Wall Street tanks as PMI shifts from reverse to drive
Main U.S. indexes all end down 2% or more
All S&P 500 sectors red; cons disc down most
Dollar up; crude, gold, bitcoin decline
U.S. 10-Year Treasury yield rises to ~3.96%
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WALL STREET TANKS AS PMI SHIFTS FROM REVERSE TO DRIVE (1605 EST/2105 GMT)
The big three U.S. stock indexes closed sharply lower on Tuesday after a report from S&P Global showed business activity in the United States is expanding this month for the first time since June.
The S&P 500 .SPX and the Dow .DJI both dropped around 2%, while the Nasdaq .IXIC, weighed by Apple AAPL.O, Microsoft MSFT.O, Tesla TSLA.O and Amazon.com AMZN.O, slid 2.5%.
The three main indexes suffered their biggest one-day percentage drops since Dec. 15.
The blue-chip Dow has now given up its year-to-date gains, and is down 0.05% so far this year.
Economically sensitive transports .DJT and chips .SOX had a worse day than most, falling 3.2% and 3.3% respectively, while the FANG group .NYFANG slid by 2.6%.
While a S&P Global composite PMI reading over 50 - it landed at 50.2 - would normally be good news, in the upside-down world of restrictive Fed policy, it could suggest inflation will take longer to cool than many might have hoped, prompting Powell & Co to keep interest rates higher for longer.
That, in turn, has fueled worries that while the recession can has been kicked down the road, there may be the possibility of a hard landing looming on the horizon.
"Rising rates due to the market’s repricing of a potentially higher for longer monetary policy path have weighed on risk appetite," writes Adam Turnquist, chief technical strategist at LPL Financial.
Wall Street set a course for a down day before the opening bell, after quarterly results from retailers Walmart WMT.N and Home Depot HD.N sounded notes of caution in their forecasts, warning of softening demand and economic uncertainty.
Fourth-quarter reporting season is on the final stretch, with 67% of the companies who have reported so far beating consensus earnings estimates, according to Refinitiv.
Later in the week, the Commerce Department will take its second stab at fourth quarter GDP on Thursday, and will follow that on Friday with its wide-ranging PCE report for January, which will show income growth, consumer spending, the saving rate, and inflation.
Economists polled by Reuters see the year-over-year core PCE price index shedding a mere 0.1 percentage point to 4.3%, still more than double the Fed's average annual 2% inflation target.
Here's your closing snapshot:
(Stephen Culp)
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DON'T FIGHT THE FED, DON'T BET ON 'NO LANDING' -MS (1405 ET/1905 GMT)
Not so fast on a "no landing," where U.S. equity investors still envision robust growth and earnings estimates, albeit revised lower, are still achievable, says Lisa Shalett, the chief investment officer at Morgan Stanely Wealth Management.
Significantly better-than-expected retail sales and a strong labor market have encouraged investors to price a Goldilocks scenario, "but resilience doesn't come in a vacuum when the Fed is hiking," Shalett says in a note on Tuesday.
Bond markets have priced in the message, as seen by higher Treasury yields and a projected 5.3% terminal Fed funds rate. But equities still shrug off inflation, bonds and Fed guidance under the guise of "looking through" the fog, Shalett says.
"Such framing could be upset by realities later this year, suggesting not only a higher neutral rate but lower multiples," she says.
Economic strength amid a Fed tightening cycle aimed at countering inflation has consequences, Shalett says. "Stocks can't ignore the facts forever," she adds.
If rates are closer to 5% for longer, valuations incorporating extremely modest risk premiums will likely be very vulnerable to market shocks.
With consumption and inflation reheating, risks of a hard landing resembling a boom/bust are growing, even if the pain may be delayed a quarter or two, she said.
(Herbert Lash)
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LARGE U.S. BANKS FACE FALLING DEPOSITS, FEWER TREASURY HOLDINGS AND SLIPPING LOAN GROWTH (1233 EST/1733 GMT)
Consumers are raiding their piggy banks, banks are selling their Treasuries to make up for the cash shortfall, and tighter credit standards are putting a damper on loan demand.
In a BNY Mellon note, forex and macro strategist John Vellis describes a chain reaction in which deposits are shrinking as rising interest rates are sending investors looking for more attractive places to park their cash, sending overall deposits held by large financial institutions down by 4.2% year-on-year.
Vellis doesn't cite hot inflation as a possible reason deposits are shrinking and the saving rate is drifting near historical lows.
As a side note, on Friday, the Commerce Department is due to release its wide-ranging personal consumption expenditures (PCE)report, which will provide the latest data on both inflation and the saving rate.
"Furthermore, the decline in reserves has forced banks to similarly reduce holdings of Treasury and Agency securities in a bid to raise cash," Vellis writes.
Tighter financial conditions brought about by the Federal Reserve's restrictive monetary policy is stunting loan growth.
"The quantity of loans issued by large domestically chartered banks peaked just before the new year at $6.53 trillion, and is now down to $6.45 trillion," the note says.
That amounts to a 1.2% drop.
"(It's a) small decline to be sure, but in light of falling deposits and tighter credit standards, it nevertheless reflects monetary policy tightening – and suggests business activity will slow," Vellis adds.
(Stephen Culp)
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MUCH ADO ABOUT THE DEBT LIMIT (1203 EST/1703 GMT)
Goldman Sachs economists Tim Krupa and Alec Philips, like most peers, expect debt limit showdown this summer in Washington to roil markets the closer we get to the decision.
The economists expect the debt limit deadline to hit in early to mid-August and their base case is that Congress will raise it before the Treasury has to delay scheduled payments.
Last week, the Congressional Budget Office warned the United States could face debt-ceiling crisis this summer without a deal.
In past instances, uncertainty around the debt ceiling has often led to increased volatility in the markets and dislocation of Treasuries maturing closest to the stated deadline. So far, however, few assets are showing signs of pricing risks to this uncertainty, the economists said in the note.
Treasuries maturing close to the debt limit deadline appear cheaper, while equity options are not signaling any risk premiums for the summer at this point, according to the note.
There are two exceptions – one, the U.S. sovereign 1-year credit default swap spreads that have hit levels last seen in 2011; and two, equities with greater exposure to government spending that have lagged the benchmark S&P 500 index.
As the main source of uncertainty is the level of April tax collections, Krupa and Philips said, we expect greater clarity on the deadline by late April or early May.
This could, in turn, lead to higher volatility around the deadline and impose a greater risk premium on Treasuries maturing near the date.
(Bansari Mayur Kamdar)
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TWO-FER TUESDAY: HOME SALES, FLASH PMI (1112 EST/1612 GMT)
A partly cloudy duet of economic indicators on Tuesday provided evidence that business activity is recovering and home sales, which have fallen for a full year, might have at long last found a trough.
Sales of pre-owned U.S. homes USEHS=ECI unexpectedly fell by 0.7% in January to an even 4 million units at a seasonally adjusted annualized rate, according to the National Association of Realtors (NAR).
What's more, the December decrease was revised to a steeper-than-previously-stated -2.2%. Consensus called for a 2.0% increase to 4.1 million units SAAR.
The report marks the twelfth-straight monthly decline, and existing home sales are now below the brief, one-month nadir of the pandemic crash that occurred in May 2020.
"Home sales are bottoming out," says Lawrence Yun, chief economist at NAR. "Prices vary depending on a market’s affordability, with lower-priced regions witnessing modest growth and more expensive regions experiencing declines."
Inventories, pushed to record lows amid a COVID-driven stampede for the suburbs, rose by 2.1%. At the current pace of sales, it would take 2.9 months to sell every home on the market.
"Rising inventories and lower prices could provide support to home sales," notes Rubeela Farooqi, chief U.S. economist at High Frequency Economics, who also notes that in view of rising home prices and mortgage rates, "affordability remains a key constraint for buyers."
Separately, S&P Global issued its current month "flash" purchasing managers' indexes (PMI) for the manufacturing USMPMP=ECI and services USMPSP=ECI sectors, both of which landed to the north of analyst expectations.
Factory activity contraction decelerated, rising 0.9 points to 48.8, contracting at a shallower pace, while the services reading jumped 3.4 points to 50.2, edging back into expansion territory.
A PMI reading above 50 indicates monthly expansion; below that level signifies contraction.
"February is seeing a welcome steadying of business activity after seven months of decline," writes Chris Williamson, chief business economist at S&P Global. "Despite headwinds from higher interest rates and the cost of living squeeze, the business mood has brightened amid signs that inflation has peaked and recession risks have faded."
Risks remain, however. Williamson flags wage inflation as a potential trigger for higher interest rates, which could "subdue the nascent expansion."
Disappointing forecasts from Walmart WMT.N and Home Depot HD.N soured investor risk appetite.
All three major U.S. stock indexes are down more than 1% in morning trading, with consumer discretionary .SPLRCD, transports .DJT, and small caps .RUT among those groups taking the biggest hits.
(Stephen Culp)
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CONSUMER DISCRETIONARY LEADS WALL STREET'S EARLY LOSSES (1004 EST/1504 GMT)
Wall Street's three major indexes are lower on Tuesday with broad declines and particular pressure on retail stocks as Home Depot HD.N and Walmart Inc WMT.N both issued full-year earnings guidance that was lower than analysts had expected.
The S&P 500's .SPX consumer discretionary index .SPLRCD is leading declines, last down 2.1%, while the S&P retail index .SPXRT is down 2.7%.
The sole gaining index among the S&P's 11 major industry sectors is energy .SPNY, which is being boosted by rising oil prices. If their early trading trends continue to the close S&P 500 and Nasdaq .IXIC would clock three straight sessions of declines.
The Dow .DJI would erase its Friday advance unless it regains some ground.
Here is a snapshot from 1004 AM:
(Sinéad Carew)
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DOW INDUSTRIALS: GLASS CEILING OR GLASS FLOOR? (0900 EST/1400 GMT)
The Dow Jones Industrial Average .DJI, which ended Friday at 33,827, has essentially gone sideways for more than three months.
With this, a daily historical volatility measure has now collapsed to its tightest reading since early-September 2021. Thus, the blue-chip average appears especially ripe for much more spirited action, or indeed, a next trend:
Daily Bollinger Band (BB) width has compressed to 0.0207 or its lowest reading since 0.0205 on September 7, 2021.
Including the September 2021 low, and prior to the current print, the DJI has seen five sub-0.0400 BB width troughs (four which preceded declines and one which preceded a rally).
The average immediate decline was as much as 6.2% over the next 12 trading days. The rally was 6.4% over the next 18 trading days.
Low BB width does not in itself predict direction, and it could become more compressed. However, with e-mini Dow futures 1YMcv1 suggesting more than 300 points of downside pressure at Tuesday's open, the DJI looks poised to test its lower daily BB, which ended Friday at around 33,570.
In the event the Dow closes below this line, coupled with a BB width rise, a more sustained downside flurry may ensue.
The DJI has support at its December 22 low of 32,573. The 200-day moving average (DMA) ended Friday around 32,345.
If the DJI can reverse back above its 20-DMA, which should be around 33,950 on Tuesday, it can instead tilt the blue-chip average toward an upside range breakout.
(Terence Gabriel)
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FOR TUESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400 GMT - CLICK HERE
DJI02212023Bhttps://tmsnrt.rs/3lT9eBN
Wall Street indexes in the redhttps://tmsnrt.rs/3Eu6u4d
Existing home saleshttps://tmsnrt.rs/3KxozT3
SP Global PMIhttps://tmsnrt.rs/3SjKQW8
Closing snapshothttps://tmsnrt.rs/3lR4xIJ
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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