes as MSFT is already facing scrutiny in the U.K., which is looking into whether the acquisition would lessen competition in the country. MSFT had announced its plans to purchase ATVI in January for roughly $68.7 billion. Shares of MSFT declined, while ATVI traded higher.

The equity markets have been choppy as investors grapple with the impact of aggressive monetary policy tightening from the Fed and how long and at what pace the Central Bank will continue to raise rates. Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her U.S. Outlook: How Many More Times, Fed?, how Powell, among other Fed officials, has seemingly shifted his attention from the rear-view mirror to the windshield. She points out how inflation is a lagging indicator, but the impact of monetary policy changes is in the future. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

PPI slightly hotter than anticipated, consumer sentiment improves

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in November rose 0.3% month-over-month (m/m), above the Bloomberg consensus estimate of a 0.2% gain, and in line with October's upwardly revised increase. The core rate—excludes food and energy—was 0.4% higher m/m, higher than estimates of a 0.2% gain, and versus the prior month's upwardly adjusted 0.1% gain. The headline rate was 7.4% higher y/y, north of expectations of a 7.2% increase, and compared to the prior month's upwardly adjusted 8.1% rise. The core PPI was up 6.2% y/y last month, above the estimated 5.9% rise and compared to October's upwardly revised 6.8% growth rate.

The preliminary University of Michigan Consumer Sentiment Index (chart) for December showed that sentiment increased more than expected, rising to 59.1 from November's final reading of 56.8, and above the Bloomberg consensus estimate calling for a slight increase to 57.0. The index continued to move off the record low seen in June, as both the current conditions portion of the index and the expectations component of the report rose. The 1-year inflation forecast declined to 4.6% from 4.9% in November, and the 5-10-year inflation outlook remained at the prior month's 3.0% rate.

Inflation has been a driving factor behind the aggressive monetary policy from the Federal Reserve. As a result, the Fed has become aggressive in its rate-hike campaign, raising rates by 75 basis points (bps) for four-straight meetings. Treasury yields have moved higher this year amid the tightened monetary policy and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her 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. You can follow Kathy on Twitter: @KathyJones.

Treasury rates were higher, as the yield on the 2-year note gained 5 bps to 4.36%, the yield on the 10-year note rose 8 bps to 3.58%, and the 30-year bond rate climbed 12 bps to 3.57%.

Europe higher as markets assess China and U.S inflation data

Stocks in Europe were higher as the markets eyed some Chinese inflation data that mostly met expectations, as well as news of the country's plans on slowly lifting additional COVID restrictions. As well, the markets sifted through a slightly hotter-than-expected wholesale inflation report out of the U.S. Conviction remains constrained by uncertainty regarding the ultimate economic impact of the recent aggressive monetary policy tightening globally, including in the U.S., Europe and the U.K. Signs of slowing economic growth amid this backdrop have emerged but Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Central Banks Stepping Down, how central banks seem to be stepping down from aggressive rate hikes, and this could lead to a year-end "Santa Pause" rally for stocks. You can follow Jeff on Twitter: @JeffreyKleintop. 

The oil markets remained in focus amid the recent choppiness in crude oil prices that came in the wake of this week's decision by OPEC and its allies, known as OPEC+, to hold its production plans steady, while the G-7 imposed a $60 per barrel price cap on Russian oil. Additionally, new sanctions by Europe went into effect on Monday that bans maritime services for the transportation of Russian oil. The euro ticked lower versus the U.S. dollar, while the British pound traded to the upside. Bond yields in the Eurozone and the U.K. advanced.

The U.K. FTSE 100 Index went up 0.1%, Italy's FTSE MIB Index increased 0.3%, France's CAC-40 Index advanced 0.5%, Spain's IBEX 35 Index gained 0.8%, Germany's DAX Index rose 0.7%, and Switzerland's Swiss Market Index traded 0.6% higher.

Asia higher amid tech rally and Chinese inflation data

Stocks in Asia finished mostly higher, led by markets in Hong Kong, as investors digested some inflation data out of China. Wholesale prices in the Asian nation fell 1.3% y/y, mostly in line with forecasts, and the country's CPI matched expectations as well, posting a 1.6% y/y increase, and cooling from the prior month's 2.1% level. Meanwhile, optimism remained amid continued easing of COVID restrictions in China, and as Hong Kong is also considering further loosening measures. Elsewhere, Bloomberg reported that the Chinese government may moderate its position on property policies at its upcoming Central Economic Work Conference (CEWC) slated for next week. China has already provided measures to try to help its struggling property market, while also recently delivering stimulus measures, including lowering the reserve requirements for its largest banks and more. In his latest 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 increased 1.2%, with the yen adding onto yesterday's gains versus the U.S. dollar. China's Shanghai Composite Index gained 0.3%, and the Hong Kong Hang Seng Index jumped 2.3%, adding to a strong rally as of late. Additionally, Australia's S&P/ASX 200 Index rose 0.5%, South Korea's Kospi Index advanced 0.8%, but India's S&P BSE Sensex 30 Index lost 0.6%.

Uncertainty and recession fears pressure stocks for the week

Stocks suffered solid losses for the week, as last week's exuberance that followed Fed Chair Jerome Powell's less hawkish commentary with regards to future rate increases succumbed to heightened recession worries. Last week's better-than-expected labor report joined upbeat services sector reports to temper some of the optimism of a less aggressive Fed, while commentary from a number of notable business leaders stoked recessionary fears to add to the pessimism. The first look at the November inflation landscape—a key driver in the assertiveness of the Fed's policy moves—showed that wholesale prices were slightly hotter than expected. Meanwhile, the energy markets saw increased volatility in the wake of new European sanctions and a G-7 imposed $60 per barrel price cap on Russian oil, pushing WTI crude oil prices to their lowest levels in a year.

More key inflation data is on tap for next week, including the Consumer Price Index (CPI) and the Import Price Index, which will likely reap increased scrutiny ahead of what is likely the marquee event on the economic calendar—the Federal Open Market Committee's (FOMC) monetary policy decision. November retail sales are on deck, as well as industrial production and capacity utilization, initial jobless claims for the week ended December 10, the MBA Mortgage Applications Index for the week ended December 9, and business inventories. Domestic business activity will also be on display, courtesy of preliminary December reads on manufacturing and services from S&P Global, as well as regional manufacturing reports from the New York and Philadelphia regions.

More central bank action will come from overseas, with both the European Central Bank (ECB) and the Bank of England (BoE) slated to release their respective monetary policy decisions following the Fed in the U.S. Other reports on the international economic calendar next week include: Australia—labor data, as well as business and consumer sentiment. Japan—PPI, machine tool orders, the Tankan Manufacturers' Survey, and industrial production. China—fixed asset investment, industrial production and retail sales. Eurozone—industrial production, CPI and the trade balance, along with German CPI, PPI, and the ZEW Economic Sentiment Survey. U.K.—industrial production, trade balance, labor figures, CPI, PPI, the Retail Price Index, consumer confidence, and retail sales. A host of manufacturing and services PMIs from across the globe are also slated for release.

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