Stocks See Support Ahead of Wednesday's FOMC Decision

The S&P 500 Index ($SPX) (SPY) is up +0.08%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.53%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.30%.  December E-mini S&P futures (ESZ25) are up +0.11%, and December E-mini Nasdaq futures (NQZ25) are up +0.34%.

US stocks are slightly higher ahead of Wednesday's results of the 2-day FOMC meeting, which begins today.  The markets are discounting a 98% chance of a -25 bp rate cut at this week's FOMC meeting.  Assuming the Fed proceeds with this week's -25 bp rate cut, the markets are then discounting a 94% chance of another -25 bp rate cut at the next FOMC meeting on December 10.  The markets are discounting an overall 115 bp rate cut by the end of 2026 to 2.95% from the current effective federal funds rate of 4.10%.

The FOMC at this week's meeting is not scheduled to release a Summary of Economic Projections, which contains the Fed's dot plot.  That means the markets on Wednesday will hear from Fed Chair Powell at his regular post-meeting press conference, but will not receive an update from other Fed officials on their views of the future course of interest rates.

However, markets are hoping for an update on when the Fed might end its quantitative tightening, which involves allowing its balance sheet to decline.  A halt to the Fed's quantitative tightening would be bullish for the stock and bond markets, as the Fed would no longer be draining liquidity from the US financial system. 

The Aug FHFA US house price index rose +0.4% m/m, which was stronger than expectations of -0.1%.  Meanwhile, the S&P Cotality CS US 20-city house index rose by +0.19% m/m and +1.58% y/y, which was stronger than expectations of -0.10% m/m and +1.30% y/y.

The Oct Richmond Fed manufacturing index rose 13 points to -4, which was stronger than market expectations of a 5 point rise to -12.

The Oct Conference Board US consumer confidence index fell -1.0 point to 94.6 from a revised 95.6, which was stronger than expectations of 93.4.

Stocks have carry-over support from Monday's news that US and Chinese negotiators, who met over the weekend in Malaysia, reached a tentative trade agreement that is expected to be officially announced at Thursday's summit between Presidents Trump and Xi on the sidelines of the APEC conference in South Korea.  Treasury Secretary Bessent said the agreement means the US threat of a 100% tariff on US imports from China, set to start November 1, is "effectively off the table." Meanwhile, China agreed not to restrict the export of rare earth metals for at least one year and to buy a "substantial" amount of US soybeans.  The two sides also made progress on shipping fees and US demands that China crack down on the export to the US of fentanyl and precursors.  The two sides may also reach an agreement that would allow US consumers to continue to access TikTok. 

This is a heavy earnings week, with 173 of the S&P 500 companies reporting earnings.  Notably, five of the Magnificent Seven companies report earnings this week.  Alphabet, Meta, and Microsoft report on Wednesday, and Apple and Amazon.com report on Thursday. Q3 earnings have been running strong so far.  According to Bloomberg Intelligence, 84% of the S&P 500 companies that have reported so far have beaten forecasts, on course for the best quarter since 2021.  However, Q3 profits are expected to have risen by +7.2% y/y, the smallest increase in two years.  Also, Q3 sales growth is projected to slow to +5.9% y/y from +6.4% in Q2.

The markets are monitoring US-Canada trade relations after President Trump said on Saturday that he would impose a new 10% tariff on US imports from Canada as punishment for last week's anti-tariff advertisement released by the provincial government of Ontario that featured former President Reagan's criticism of tariffs.  Mr. Trump initially said he was halting US trade negotiations with Canada because of the ad, but he escalated the punishment this past weekend by imposing a new 10% tariff, even though Ontario had agreed to pause the ad campaign. 

Regarding President Trump's reciprocal tariffs, markets are looking ahead to oral arguments at the Supreme Court scheduled for November 5 on whether the tariffs are legal.  Lower courts have already ruled that Mr. Trump's reciprocal tariffs are illegal, finding they are based on a specious claim of emergency authority.  If the US Supreme Court upholds those rulings and strikes down the tariffs, then the US government will have to refund the reciprocal tariffs already collected, and Mr. Trump's power to impose tariffs will be limited to well-founded sections of US trade law.  Observers expect the US Supreme Court to announce its final ruling on the reciprocal tariffs by late 2025 or early 2026.

The US government shutdown continues into its fifth week, weighing on market sentiment and the US economy.  The government shutdown is delaying the release of government reports, including all the recent weekly unemployment claims reports, the September unemployment and payroll report, Aug trade balance, Sep retail sales, Sep PPI, Sep housing starts, Sep industrial production, Sep leading indicators, and others. Bloomberg Economics estimates that 640,000 federal workers will be furloughed during the shutdown, which would expand jobless claims and push the unemployment rate up to 4.7%.

Overseas stock markets today are lower.  The Euro Stoxx 50 is down -0.08%.  China's Shanghai Composite closed down -0.22% after Monday's rally of +1.18%.  Japan's Nikkei Stock 225 closed down -0.58% after Monday's rally of +2.46%.

Interest Rates

December 10-year T-notes (ZNZ5)  are up +0.5 tick.  The 10-year T-note yield is up +0.2 bp at 3.981%.  T-note prices are trading on a cautious note ahead of Wednesday's FOMC decision.  T-note prices are being undercut by carry-over pressure from Monday's news of a US-Chinese trade agreement, which reduced safe-haven demand for Treasury securities. Also, T-note prices are being undercut by today's stronger-than-expected Richmond Fed report and US consumer confidence report.

T-note prices have underlying support from the ongoing US government shutdown, which could lead to additional job losses, reduced consumer spending, and a weakened US economy, potentially allowing the Fed to continue cutting interest rates. 

European government bond yields are mixed.  The 10-year German bund yield is up +0.3 bp at 2.619%.  The 10-year UK gilt yield is down -1.1 bp at 4.391%.

Swaps are discounting a 1% chance for a -25 bp rate cut by the ECB at its next policy meeting on October 30.

US Stock Movers

The Magnificent Seven stocks are mixed, with Microsoft (MSFT) and Tela (TSLA) showing gains of more than +2%.  Microsoft is trading higher after news that it will receive a 27% ownership stake worth about $135 billion in the restructured for-profit OpenAI entity.

Intel (INTC) is up more than +5%, but most of the other chip stocks are showing losses, giving back some of Monday's gains.

PayPal (PYPL) is up more than +10%, and is the largest gainer in the Nasdaq 100 index, on a CNBC report that Open AI has agreed to embed Paypal's digital wallet into ChatGPT.

UPS (UPS) is up more than +7% after reporting favorable adjusted earnings. 

D.R. Horton (DHI) is down about -1% after reporting an earnings miss.

Royal Caribbean (RCL) is down more than -7% after an earnings miss.

Earnings Reports(10/28/2025)

DR Horton Inc (DHI), PayPal Holdings Inc (PYPL), UnitedHealth Group Inc (UNH), Wayfair Inc (W), Labcorp Holdings Inc (LH), Corning Inc (GLW), Armstrong World Industries Inc (AWI), Sysco Corp (SYY), Royal Caribbean Cruises Ltd (RCL), VF Corp (VFC), Carrier Global Corp (CARR), A O Smith Corp (AOS), United Parcel Service Inc (UPS), Hubbell Inc (HUBB), Sherwin-Williams Co/The (SHW), Ecolab Inc (ECL), Zebra Technologies Corp (ZBRA), IQVIA Holdings Inc (IQV), MSCI Inc (MSCI), Smithfield Foods Inc (SFD), Tenet Healthcare Corp (THC), Applied Industrial Technologie (AIT), Axalta Coating Systems Ltd (AXTA), Repligen Corp (RGEN), Xylem Inc/NY (XYL), Invesco Ltd (IVZ), SoFi Technologies Inc (SOFI), Regeneron Pharmaceuticals Inc (REGN), American Tower Corp (AMT), Incyte Corp (INCY), ATI Inc (ATI), NextEra Energy Inc (NEE), Neurocrine Biosciences Inc (NBIX), Booking Holdings Inc (BKNG), Mondelez International Inc (MDLZ), Sensata Technologies Holding P (ST), WP Carey Inc (WPC), Enphase Energy Inc (ENPH), Aurora Innovation Inc (AUR), Landstar System Inc (LSTR), Equity Residential (EQR), ONEOK Inc (OKE), Flowserve Corp (FLS), Caesars Entertainment Inc (CZR), Edison International (EIX), CoStar Group Inc (CSGP), Frontier Communications Parent (FYBR), MSA Safety Inc (MSA), Chemed Corp (CHE), Range Resources Corp (RRC), BXP Inc (BXP), PPG Industries Inc (PPG), RenaissanceRe Holdings Ltd (RNR), Regency Centers Corp (REG), ExlService Holdings Inc (EXLS), Veralto Corp (VLTO), Visa Inc (V), Expand Energy Corp (EXE), Seagate Technology Holdings PL (STX), Element Solutions Inc (ESI), Highwoods Properties Inc (HIW), Electronic Arts Inc (EA), Teradyne Inc (TER).