Nasdaq bounces back on better tech earnings

Nasdaq bounced back on better-than-expected earnings from Amazon, Intel, and, earlier this week, Microsoft. The sell-off in bonds appears to have abated despite a modest improvement in the Fed’s favored inflation measure. Consumer inflation expectations are still worryingly high. Next Wednesday’s Fed meeting is expected to see unchanged rates, but most likely a hawkish tone given the continued strength of the US economy.

Bottom line: Risk-on.

TODAY’S MAJOR NEWS

Tech sector rallies on improving earnings

The tech sector is recovering today after an ugly week, with better-than-expected results coming from Amazon and Intel's Q3 earnings after yesterday's close. Amazon's surprisingly upbeat third-quarter revenues highlight the continued strength of the US consumer. This morning's push higher reversed course after the tech-heavy Nasdaq shed over 4% in the previous two sessions, mainly by heavy losses for Google parent company Alphabet and Facebook parent Meta following earnings reports earlier in the week. Big tech will cap off this quarter's earnings season next week, ith Apple due to report on Thursday.

Ford reaches a deal with unions; will GM and Stellantis follow?

Ford reached a tentative deal with the United Auto Workers union, allowing the company to withdraw its previous negative earnings guidance, which overshadowed its earnings report. The strikes have cost Ford an estimated $1.2 billion in Q4. Pressure is now on GM and Stellantis to follow suit.

How much higher rates for how much longer?

The Fed still faces the critical question: what does ‘higher for longer’ mean for interest rate policy if it cannot slow the economy?  Inflation readings around 4% remain well above the Fed’s ultimate 2% inflation target. Americans continued to spend at a brisk rate, ahead of income growth. Consumer inflation expectations are stuck at over 4%.

The CME’s Fedwatch tool puts the probability of unchanged interest rates at 80% in December, 72% in January, and 65% in March. We will find out next week if this market view is too optimistic or if there will be another rate rise. The recent strong run of economic data and embedded inflation suggests the Fed is likely to strike a hawkish tone, leaving the door open for further hikes if needed and a possible rate rise before the end of the year.

Fed’s favored inflation measure hovers around 4%

• The Fed’s favorite inflation measure, the Personal Consumption Expenditure (PCE), came as expected at 3.4% year-on-year, or 0.3% month-on-month.
• Core PCE, ex-food and energy, was up 3.7% year-on-year, or 0.3% month-on-month, a slight cooling from August’s 3.8% annual rate
• Personal spending rose 0.7% month-on-month, ahead of the 0.5% expected and up from 0.4% last month
• Personal income for September rose 0.3% from August, less than the 0.4% forecast and last month’s reading

Consumer inflation expectations rose in October, consumer sentiment is still good

Consumer inflation expectations rose in the US in October, with this morning's University of Michigan Consumer Sentiment Survey showing 1-year and 5-year expectations increasing from the previous month. This and this morning's PCE readings show inflation holding stubbornly above the Fed's 2% target. Consumer sentiment remains robust.

• 1-year inflation expectations jumped a whole percentage point from September, up to 4.2%, marking the highest level seen since May
• 5-year inflation expectations saw a smaller jump, rising 0.2% from the month before 3.0%, matching the same level seen throughout the summer
• Overall, consumer sentiment did improve, with the headline Consumer Sentiment Index rising 0.8 points from the preliminary October reading to reach 63.8, which still marks a sharp drop from September's 68.1 reading
• Current Economic Conditions saw a minor decline from the month prior, falling to 70.6 versus the 71.4 seen in September
• The forward-looking Consumer Expectations portion of the index fell 6.7 points from the month before, sitting at 59.3, also the worst reading since May
• Survey participants noted declining expectations for business conditions and their own personal finances in the months ahead, in part due to the escalating conflict in the Middle East and its potential cascading impact

TODAY’S MAJOR MARKETS

Nasdaq leads market bounce

• Nasdaq rose 0.9% in morning trade after a week of broadly positive tech company earnings, with the S&P 500 up 0.2% and the more broadly based Russell 2000 of 0.7%
• Foreign equity markets continued to echo recent weakness in US equity markets, led by a 1.0% fall in the FTSE 100, a 0.4% fall in the DAX, and a 1.4% rise in the Nikkei 225
• The VIX, Wall Street’s fear index, fell back to 20.3

Bond yields and dollar unchanged

• 2- and 10-year yields held steady at 5.04% and 4.86%
• The dollar index was unchanged at 106.5
• Versus the dollar, the Yen rose 0.5%, the Euro recovered 0.2% after recent weakness, and Sterling was up 0.1%

Oil rallies on Med-East tensions

• Crude oil prices rallied 0.6% to $83.6 per barrel. Crude oil is up due to further escalations in the Middle East, with reports of Israel conducting other raids into Gaza and reports of US air strikes on Iranian military targets in eastern Syria overnight in response to the recent ramp-up in attacks on US military targets in the region by Iranian-backed proxies

• Spot gold prices fell 0.3% at 1,989 per ounce, while Silver was unchanged at $22.9 per ounce
• The agricultural complex was mixed at mid-day, with the soy complex pushing higher on continued strength in soymeal, dragging corn slightly higher, while the wheat complex falls

Analysis by Matt Zeller, Senior Market Intelligence Analyst: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]