Nasdaq leads markets lower on rate fears, disappointing tech earnings

Stocks fell sharply, led by a 1.3% fall in Nasdaq, spooked by economic data that reinforced the ‘higher for longer’ interest rate mantra and mixed to disappointing earnings reports from the tech majors, with many lowering forward guidance. With weak technical support, the Nasdaq is squarely in correction territory, off 12.2% from this year’s peak. The dollar is behaving like a clear winner in the current rate and risk environment.

Bottom line: Risk-off.

TODAY’S MAJOR NEWS

ECB holds interest rates, Euro weaker

The European Central Bank (ECB) held its interest rate at 4%, pausing after ten consecutive hikes. Today’s news was unsurprising following this week’s Eurozone Purchasing Managers Index (PMI), which dropped to 46.5 in October, down from 47.2 last month, the survey’s lowest reading outside the Covid era in more than ten years. (A reading below 50 indicates contraction). The Euro is 6.4% down versus the dollar since June. The ECB repeated what is becoming the central bank mantra: current interest rates would curb inflation with rates at current levels and if “maintained for a sufficiently long duration.” All major central banks, including the Fed, the Bank of England, and the Swiss National Bank, held rates steady in September.

US economy hotter than expected, dollar gains

Today’s US gross domestic product (GDP)  data again supports the Federal Reserve’s “higher for longer” narrative regarding the interest rate policy needed to slow the US economy and bring inflation down to the 2% mandate.

The Federal Reserve is expected to wait a little longer before raising rates. Fed Funds futures are trading at zero percent odds of a rate hike next week, with one in three odds of a hike by January. The dollar is a clear beneficiary.

• GDP grew at an annualized rate of 4.9% in the third quarter, ahead of 4.2% forecast, more than double the 2.1% growth seen in the second quarter
• Personal consumption expenditures rose at an annualized rate of 4.0%, in line with a forecast of 4.1%, up from 0.8% growth in the second quarter

Durable goods orders beat expectations

Durable goods orders were much more robust than expected in September, another data point that reflects economic resiliency.

• Durable goods orders rose 4.7% month-on-month in September, well above analyst expectations of 1.0% and up from a downwardly revised -0.1% in August
• Durable goods orders minus transportation “only” increased 0.5% month-on-month, above the 0.2% expected by analysts and matching the previous month’s growth
• Core capital goods orders, a measure of business confidence, rose 0.6% month-on-month in September, above the unchanged expectation and down from 1.1% growth in August

Continuing unemployment claims rise, Auto strike close to settlement

While the weekly unemployment claims number remains relatively low, it ticked higher, and there was a jump in the continuing claims number – some indication that the jobs market is softening. Ford reached a tentative agreement with the United Auto Workers Union after the UAW dropped its wage hike demand to 25% over the 4-1/2-year contract, possibly paving the way for deals with the other two big automakers.

• First-time claims for unemployment benefits rose to 210,000 in the week ending October 21, up from 200,000 in the previous week
• That pushed the four-week moving average up slightly to 207,500 claims, up from 206,250 the previous week
• Continuing claims for the week ending October 14 rose by a substantial 63,000 to 1.790 million, marking the second consecutive week of a significant increase in continuing claims
• That moved the four-week moving average to 1.724 million, up 31,250 from the previous week

Pending home sales remain weak

• Pending home sales under contract fell 1.1% in September, following a 7.1% drop in August, according to the National Association of Realtors on Thursday (NAR)
• Activity in the resale market is weak, with sales down by 11% on a yearly basis
• The NAR predicts that existing home sales will fall by 17.5% this year
• The average 30-year mortgage rate jumped to 7.79% last week, according to Freddie Mac, and this is dampening the housing market

TODAY’S MAJOR MARKETS

Russell 2000 up, Nasdaq down

• The Russell 2000 rose 0.7% in morning trade in generally weaker US equity markets, with Nasdaq and the S&P 500 down by 1.3% and 0.7%, respectively
• Foreign equity markets echoed the weakness in US equity markets overnight, led by a 2.1% decline in the Nikkei 225, a 1.1% fall in the DAX, and a 0.8% fall in the FTSE 100
• The VIX, Wall Street’s fear index, rose to 21.0

Euro decline continues, dollar gains

• 10-year yields fell back to 4.90%, while 2-year yields rose fell back to 5.05%
• The dollar index rose 0.3% to 106.9
• The Euro was down 0.3% versus the dollar today, marking a 6.4% decline since June. Relative to the dollar, the Yen was down 0.2% and Sterling was unchanged

Oil, gold, and silversell off

• Crude oil prices continued to fall, off 1.7% to $83.9 per barrel
• Spot gold prices fell 0.3% at 1,989 per ounce, while Silver was down 0.8% to $22.8 per ounce
• Grain and oilseed prices were mixed

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com