Thursday afternoon saw a decline in stocks as investors processed Federal Reserve Chair Jerome Powell’s speech and Treasury rates continued to rise.
The S&P 500 (^GSPC) dropped about 0.9%, the Nasdaq Composite (^IXIC) led the losses with a drop of nearly 1%, and the Dow Jones Industrial Average (^DJI) was down roughly 0.75%.
For the fourth day in a row, Treasury rates increased, maintaining the pressure on equities as investors cautiously monitored developments in the Middle East crisis.
The 30-year yield (\TYX) exceeded 5.1%, while the benchmark 10-year yield (\TNX) nearly reached 5% for the first time in 16 years.Now, yields have increased for four days in a row.
Powell’s remarks on Thursday that inflation is still too high are an indication that the Fed plans to keep interest rates high for a while as long as the economy is growing rapidly. Some analysts, including as Mohamed El-Erian, have questioned whether it’s appropriate for the central bank to increase its inflation goal in recent days.
See more about the implications of a Fed rate-hike halt for credit cards, loans, bank accounts, and CDs.
As the third quarter earnings season progresses, investors are also keeping an eye out for any possible effects of higher interest rates on business performance.
Elon Musk, the CEO of Tesla (TSLA), expressed concern on Wednesday that increased financing prices would make it impossible for consumers to buy the company’s electric cars. He made this comment after the company’s earnings fell short of forecasts. Tesla’s stock dropped by about 10%.
In the meantime, Netflix’s (NFLX) stock increased by more than 16% on the streamer’s announcement of a spike in US subscriptions and pricing increases.
Weekly unemployment claims in economic statistics reached their lowest points since January, indicating the resilience of the US labour market.
As investors processed Fed Chair Jerome Powell’s speech, stock losses picked up speed on Thursday afternoon, and bond rates increased for the fourth day in a row.
The S&P 500 (^GSPC) dropped about 0.9%, the Nasdaq Composite (^IXIC) led the losses with a drop of nearly 1%, and the Dow Jones Industrial Average (^DJI) was down roughly 0.75%.
For the fourth day in a row, Treasury rates increased, maintaining the pressure on equities as investors cautiously monitored developments in the Middle East crisis.
The 30-year yield (\TYX) exceeded 5.1%, while the benchmark 10-year yield (\TNX) nearly reached 5% for the first time in 16 years.
After the streaming giant’s spectacular third quarter earnings release on Thursday, Netflix (NFLX) was the top trending ticker on the Yahoo Finance trending page. After the business revealed results that above forecasts on both the top and bottom lines and subscriber additions increased by almost 9 million during the quarter, Netflix shares climbed by more than 16%.
Following better-than-expected sales and earnings per share, AT&T (T) saw a more than 7% increase in stock price. Moreover, AT&T raised its free cash flow forecast for the entire year.
The electric car manufacturer, Tesla (TSLA), disappointed on both the top and bottom lines, and as a result, its shares fell more than 10%. Elon Musk, the CEO of Tesla, has mentioned that fulfilling demand for the much awaited November debut of the Cybertruck will provide “enormous challenges”.
Shares of Taiwan Semiconductor (TSMC) surged by almost 4% after the business exceeded expectations for both its top and bottom lines. In the wake of the revelation, Goldman Sachs included the chipmaker to its “Conviction List”.
The streaming behemoth Netflix (NFLX) posted earnings on Thursday that above estimates on both the top and bottom lines, and subscriber additions increased by about 9 million during the quarter. As a result, the shares of Netflix climbed as high as 16% on Thursday.
Additionally, the firm disclosed that it will be increasing pricing in the US, UK, and France; some Wall Street analysts view this as a good move.
In response to the announcement on Thursday, MoffettNathanson analyst Michael Nathanson stated, “Of all the new data points, we think the biggest surprise is the immediate and substantial price hikes in three of Netflix’s largest revenue markets.”
In the US, Netflix’s Basic and Premium subscriptions will now run you $11.99 and $22.99, respectively. This is a higher price than the previous ones of $9.99 and $19.99. The cost of the company’s $15.49 Standard plan and $6.99 ad-supported plan will not change.
“By [raising prices], Netflix is further incentivizing new and existing members to sign up for its materially lower priced ad-supported plan while also driving ARM, [or average revenue per membership], among households that are either price inelastic and/or advertising adverse,” the researcher continued.
Nathanson boosted his revenue estimates for the fourth quarter and the entire year 2024 by 2.6% and 3.5%, respectively, noting the price increases. Nathanson kept his Neutral rating and price target of $390 on the company.
In the three areas where the price adjustments would have an impact, he also predicted that ARM will increase by 8% to 9%, assuming no significant shifts in subscriber behaviour.
Although Netflix stated that the price adjustments will greatly assist raise the statistic in the upcoming quarters, ARM fell 1% year over year in the third quarter.
“Netflix rolled out a series of upside surprises across a variety of 2023 and 2024 metrics that have the net effect of materially lifting 2023 free cash flow and 2024 EPS,” Nathanson stated. “This will undoubtedly be the read of the market, which will help stabilise Netflix’s recently turbulent stock price.”
Despite having increased by more than 30% year to date, Netflix’s stock has decreased by 15% within the last three months.
In a speech on Thursday, Federal Reserve Chair Jerome Powell discussed the controversy around the question of how the Fed’s pace of interest rate hikes should be affected by rising bond yields.
Powell told the New York Economic Club on Thursday, “I think we have to watch this play out and see how it plays out.” “But for now it’s clearly a tightening in financial conditions and so we’ll be watching it carefully.”
Since the previous Fed meeting in late September, bond rates have increased dramatically. Both the 10-year and 30-year Treasury bond yields are at 16-year highs, and some Fed officials have stated that another increase in interest rates may not be necessary due to the financial tightness that results from rising yields.
“Are the [increases] in longer bonds being reflected consistently in the financial conditions? Yes, you are, in my opinion, if you look at financial conditions indices, Powell stated. “Persistence will be a matter of just seeing with our own eyes.”
Powell emphasised many times that the reason why rates aren’t rising isn’t because of their short-term policy actions or the expectations of the market for them. Because “you’d have to follow through,” Powell added, if markets have priced rates higher due to expectations that the Fed would rise.
Powell said, “But that doesn’t seem to be the case.” “It doesn’t seem to be principally about expectations of us doing more.”
The head of the US Federal Reserve has noticed the recent surge in positive economic indicators.
Jerome Powell, the chair of the Federal Reserve, stated, “We’ve certainly got a resilient economy on our hands,” on Thursday at the Economic Club of New York.
Powell drew particular attention to the September retail sales data released this week, which revealed that sales increased at a rate twice as high as analysts had predicted. Powell said that this indicates that consumer spending is still robust even while growth is not occurring quickly.
Since Powell’s previous news conference on September 20, further statistics—such as a robust September employment report and data released on Thursday showing weekly jobless claims are at their lowest levels since January—have also demonstrated the strength of the US economy.
Powell did not specifically state that this dynamic will result in future interest rate rises, but he did describe the economic situation as one of “much stronger demand” than had been anticipated.
“It may just be that rates have not been high enough for long enough.” stated Powell. “It may take more time.”
In addition to stating that inflation is currently too high, Federal Reserve Chair Jay Powell cautioned that more interest rate hikes may be necessary if the economy continues to grow remarkably quickly or if the tight labour market doesn’t loosen.”
Powell stated on Thursday in front of the Economic Club of New York that “further evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
The next interest-rate-setting meeting of the central bank, scheduled on November 1, is framed by Powell’s remarks. This meeting occurs just days before a 10-day blackout period, during which Fed officials are prohibited from making any public statements.
At its September meeting, the Fed signalled that another rate rise will be necessary later this year to bring inflation back to its objective of 2%, but it kept interest rates constant at a 22-year high.
At the meeting in November, investors anticipate that the central bank would maintain its benchmark interest rate, which is presently expected to remain between 5.25% and 5.50%.
The leap in long-term bond rates, which has increased by more than 50 basis points since the Fed’s most recent policy meeting on September 20, is something Powell made plain the central bank is closely monitoring on Thursday. Other Fed members have hinted that the Fed would not need to act as much if long-term interest rates continue to rise.
“We continue to monitor these developments since ongoing modifications in Monetary policy decisions can be influenced by financial circumstances, according to Powell.
While inflation showed improvement throughout the summer, Powell noted in his address that the September statistics were a little less promising.
He conceded that during the last three and six months, shorter-term estimates of core inflation—that is, inflation measures that exclude volatile food and energy prices—have been falling below 3%.
“But these shorter-term measures are often volatile,” he stated. “Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably towards our goal.”