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Stocks Fell Following Hot Inflation Report

U.S. equities ended the day and week lower as the markets reacted to a Fed-favored gauge of inflation that came in hotter than expected. PCE and Core PCE Price Indexes rose more than anticipated, while personal income increased less than expected, and spending jumped. The moves came as equities have shown some volatility amid festering uncertainty regarding the ultimate economic impact of aggressive global central bank tightening as a result of persistent inflation. In other economic news, new home sales rose, and consumer sentiment was surprisingly revised to the upside. Treasury yields were higher, and the U.S. dollar gained ground, while crude oil prices increased, and gold traded to the downside. Q4 earnings season rounded a corner this week with some second-tier results hitting the tape, as Autodesk disappointed with its guidance and Intuit bested expectations, while Warner Bros. Discovery fell well short of forecasts. In other equity news, shares of Boeing declined after the company paused delivery of its 787 Dreamliner planes. Asian stocks finished mixed, and markets in Europe fell, with economic data in the respective regions keeping the anxiety over future global monetary policy elevated.

The Dow Jones Industrial Average decreased 337 points (1.0%) to 32,817, the S&P 500 Index fell 42 points (1.1%) to 3,970, and the Nasdaq Composite went down 195 points (1.7%) to 11,395. In moderate volume, 3.8 billion shares of NYSE-listed stocks were traded, and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.93 to $76.32 per barrel. Elsewhere, the gold spot price declined $8.80 to $1,818.00 per ounce, and the Dollar Index rallied 0.6% to 105.23. Markets ended noticeably lower for the week, as the DJIA lost 3.0%, the S&P 500 went down 2.7%, and the Nasdaq Composite tumbled 3.3%.

Autodesk Inc. (ADSK $193) reported adjusted Q4 earnings-per-share (EPS) of $1.86, above the $1.81 FactSet estimate, as revenues rose 8.7% year-over-year (y/y) to $1.32 billion, versus the Street's forecast of $1.31 billion. The software maker said that overall, the demand environment in Q4 remained consistent with that of the Q3. However, looking ahead it sees Q1 EPS within a range of $1.50 to $1.56 and revenues of between $1.26 billion and $1.28 billion, compared to the Street's forecasts for $1.64 and sales of $1.27 billion, respectively. ADSK also offered full-year guidance that fell short of expectations. Shares fell over 10%.

Intuit Inc. (INTU $420) posted adjusted fiscal Q2 EPS of $2.20, well ahead of the $1.47 estimate, with revenues rising 13.8% y/y to $3.04 billion, compared to the forecasted $2.91 billion. The company cited strong execution in its strategy to be the global AI-driven expert platform. The maker of TurboTax and QuickBooks software provided fiscal Q3 EPS guidance that fell short of analysts projections but revenue growth of 8% to 9%, which eclipsed estimates of 7.9%. INTU also reaffirmed its full-year top and bottom line outlooks. Additionally, the company said its Chief Financial Officer (CFO) will step down at the end of July after 20 years with the firm. INTU traded higher.

Warner Bros. Discovery Inc. (WBD $16) reported a Q4 loss of $0.86 per share ex-items, well below the $0.21 shortfall expected by analysts, on revenues of $11.01 billion, compared to the $11.36 billion estimate. The results come in the wake of company executives warning last summer of a deteriorating advertising market that has weighed on earnings. The downward trend in advertising was exacerbated by a decline in audience, according to the company's CFO. The mass media and entertainment conglomerate also cited a "very challenging" macroeconomic environment but felt that things will get better in the second half of the year. WBD has also had to contend with restructuring costs associated with the 2022 merger of Warner Bros. and Discovery. Shares were lower.

In other equity news, Dow component Boeing Company (BA $198) fell after the aircraft designer and manufacturing company halted delivery of its 787 Dreamliner plane after discovering an analysis error on a fuselage component.

Q4 earnings season headed down the home stretch this week, and of the 468 S&P 500 companies that have reported thus far, about 58% have topped revenue estimates and approximately 68% have exceeded earnings projections, per data compiled by Bloomberg. Results have been mixed, along with guidance as corporations try to determine the ultimate impact of the aggressive Fed monetary policy tightening on the economy and profit margins.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, The Price You Pay: A Look at Equity Valuations, how valuation metrics broadly look more attractive relative to where they were a year ago, but history shows they don't provide clear guidance on future returns. 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.Inflation numbers hotter than expected, new home sales jump, sentiment revised higher Personal income (chart) rose 0.6% month-over-month (m/m) in January, below the Bloomberg consensus forecast of a 1.0% increase, while December's figure was upwardly revised to a 0.3% rise. Personal spending increased 1.8%, ahead of the Street's expectation for a 1.4% gain, and compared to the prior month's positively adjusted 0.1% decrease. The January savings rate as a percentage of disposable income was 4.7%, up from December's positively revised 3.4% rate.

The PCE Deflator rose 0.6% m/m, above expectations for a 0.5% rise, and compared to December's upwardly adjusted 0.2% gain. Compared to last year, the deflator was 5.4% higher, compared to estimates of a 5.0% increase, and compared to the prior month's upwardly adjusted 5.3% rise. Excluding food and energy, the PCE Core Price Index rose 0.6% m/m, higher than forecasts for a 0.4% gain, and compared to December's upwardly adjusted 0.4% rise. The index was 4.7% higher y/y, compared to estimates of a 4.3% increase, and after December's upwardly adjusted 4.6% rise.

New home sales (chart) jumped 7.2% m/m in January to an annual rate of 670,000 units, versus forecasts calling for a rate of 620,000 units, and compared to December's upwardly revised 625,000-unit level. The median home price declined 0.7% y/y to $427,500. New home inventory fell to 7.9 months from December's downwardly revised level of 8.7 months of supply at the current sales pace. Sales were lower m/m in the Northeast, Midwest, and West, but increased in the South, while sales in all four regions were down y/y. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.

The final University of Michigan Consumer Sentiment Index (chart) for February was unexpectedly revised higher to 67.0, from the preliminary 66.4 figure, where it was expected to remain. The upward revision came as a modest downward adjustment to the current conditions portion of the index was more than offset by an upward revision to the expectation component of the survey. The 1-year inflation forecast was adjusted lower to 4.1% from the preliminary estimate of 4.2%, where it was expected to remain, and up from January's 3.9% rate. The 5-10 year inflation forecast was unadjusted at January's rate of 2.9%, matching estimates.

Treasury rates were higher, as the yield on the 2-year note rose 11 basis points (bps) to 4.80%, the yield on the 10-year note increased 7 bps to 3.95%, and the 30-year bond rate gained 6 bps to 3.94%.

Treasury yields have jumped as a tight labor market and still elevated inflation have preserved Fed expectations that it could stay on the hawkish path of tighter monetary policy. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Mind the Gap: Bond Yields Appear Set for a Rebound, how over the next few months, we see room for yields to move higher, especially if the inflation data come in stronger than anticipated. You can follow Kathy on Twitter @KathyJones.

Next week, the economic calendar will bring some key data points that could move the markets. Durable goods orders for January will get the ball rolling on Monday, along with pending home salesto close the book on January housing data. Economic activity for February will be released via the ISM Manufacturing Index and the ISM Services Index, as well as the Chicago PMI and regional manufacturing data from the Dallas and Richmond regions. The Conference Board's Consumer Confidence Index is also on tap, as well as Q4 nonfarm productivity and unit labor costs, and the S&P CoreLogic Case-Shiller Home Price Index for December. Rounding out the docket will be construction spending, the advance goods trade balance, and the weekly reads on initial jobless claims and MBA Mortgage Applications.

Europe fell amid economic data

Stocks in Europe were lower across the board as investors continued to fret over the lingering uncertainty regarding the ultimate implications of aggressive monetary policy tightening across the globe. A hot inflation figure out of the U.S. and economic data in the region exacerbated the uneasiness, as German Q4 GDP was negatively adjusted to a larger-than-expected contraction in output, and consumer confidence in Europe's largest economy continued to deteriorate. The markets have been on edge as of late following the Fed's minutes that suggested that it may still need more rate increases to combat inflation, which has come in the wake of rate increases across the globe, including the Bank of England and the European Central Bank. In other economic news, consumer confidence in France also tempered, but sentiment in the U.K. hit its highest level since April 2022, while consumer prices in Spain cooled significantly and were well below forecasts. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the Eurozone and the U.K. moved higher.

Despite some volatility, equities in the region have had a strong start for 2023, 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. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, The Everything Everywhere All at Once Rally, how despite market volatility, inflationary pressures, and a potential earnings recession, a rally involving stocks, bonds, and some commodities started in November still persists. You can follow Jeff on Twitter: @JeffreyKleintop.

The U.K. FTSE 100 Index declined 0.4%, Germany's DAX Index was down 1.7%, France's CAC-40 Index fell 1.8%, Spain's IBEX 35 Index lost 0.3%, Italy's FTSE MIB Index decreased 1.1%, and Switzerland's Swiss Market Index traded 0.6% to the downside.

Asian markets finish out the week mixed

Stocks in Asia finished mixed to cap off another choppy week, as investors continued to focus on monetary policy tightening implications. The uneasiness comes in the wake of the minutes from the Fed's last policy meeting that solidified the notion that the central bank will need to continue to tighten monetary policy. The anxiety and volatility in the markets have been exacerbated by heightened geopolitical tensions between the U.S. and China, as Washington has increased its engagement with Taiwan, with Reuters reporting that the U.S. will expand troops in the province. Schwab's Jeffrey Kleintop discusses the latest rise in tensions in his latest article, Investors' Guide to Geopolitical Risk, noting that while threats flare up from time to time, it is important to keep in mind that geopolitical risks are an ever-present part of investing. Despite the recent news of geopolitical tensions, the risks are not necessarily higher now than on average in the past. But even when geopolitical risk is "average" it remains an important consideration. "That is one reason why it is important to diversify, which may lessen the volatility that can result."

In economic news in the region, Japan's core CPI rose 4.2% y/y last month, a tick under the 4.3% expected, which is the first time in a year that the figure surprised on the downside, but above the prior month's 4.0% rate and matching a high not seen since September 1981. Meanwhile, the Nikkei newspaper in the island nation reported "dovish" comments from Bank of Japan Governor nominee Kazuo Ueda as he spoke at a lower house confirmation hearing, where he reaffirmed support for maintaining the central bank's easy monetary policy.

Japan's Nikkei 225 Index rose 1.3% in a return to action following yesterday's holiday break, with the yen easing somewhat. China's Shanghai Composite Index fell 0.6%, and the Hong Kong Hang Seng Index declined 1.7%, while Australia's S&P/ASX 200 Index traded 0.3% higher, South Korea's Kospi Index lost 0.6%, and India's S&P BSE Sensex 30 Index moved 0.2% to the downside.

Next week's international economic calendar will have a host of manufacturing and services PMIs from across the globe hitting the tape, including China, Japan, Germany, Italy, France, Spain, the U.K., and the Eurozone. Other items of note include Australia—trade data, retail sales, and Q4 GDP. Japan—industrial production, retail sales, housing starts, Tokyo CPI, and consumer confidence. Eurozone—consumer and business sentiment, CPI, PPI, and labor figures, along with German import prices, CPI, and trade balance. U.K.—lending statistics.


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