US equities recovered some of their lost ground on Wednesday as traders evaluated higher-than-expected inflation data, braced themselves for more on Thursday, and watched the Federal Reserve minutes for clues about policymakers’ interest rate decisions.
In the end, the S&P 500 (\GSPC) gained 0.4%, while the Dow Jones Industrial Average (\DJI) finished up 0.2%. Extending Tuesday’s gain, the tech-heavy Nasdaq Composite (^IXIC) gained almost 0.7%.
In contrast to the 1.6% gain anticipated, US wholesale prices increased last month at their quickest rate since April. The producer price index for September increased 2.2% from a year earlier.
Despite the Fed’s aggressive interest rate hikes, the PPI report indicates that inflationary pressures are still present. The next indicator of inflation will be the consumer price index, which is predicted to have marginally decreased from the previous month on Thursday.
The Fed saw one more raise in its two remaining meetings this year, according to minutes from its most recent meeting, which were made public on Wednesday. However, the inflation picture that this week’s results reveal likely heighten anticipation for the bank’s decision on November 1.
Treasury rates, meanwhile, kept falling from 16-year highs reached during the bond sell-off following an increase in Israel’s shelling of Gaza. From a top above 4.88% last week, the benchmark 10-year (^TNX) yield fell to trade below 4.6% on Wednesday.
However, some analysts suggested that bonds might not be out of the woods just yet because there isn’t any negative economic data or a compelling reason for yields to keep dropping.
Since the recent spike in bond yields is thought to be effectively accomplishing the tightening mission of the central bank, more investors are now placing bets that the Federal Reserve won’t raise interest rates at its meeting in November.
Investors will be keenly monitoring the Consumer Price Index (CPI) for September on Thursday, as it is one of the key data points the Federal Reserve will take into account when making its next interest rate decision.
According to forecasts from Bloomberg, the data, which is scheduled for release at 8:30 a.m. ET, is anticipated to show headline inflation of 3.6%, a minor slowdown from August’s 3.7% annual growth in prices.
September’s consumer prices are predicted to have increased by 0.3% over the previous month, which is less than August’s 0.6% monthly increase.
Given that the majority of August’s price hikes were driven by energy prices, oil will remain a major subject of emphasis. Energy prices, which have been volatile because to the ongoing Israeli issue, are predicted to have stabilised last month. Bank of America is projecting a 0.4% month-over-month increase after a 5.6% surge in August.
The bank also anticipates that food costs, which rose 0.2% month over month and 4.3% annually in August, will continue to rise.
According to Bloomberg data, prices are predicted to have increased 4.1% over the previous year on a “core” basis, which eliminates the more erratic costs of groceries and petrol. This represents a decrease from the 4.3% annual increase recorded in August.
Small-cap equities were not part of the market upswing in 2023.
This year, the Russell 2000, the leading small cap index, is just above the flat line. In the meantime, the S&P 500 (^GSPC) has increased 13%, while the tech-heavy Nasdaq (^IXIC) is up almost 30%.
The equity strategy team at Bank of America has recently brought attention to a critical problem that small cap companies face and which is probably concerning investors: debt.
More than 75% of the debt of S&P 500 corporations, according to analysis by Bank of America, is long-term fixed and distributed more widely than the small caps. With over 60% of its debt being long-term fixed, the Russell 2000 has a significantly higher front load overall.
Despite the historically rapid rate hikes by the Fed, investors are increasingly worried about how consumers and corporations will adjust to a substantially higher cost of capital once they leave the low interest rate regime of the 2010s.
Russell 2000 businesses are among the most at danger, as the Bank of America chart demonstrates, because their debt expires earlier and they will have to pay higher interest rates in the near future if they require additional money to run their operation. Increased interest costs would probably result in lower profitability.
In a research report dated September 21, Ed Clissold, chief US strategist at Ned Davis Research, stated, “Interest expense should continue to eat into small-caps’ earnings unless interest rates reverse lower.”
Following the stock’s opening transaction on Wednesday, shares of the shoe manufacturer saw a 10% decline during their Wall Street debut. After the company priced its initial public offering (IPO) at $46 per share on Tuesday night, shares began trading at $41 under the ticker code “BIRK”.
Exxon Mobil Corporation (XOM): Following the announcement that the corporation will acquire US rival Pioneer Natural Resources in an all-stock deal valued at $59.5 billion, shares of XOM slumped 4% in afternoon trading. Pioneer Natural Resources (PXD) saw a 1.2% increase in shares.
Alphabet (GOOG, GOOGL): Shortly before the launch of the company’s Pixel 8 and Pixel 8 Pro smartphones, shares of the tech giant increased by more than 1%. The AI-generation phones will be available for purchase in October.
This week marks the start of the third quarter results season, and Wall Street analysts predict that earnings growth will not be negative for the first time this year.
The 6% profit decrease in the second quarter was the “trough,” as the equities strategy team at Bank of America put it.
BofA strategists Ohsung Kwon and Savita Subramanian said in a research note on Wednesday, “It gets better from here.”
Interestingly, third-quarter average estimates from the Street point to flat earnings compared to the same period last year rather than spectacular earnings increase. The outlook gets better in the fourth quarter as Wall Street projects earnings to increase at a rate of 9%.
Julian Emanuel, senior managing director of Evercore ISI, believes that there is still room for earnings growth due to the third quarter’s flood of better-than-expected economic data. Up from an early estimate of 3.5%, the GDPNow tool of the Atlanta Fed predicted on Tuesday that the economy grew by 5.1% in the third quarter.
Third quarter expectations are “muted,” according to Emanuel, which he says creates a low bar for profit beats and offers “opportunities from potential surprises given the still strong economic backdrop.”
The team at Bank of America observes that quarterly earnings growth has generally surpassed GDP growth by 1.5 percentage points since 1950. This has not occurred in the previous five quarters as the post-pandemic economy has changed to a services-driven economy.
However, a closer look at current economic data reveals that during the third quarter, manufacturing activity had been overtaking services activity. The BofA team observes that earnings have “historically been a tailwind” in relation to GDP.
As the firm prepares for its highly anticipated Wall Street debut, Germany-based footwear company Birkenstock is predicted to open between $42 and $44 per share, below its IPO price of $46). The New York Stock Exchange will allow the stock to trade with the ticker symbol “BIRK.”
“We have effectively built a growing global fanbase of millions of consumers that uniquely transcends geography, gender, age, and income through the strong reputation and universal appeal of our brand — enabling extensive word-of-mouth exposure and outsized earned media value,” Birkenstock stated in a recent SEC filing.
After the launches of Arm Holdings, Klaviyo, and Instacart, Birkenstock will be the fourth US initial public offering (IPO) in the previous month.
Wednesday saw a further decline in oil prices, with crude oil futures (CL=F) falling by about 3% to trade below $84 per barrel. Futures for Brent crude (BZ=F) were down almost 2.3% to trade at slightly less than $86 per barrel.
The recent violence in Israel caused oil prices to soar on Monday, and the cooling of prices follows. But since then, supply-related worries have started to fade.
September’s Producer Price Index (PPI) for final demand rose 0.5% seasonally adjusted, which was higher than predicted, according to data provided by the Bureau of Labour Statistics on Wednesday morning. Bloomberg surveyed economists, who predicted a 0.3% increase.
The study states that the 0.5% gain came after increases of 0.7% in August and 0.6% in July. The measure grew 2.2% year over year, significantly exceeding predictions of 1.6%.
The increase coincides with rising energy and food expenses, as last month’s oil prices hit their highest point in more than a year. With those items removed, the PPI increased by 0.3% in September, somewhat exceeding forecasts of 0.2%.
In response to the data, Oxford Economists economist Matthew Martin commented, “While we would expect the Fed look past volatility in the energy market, less encouraging is the pickup in core services momentum.” “Officials are committed to reigning in inflation, but we expect prices to slow enough over the coming quarters to keep additional rate hikes off the table.”
Martin stated that this week’s moderate oil prices will be “encouraging news” for the October report.