Stocks Drift Lower as Fed Speakers Express Caution: Markets Wrap

(Bloomberg) -- U.S. stocks drifted lower Tuesday as Federal Reserve officials cautioned against disruptive policy tightening and U.S. companies signaled another strong earnings season.

The S&P 500 fell  while the tech-heavy Nasdaq 100 shed  a day after the equity benchmarks posted their best two-day rallies since 2020. The dollar weakened, gold gained and Treasury yields rose. 

Four Fed officials said they’ll back interest-rate increases at a pace that doesn’t disrupt the economy, calming markets unnerved by previous hawkish messages from the central bank. 

Meanwhile, positive corporate results lifted markets. Exxon Mobil Corp. posted its highest earnings in eight years on aggressive spending cuts. United Parcel Service Inc. projected annual sales above expectations. And UBS Group AG boosted its buy back program after an earnings beat.

“Earnings historically offer the strongest support to equities during times of unease, and as the Fed shifts its stance, we expect reports will maintain their grip on stock prices,” wrote Bloomberg Intelligence’s Gina Martin Adams.

Waves of volatility have swept across markets after the U.S. central bank signaled swifter monetary-policy tightening to curb inflation than many had expected. However, a few Fed officials expressed caution over over faster-than-necessary tightening included San Francisco Fed chief Mary Daly, who cited a number of risks facing the economy in addition to the ongoing pandemic. Additionally, Kansas City Fed President Esther George said it’s in “no one’s interest to try to upset the economy with unexpected adjustments.”

The comments “seems to have been the tonic that the market needed just to calm it down as we head into February,” Fiona Cincotta, senior financial markets analyst at City Index, said by phone. “They’ve really calmed those nerves and that’s pushing back on this idea of rapid increases in interest rates. They’re still suggesting that tightening needs to be done, but there was a suggestion that it would be better to run down the balance sheet more quickly rather than hiking rates rapidly, so there were just alternative approaches.”

Dennis DeBusschere, founder of 22V Research, said: “Fed tightening is still the path forward, but a short-term rebound in equities will continue, led by growth and cyclicals, as investors focus on a narrative of ‘peak tightening’ ahead of what is likely to be a weak payroll report.”

For more market analysis, read our MLIV blog.

What to watch this week:

• Earnings are due from Alphabet, Amazon, Ford Motor, Meta Platforms, Qualcomm, Sony, Spotify
• Manufacturing PMIs, including euro zone, Tuesday
• OPEC+ meeting on output, Wednesday
• Euro zone CPI, Wednesday
• Bank of England, European Central Bank rate decisions, Thursday
• Fed Board of Governors confirmation hearing, Thursday
• U.S. factory orders, initial jobless claims, durable goods, Thursday
• U.S. payrolls report for January, Friday
• Winter Olympics kick off in China, Russia’s President Vladimir Putin due to attend opening ceremony, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 9:51 a.m. New York time
• The Nasdaq 100 fell 0.4%
• The Dow Jones Industrial Average rose 0.1%
• The Stoxx Europe 600 rose 1.2%
• The MSCI World index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%
• The euro rose 0.3% to $1.1265
• The British pound rose 0.4% to $1.3504
• The Japanese yen rose 0.3% to 114.79 per dollar

Bonds

• The yield on 10-year Treasuries advanced two basis points to 1.80%
• Germany’s 10-year yield advanced one basis point to 0.02%
• Britain’s 10-year yield was little changed at 1.30%

Commodities

• West Texas Intermediate crude fell 0.9% to $87.40 a barrel
• Gold futures rose 0.3% to $1,802.50 an ounce

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.