Stocks Plunge as Powell Remains Hawkish

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday fell by -2.50%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -1.55%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -3.39%.  U.S. stock indexes Wednesday whipsawed lower, with the S&P 500 posting a 1-week low and the Nasdaq 100 dropping to a 2-1/2 week low. 

Stocks pushed higher briefly Wednesday afternoon after the FOMC raised interest rates by 75 bp, as expected, but noted that it would take cumulative tightening and lags into account in future policy moves.  That sparked a brief rally on speculation the Fed may slow the pace of rate hikes.  However, stocks gave up their advance and plunged into the close on comments from Fed Chair Powell, who said it’s “very premature” to think about pausing rate hikes as rates could peak at higher levels than previously thought.

Concern about global economic growth also undercut stocks after Eurozone Oct manufacturing activity sank to its lowest level in 2-1/2 years.  Also, shipper A.P. Moller-Maersk A/S, a bellwether for global trade, cut its forecast for the global container market, saying inflation will persist even as demand drops as much as 4% this year.

Wednesday’s U.S. labor market news was better than expected, which may keep the Fed hawkish and was bearish for stocks.  U.S. Oct ADP employment rose +239,000, stronger than expectations of +185,000.

The FOMC, as expected, unanimously raised the federal funds target range by 75 bp to 3.75%- 4.00%. The post-meeting statement said that "ongoing increases" will likely be needed to bring interest rates to a level that is "sufficiently restrictive to return inflation to 2% over time."  The FOMC also said that "in determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

Fed Chair Powell said we still have "some ways to go" on interest rates and that the ultimate level of the terminal rate may be higher than previously expected. He added that financial conditions had tightened quite a bit, and the time to slow the pace of interest rate hikes may come as soon as the December FOMC meeting.

Today’s stock movers…

Devon Energy (DVN) closed down more than -12% Wednesday to lead losers in the S&P 500 after it cut its fixed-plus-variable dividend payment to $1.35 for Q3 from $1.55 in Q2. 

Paramount Global (PARA) closed down more than -12% after reporting Q3 revenue of $6.92 billion, weaker than the consensus of $7.06 billion.

Extra Space Storage (EXR) closed down more than -10% after forecasting full-year core FFO/share of $8.30-$8.40, weaker than the consensus of $8.49. 

CH Robinson Worldwide (CHRW) closed down more than -9% after reporting Q3 revenue of $6.02 billion, below the consensus of $6.34 billion. 

Estee Lauder (EL) closed down more than -8% after cutting its full-year EPS estimate to $5.01-$5.1 from a previous forecast of $7.11-$7.33.

Airbnb (ABNB) closed down more than -13% to lead losers in the Nasdaq 100 after forecasting Q4 revenue of $1.80 billion-$1.88 billion, the midpoint below the consensus of $1.86 billion. 

Clorox Co (CLX) closed down more than -4% after forecasting full-year adjusted EPS of $3.85 to $4.22, the midpoint below the consensus of $4.11. 

Apple (AAPL) closed down more than -3% after China ordered a seven-day lockdown of the area around Foxconn Technology Group’s main plant in Zhengzhou due to rising Covid infections.  The plant produces four out of five of Apple’s latest handsets.

Match Group (MTCH) closed up more than +4% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q3 revenue of $809.5 million, above the consensus of $794.4 million.

Charles River Laboratories International (CRL) closed up more than +4% after reporting Q3 revenue of $989.2 million, better than the consensus of $970.9 million, and raised the bottom-end estimate of its full-year adjusted EPS range to $10.80-$10.95 from a previous estimate of $10.70-$10.95.

Dupont de Nemours (DD) closed up more than +3% after it scrapped a planned $5.2 billion acquisition of Rogers Corp. 

CVS Health Corp (CVS) closed up more than +2% after reporting Q3 adjusted EPS of $2.09, better than the consensus of $1.99, and raising its full-year adjusted EPS estimate to $8.55-$8.65 from a prior estimate of $8.40-$8.60.

Boeing (BA) closed up more than +2% to lead gainers in the Dow Jones Industrials after CEO Calhoun laid out plans to speed jetliner output and return annual sales to about $100 billion by 2025 or 2026 and generate $10 billion in free cash flow by then.   

Across the markets…

Dec 10-year T-notes (ZNZ22) on Wednesday rose by +1.5 ticks, and the 10-year T-note yield rose by +0.6 bp to 4.048%.  T-note prices Wednesday afternoon spiked to the session high after the FOMC raised interest rates by 75 bp but suggested a slower pace of tightening might be warranted soon.  However, T-notes gave up their gains and dropped to a 1-week low after Fed Chair Powell said the FOMC has "some ways to go" on interest rates and that the ultimate level of the terminal rate may be higher than previously expected.

T-notes were also undercut by the stronger-than-expected ADP report.  Also, an increase in inflation expectations weighed on T-note prices after the 10-year breakeven inflation rate climbed to a 1-week high of 2.560%.

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