Stocks Climb as Interest Rate Worries Ebb

Stocks Pull Back

In today’s market, there is a positive trend with December E-Mini S&P 500 futures (ESZ23) up +0.89%, and the Dec Nasdaq 100 E-Mini futures (NQZ23) up +1.28%, both hitting 1-week highs.

This surge in stock index futures is fueled by optimism that central banks worldwide are approaching the conclusion of their interest rate hikes. Wednesday’s comments from Fed Chair Powell, expressing a cautious approach to further rate increases, indicate a possible halt in rate hikes. The Bank of England (BOE) also maintained its benchmark lending rate, contributing to this optimistic outlook. Additionally, this morning’s release of Q3 nonfarm productivity and weekly jobless claims exceeding expectations provides further dovish signals for Fed policy.

The market is further buoyed by better-than-expected corporate earnings results, with notable gains such as Qualcomm’s over +5% increase in pre-market trading due to its Q4 adjusted revenue surpassing consensus estimates. PayPal Holdings and Starbucks also shine, up by more than +6% and +4% respectively, following strong earnings reports.

However, not all news is rosy, as Confluent saw a drop of more than -30% in pre-market trading after forecasting Q4 total revenue well below consensus. Etsy is down more than -4% after forecasting Q4 adjusted Ebitda below consensus, and Moderna is down more than -5% following an unexpected Q3 loss due to a $3.1 billion charge for resizing and tax allowances.

The U.S. labor market experienced a slight hiccup, with U.S. weekly initial unemployment claims rising +5,000 to 217,000, contrary to expectations of no change at 210,000. Weekly continuing claims also rose by +35,000 to 1.818 million, signaling a softer labor market compared to the expected 1.800 million.

On a more positive note, U.S. Q3 nonfarm productivity showed a strong increase of +4.7%, surpassing expectations of +4.3%, the most substantial rise in three years. Additionally, Q3 unit labor costs unexpectedly decreased by -0.8%, contrary to the expected +0.3%, which is seen as a positive sign for inflation.

Regarding future rate hikes, the market indicates a 19% chance of a +25 bp rate hike at the next FOMC meeting on Dec 12-13 and a 27% chance of the same hike at the following FOMC meeting on Jan 30-31, 2024. Furthermore, the market anticipates the FOMC to commence rate cuts in response to an expected slowdown in the U.S. economy later in 2024.

Both U.S. and European bond yields have dropped, with the 10-year T-note yield reaching a 2-1/2 week low of 4.653%. The 10-year German bund yield also hit a 1-1/4 month low of 2.674%, and the 10-year UK gilt yield fell to a 3-week low of 4.328%. This shift is attributed to the expectation that the Fed may cease raising interest rates.

The Bank of England (BOE) maintained its key interest rate unchanged at 5.25% with a “restrictive” policy to control inflation for an extended period. BOE Governor Baily emphasized the need for more rate hikes and emphasized that it’s too early to consider rate cuts.

Overseas stock markets display mixed performance, with the Euro Stoxx 50 up +1.98%, China’s Shanghai Composite Index down -0.45%, and Japan’s Nikkei 225 up +1.10%. Interest rate-sensitive real estate stocks are performing well in Europe due to lower government bond yields. Positive corporate news and comments from ECB Governing Council member Knot further contribute to the market’s positive outlook.

In conclusion, the markets are influenced by shifting dynamics in central bank policies, corporate earnings results, and economic indicators. Investors are closely monitoring developments in anticipation of future rate decisions and economic trends.

Featured Image: Freepik @ chandlervid85

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.