Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
US equities rallied on Friday on news of strong earnings reports, but ended mostly lower for the week, giving back some of the previous week's big gains that saw the S&P and Nasdaq both post their best weekly performance since June. For the week, the Dow Jones Industrial Average rose by 0.1%, the S&P 500 declined by 0.6%, and the Nasdaq Composite ended the week 1.5% lower. U.S. Treasury yields fell early in the week, to their lowest level in over a month, but rebounded after Federal Reserve policymakers indicated a more hawkish stance on monetary policy. The inversion of the yield curve deepened, with the 10-year U.S. Treasury note yielding 3.83% while the two-year U.S. Treasury note yielding 4.52%, marking the deepest inversion in over 40 years. Crude oil prices fell last week, with the price of West Texas Intermediate (WTI) crude hitting an intraday low of $78 per barrel on Friday, its lowest level since September, as renewed COVID-19 outbreaks in China and a weakening global growth outlook put pressure on prices. For the week, WTI crude was down 9.8%, closing the week at $80.23/barrel. The U.S. dollar modestly weakened, ending down 0.3% for the week. Gold was slightly lower, dropping 1.2% for the week.
Equities were dragged lower last week by several factors. Reports from Fed officials leaned hawkish, with some continuing to push the higher interest rates for longer narrative despite recent signs of easing inflationary pressures. The U.S. Treasury yield curve saw a further inversion, including the three-month rate now versus where the three-month rate is expected to be in eighteen months, in which Fed Chair Powell has previously said is a signal that the Fed must cut interest rates. Though Beijing has started to ease some of its Covid-19 policies, China also posted near-record Covid-19 case levels last week. Further, while last week's retail earnings were mixed, there was some concern around company commentary on stressed consumers and a pullback in spending. There were also more high-profile layoff announcements and another batch of weak housing data, both of which highlighted the Fed’s tightening policy spilling into the real economy. But not all the news was bad last week. The peak inflation narrative was given more convincing data by a softer October PPI print. And despite last week's hawkish-leaning Fed speak, there was some more support around the peak-Fed narrative as officials, including Vice Chair Brainard, were uniform in their calls for a prospective slower pace of interest rate increases.
The week ahead will be a holiday-shortened one in the U.S., with the Thanksgiving holiday on Thursday. On Wednesday, investors can expect data on October new home sales, a PMI reading from S&P Global, and the final reading of the University of Michigan’s Consumer Sentiment Index. Also, the Federal Reserve will release meeting minutes from the FOMC’s latest monetary policy meeting. The transcript could provide clues as to how far Fed officials are willing to raise interest rates to tame high inflation. The U.S. central bank has raised its benchmark federal funds rate by a cumulative 3.75% since March, with Fed policymakers expected to conduct another 0.50% increase in December. This would put the fed funds rate in a range of 4.25% to 4.50% by year-end, the highest level since 2007. Earnings reports this week will arrive from Dell Technologies, Zoom, Dollar Tree, HP, Dick’s Sporting Goods, and Nordstrom, among others.
As always, we will be watching and reporting to you next week. Thank you.