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Stocks End the Week Lower Following Central Bank Decisions



U.S. equities declined, posting a second-straight weekly loss, as recession worries have ratcheted higher in the wake of a host of global central bank actions earlier this week. The Fed's mid-week 50 basis point rate increase was followed by similar actions from the European Central Bank, the Bank of England, and the Swiss National Bank. The moves came amid an evident slowdown in global economic growth, with data released today showing most manufacturing and services PMIs domestically and across the globe continue to see a contraction in activity, adding fuel to the recessionary fears. Treasury yields diverged, and the U.S. dollar was little changed, while crude oil prices fell, and gold traded to the upside. The equity front was relatively quiet, but Adobe’s quarterly results beat the Street on the top line, and the company reaffirmed its guidance, while shares of Darden Restaurants fell despite posting better-than-expected earnings and an upbeat outlook. Asian stocks were mixed and European stocks saw widespread losses as the global markets continued to digest the flood of monetary policy decisions around the world.

The Dow Jones Industrial Average decreased 282 points (0.9%) to 32,920, the S&P 500 Index fell 43 points (1.1%) to 3,852, and the Nasdaq Composite went down 105 points (1.0%) to 10,705. In heavy volume, 7.1 billion shares of NYSE-listed stocks were traded, and 7.6 billion shares also changed hands on the Nasdaq. WTI crude oil lost $1.82 to $74.29 per barrel. Elsewhere, the gold spot price rose $14.30 to $1,802.10 per ounce, and the Dollar Index went up 0.1% to 104.69. Markets ended lower for the week, as the DJIA declined 1.7%, the S&P 500 fell 2.1%, and the Nasdaq Composite dropped 2.7%.

Adobe Incorporated (ADBE $339) reported fiscal Q4 earnings-per-share (EPS) of $3.60, above the $3.50 FactSet estimate, as revenues grew 10% year-over-year (y/y) to $4.53 billion, matching the Street's forecasts. The digital experience and software company said it saw record operating cash flows of $7.84 billion for 2022 and continued strong demand for its offerings. Looking ahead, ADBE said it sees Q1 EPS within a range of $3.65 to $3.70 on sales of between $4.60 and $4.64 billion, compared to analysts' projections of $3.64 per share and $4.63 billion in revenues. ADBE also reaffirmed its FY2023 guidance. Shares of ADBE were higher.

Darden Restaurants Inc. (DRI $140) posted an adjusted fiscal Q2 profit of $1.52 per share, beating the Street's $1.44 forecast, as revenues of $2.49 billion also bested expectations of $2.43 billion, a 9.5% increase y/y. The restaurant operator, which includes the likes of Olive Garden, LongHorn Steakhouse, and Yard House, said it surpassed $10 billion in sales on a trailing 52-week basis for the first time in the company's history, despite continued upward pressures from higher food, beverage, and labor costs. DRI also expanded its full-year guidance. However, shares traded lower.

The equity markets posted a second-straight week of declines, with the past two-day rout adding to the persistent volatility seen in the markets. Investors continue to wrestle 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 amid increased recession worries. The Schwab Center for Financial Research discusses the recent volatility in the latest article, Stock Market Volatility: Fed Concerns to the Fore. Additionally, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, 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.


Domestic economic activity data disappoints.


The preliminary S&P Global U.S. Manufacturing PMI Index for December remained in contraction territory (a reading below 50), dropping to 46.2 from November's unrevised 47.7 figure and versus the Bloomberg consensus estimate of a slight uptick to 47.8. The preliminary S&P Global U.S. Services PMI Index also deteriorated and fell further into contraction terrain, as the key U.S. sector in December dropped to 44.4, compared to expectations of a modest gain to 46.5 from November's 46.2 figure.

Treasury rates were mixed, as the yield on the 2-year note declined 3 basis points (bps) to 4.21%, while the yield on the 10-year note increased 4 bps to 3.49%, and the 30-year bond rate rose 6 bps to 3.54%.

The markets continued to digest the mid-week monetary policy decision from the Fed, which delivered a 50-bp rate hike, a deceleration from the previous string of 75-bp rate hikes. Schwab's Liz Ann Sonders discusses the decision in her commentary, Listen to the (More Hawkish Fed) Music, where she notes how while progress has been made on inflation, Fed Chair Powell noted it is too early to declare victory.

Treasury yields and the U.S. dollar have moved higher this year amid this backdrop 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. You can follow Kathy on Twitter: @KathyJones.


Europe saw pressure after central bank decisions.


European stocks were lower across the board as the markets continued to digest the slew of rate hike announcements on both sides of the pond. The European Central Bank (ECB), the Bank of England (BoE), and Swiss National Bank followed in the footsteps of the Fed in the U.S. by boosting their respective benchmark interest rates by 50 bps. The moves by the Fed and ECB were less aggressive that the recent 75-bp rate increases by the central banks, and 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.

Meanwhile, investors also sifted through a host of economic data in the region.

Manufacturing and services PMIs for France, Germany, and the Eurozone all remained in contraction territory but improved from last month, and consumer prices in the Eurozone ticked higher y/y. Elsewhere, manufacturing in the U.K. tumbled further, but services activity increased to a level of 50, the demarcation point between expansion and contraction, while retail sales in the nation fell more than forecasts. The euro and British pound turned lower versus the U.S. dollar, and bond yields in the Eurozone and the U.K. gained ground.

The U.K. FTSE 100 Index and Spain's IBEX 35 fell 1.3%, France's CAC-40 Index lost 1.1%, Germany's DAX Index declined 0.7%, Italy's FTSE MIB Index decreased 0.2%, and Switzerland's Swiss Market Index traded 1.0% lower.


Asia mixed in the wake of global monetary policy decisions, and data


Stocks in Asia finished mixed following a host of monetary policy decisions across the globe this week, as well as some diverging economic data in the region. Yesterday's decisions from the ECB, the BoE, and the Swiss National Bank to boost their benchmark interest rates by 50 bps followed the Fed's similar move a day prior. The central banks also suggested rates will likely remain restrictive as it has not brought down inflation enough to be comfortable. Inflation has been a main driver of aggressive monetary policy tightening around the globe, and in his latest 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.

The reopening of parts of China and Hong Kong continues to be of prime focus, as the South China Morning Post reported that the border between Hong Kong and mainland China is expected to be fully opened next month, citing sources with knowledge of the matter. However, the news comes amid a surge in new COVID cases in the region. Economic data was light but showed some divergence in economic activity out of Japan. The Asian nation's manufacturing PMI fell further into contraction territory, but a read on its services sector improved, expanding its reach into expansion terrain.

Japan's Nikkei 225 Index fell 1.9%, with the yen seeing some strength versus the U.S. dollar late in the session. China's Shanghai Composite Index was flat, and the Hong Kong Hang Seng Index gained 0.4%. Australia's S&P/ASX 200 Index and India's S&P BSE Sensex 30 Index both traded 0.8% to the downside, and South Korea's Kospi Index was little changed.

Markets post a second-straight week of losses amid continued recession fears.

Stocks suffered a second week of losses, despite getting off to a solid start, in the wake of a softer-than-expected Consumer Price Index (CPI) report. The data seemed to offer optimism of a less-aggressive stance by the Fed in the near term. However, even though the Federal Open Market Committee (FOMC) hiked the target for the fed funds rate by 50 bps mid-week, a welcomed departure from the 75-bp increases over the prior four meetings, the FOMC's outlook for interest rates in the future to peak at 5.1% was higher than expected. The European Central Bank, the Bank of England, and the Swiss National Bank followed suit with their own 50-bp increases, solidifying what appears to be continued aggressiveness globally in the endeavor to tamp down inflation pressures. Adding to the negative sentiment, manufacturing, and services PMIs domestically and abroad continued to depict sluggishness in the global economy. Meanwhile, retail sales fell more than expected, industrial production surprisingly declined, and manufacturing activity data out of the New York and Philadelphia regions disappointed. Elsewhere, crude oil prices fell to their lowest levels in over a year, gold saw choppy action, and the U.S. dollar continued to come off its October highs while Treasury yields declined.

Housing will be the focus on next week's economic calendar, courtesy of November reports on existing home sales, new home sales, housing starts and building permits, the NAHB Housing Market Index for December, as well as the weekly read on MBA Mortgage Applications. The final look at Q3 GDP is slated for release, as well as durable goods orders, the Leading Economic Index (LEI), and initial jobless claims for the week ended December 17. Data on the all-important consumer is also on tap, with the Conference Board's Consumer Confidence Index for December joining personal income and spending for last month, as well as the final University of Michigan Consumer Sentiment Index for December.

Internationally, more central bank action will be announced next week, with the Bank of Japan slated to release its monetary policy decision and the Reserve Bank of Australia to issue the minutes from its last get-together. Other reports on the international economic calendar next week include Australia—labor data, as well as business and consumer sentiment. Japan—wage data, Leading Index, CPI, and department store sales. Eurozone—consumer confidence, along with Germany's Ifo Business Climate Index, consumer confidence, and PPI. U.K.—public sector net borrowing and Q3 GDP.


 

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