Title: Robust Economic Data and Strong Earnings May Lead to Prolonged Tight Policy by the Fed, Nasdaq Displays Minor Downturn
The Nasdaq experienced a slight dip while benchmark U.S. Treasury yields surged on Tuesday, reflecting the impact of robust economic data and strong third-quarter earnings. The data suggest that the Federal Reserve may keep its current tight policy in place for a longer duration than initially anticipated.
Throughout the trading session, all three major U.S. stock indexes fluctuated but ultimately settled relatively unchanged. However, interest rate-sensitive large-cap stocks weighed down the Nasdaq, resulting in a modest loss. Additionally, chip shares faced pressure due to the Biden administration’s decision to halt shipments of advanced artificial intelligence chips to China.
The Philadelphia SE Semiconductor index declined by 0.8%. Despite the Federal Reserve’s efforts to combat inflation by increasing interest rates, consensus-topping retail sales data and impressive earnings reports from Bank of America and Goldman Sachs indicate that the U.S. economy continues to thrive.
Yields on two-year Treasury notes reached a 17-year high, while five-year yields hit a 16-year peak. Thomas Martin, a senior portfolio manager at GLOBALT in Atlanta, stated, The retail sales report was quite strong, and definitely an indication that the consumer is doing well. So the question is, how does the market react to that? Is good news good news or is good news bad news?
Uncertainty surrounds the market’s response to positive news, as it remains unclear how it will influence the Federal Reserve’s decision. Furthermore, market participants are closely monitoring the humanitarian crisis arising from the Israel-Hamas conflict, especially as President Joe Biden plans to visit the region.
On Tuesday, the Dow Jones Industrial Average rose by 13.11 points or 0.04% to reach 33,997.65, while the S&P 500 and the Nasdaq Composite closed essentially flat, with a loss of 0.43 points (0.01%) and 34.24 points (0.25%), respectively. European stocks experienced a decline due to disappointing earnings and higher government bond yields. Despite rising energy shares and reduced concerns regarding Middle East turmoil, the pan-European STOXX 600 index dropped by 0.10%. However, MSCI’s global stocks gauge increased by 0.15%, and emerging market stocks rose by 0.48%. Additionally, MSCI’s broadest index of Asia-Pacific shares outside Japan closed with a 0.54% gain, while Japan’s Nikkei rose by 1.20%.
The release of strong retail sales data prompted a surge in benchmark Treasury yields, leading market participants to adjust their expectations regarding the duration of the central bank’s tightening cycle. Consequently, benchmark 10-year notes experienced a decrease in price, resulting in a yield of 4.8383% compared to 4.71% late on Monday. Similarly, the 30-year bond fell in price, with a yield of 4.9323% compared to 4.866% late on Monday.
In foreign exchange markets, the U.S. dollar fluctuated against a basket of world currencies. The dollar strengthened against the Japanese yen while declining against the euro amidst the unfolding Middle East conflict. Additionally, market participants awaited speeches by central bank officials, further influencing the currency exchange landscape. The dollar index decreased by 0.03%, with the euro rising by 0.15% to $1.0574. The Japanese yen weakened by 0.18% against the U.S. dollar at 149.79 per dollar, while sterling traded at $1.2184, displaying a 0.26% decline.
Crude oil prices remained relatively stable as market participants awaited President Biden’s visit to Israel, hoping for a resolution to prevent further escalation of the conflict in the Middle East. U.S. crude settled unchanged at $86.66 per barrel, while Brent crude settled at $89.90, marking a 0.28% increase.
Amidst mounting geopolitical uncertainties, gold prices steadied, benefitting from its status as a safe-haven asset. Spot gold observed a 0.1% increase, reaching $1,922.16 per ounce.
In conclusion, the combination of robust economic data, strong third-quarter earnings, and higher Treasury yields suggests that the Federal Reserve may maintain its tight policy for a longer period. The Nasdaq experienced a minor downturn as interest rate-sensitive megacap stocks weighed on the index. While the U.S. stock market closed relatively unchanged, the global stock market presented a mixed picture with a slight decline in European stocks and gains in Asia-Pacific markets. Market participants adjusted their expectations regarding the Federal Reserve’s tightening cycle based on the strong retail sales data. Foreign exchange markets remained volatile, influenced by the evolving Middle East conflict and central bank officials’ speeches. Crude oil prices remained stable, and gold prices benefited from geopolitical uncertainties.