Daily Markets: European Central Bank Rate Decision Drives Markets

Today’s Big Picture

Asia-Pacific equity indexes ended today’s session mixed. China’s Shanghai Composite declined 0.33% and Hong Kong’s Hang Seng fell 1.00% while South Korea’s KOSPI gained 0.33%, India’s Sensex rose 1.12%, Taiwan’s TAIEX advanced 1.22% and, Australia’s ASX All Ordinaries closed up 1.81%. Japan’s Nikkei led the way, up 2.31% on a broad rally with energy names providing the only drag. By mid-day trading, European equity indices are mixed, and U.S. futures point to a muted open later this morning. At the point of writing this, futures are up and VIX is up even more so. This should be, as they say, interesting.

Markets were lifted in part yesterday by the Fed’s latest Beige Book that found economic activity across the country was little changed since early July and even though prices remained highly elevated, nine Fed Districts reported some degree of moderation. That said, the report also found “expected price pressures to persist at least through the end of the year.” The market may have viewed that as progress, but even so, next week’s August Consumer Price Index and Producer Price Index data are likely to show inflation remains a ways away from the Fed’s 2% target. 

Before the opening bell rings and trading gets underway today, monetary policy and interest rates will be back in the spotlight. At 8:15 AM ET, the European Central Bank will announce its interest rate decision and at 8:45 AM ET, it will conduct its corresponding press conference. Following the blistering pace of inflation in the region, expectations are for the central bank to boost rates by 75-basis points. Similar to the Fed’s conundrum, the ECB is looking to front-load its effort to fight inflation that stems largely from higher food and energy costs, but there are concerns about potential economic fallout. As we see it, ECB President Christine Lagarde will be joining Fed Chair Powell on the monetary policy messaging tightrope later this morning and how that messaging is received will influence where European markets close and U.S. equity markets open. 

At 9:10 AM ET, Fed Chair Powell will participate in the Cato Institute’s 40th Annual Monetary Conference, which is expected to include a Q&A. Ahead of Powell’s comments, the CME FedWatch Tool sees an 82% probability of a 75-basis point rate hike at the Fed’s next monetary policy meeting that concludes on September 21. Given that expectation, more than likely the Q&A will attempt to focus on the size of potential interest rate moves at its November and December meetings, but we expect Powell will stick to his Jackson Hole comments where he remained focused on returning inflation to 2% and remaining data dependent.

As the market digests the ECB’s rate hike and Powell’s comments, it will also have to contend with another round of earnings misses and guidance cuts due to lingering supply chain issues, elevated raw material costs, and bloated retail inventories. 

Data Download

International Economy

Japan’s economy grew 3.5% on an annualized basis in 2Q 2022 vs. the preliminary reading of 2.2% as well as the market forecast of 2.9% and compares to the 0.2% reading for 1Q 2022. Improvement in private consumption amid the improved covid situation was cited as a key factor for 2Q 2022. Japan’s Economy Watchers' Survey showed Japan’s service sector sentiment rose by 1.7 points to 45.5 in August vs. July’s reading of 43.8, the lowest reading in five months. Here too, progress on the covid front was touted as a key factor in the MoM improvement. The Economy Watchers Survey Outlook increased to 49.40 points in August from 42.80 points in July.

Domestic Economy

8:30 AM ET will see the latest Initial Jobless Claims figures as of September 3 which are estimated at 237,500, up slightly from the previous week’s 232,000. Continuing Claims ending August 27 are also to be released and are expected to remain flat at 1.438 million from the previously reported figure.

3:00 PM ET will see the release of July Consumer Credit which is expected to decline to $31.0 billion from the previously reported $40.2 billion.

Markets

Markets finally got the break investors have been looking for; there was a fairly broad rally yesterday which saw the Dow up 1.40%, the S&P 500 rise 1.83%, the Nasdaq Composite gain 2.14%, and the Russell 2000 close up 2.21% at the close. Big sector gainers yesterday included Utilities and Consumer Discretionary and the only sector to see losses was Energy as both crude and natural gas prices dipped. The rally was so broad that the only stock to have a down day in the Consumer Discretionary Select Sector SPDR Fund (XLY) was Domino’s Pizza (DPZ) but even then, it was only down 0.04%.

Here’s how the major market indicators stack up year-to-date:

• Dow Jones Industrial Average: -13.09%
• S&P 500: -16.50%
• Nasdaq Composite: -24.63% 
• Russell 2000: -18.41%
• Bitcoin (BTC-USD): -58.41%
• Ether (ETH-USD): -55.74%

Stocks to Watch

Before trading kicks off for U.S.-listed equities, FuelCell Energy (FCEL), Lovesac (LOVE) will be among the companies issuing their latest quarterly results and guidance. 

Spice and seasoning company McCormick & Co. (MKC) issued downside guidance for its August quarter with EPS of $0.65 vs. the $0.83 consensus with revenue near $1.60 billion vs. the $1.63 billion consensus. Impacting comparisons, the company divested its Kitchen Basics business during the quarter but the moderation in consumer consumption was greater than anticipated. Its gross margins were also impacted by continued supply chain issues and related raw material costs. For its fiscal 2022, McCormick now calls for EPS of $2.63-2.68 vs. the $3.03 consensus with revenue for the year of $6.32-6.44 billion vs. the $6.55 billion consensus.

Despite reporting July quarter consolidated revenue of $1.2 billion that matched the consensus forecast, American Eagle (AEO) widely missed EPS expectations for the quarter. The company shared it was impacted by a challenging consumer backdrop and is expanding the scope of expense and capital expenditure reductions with a focus on store payroll, corporate expense, professional services, and advertising. Alongside these efforts, American Eagle is pausing its quarterly cash dividend to provide additional financial flexibility. Quarter-to-date, demand trends remain difficult, with brand revenue down in the high-single digits. Per the company, if the current trends continue, the current quarter will see higher markdowns in anticipation of a more promotional retail environment and its seasonal clearance cadence which is more weighted to its January quarter. 

Even though GameStop (GME) reported mixed July quarter results that included revenue for the quarter falling 4% YoY and missing the consensus forecast, GME shares popped in aftermarket trading last night following word it entered into a partnership with FTX US, a US-regulated cryptocurrency exchange. 

Taiwan Semiconductor (TSM) announced its August 2022 net revenue was ~NT$218.13 billion, an increase of 16.8% MoM and 58.7% YoY.

The Information reports Google (GOOGL) has told a number of senior managers to restrict travel to "business critical" trips another indication it is managing a macroeconomic slowdown.

IPOs

As of now, no IPOs are slated to be priced this week. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

American Outdoor Brands (AOUT), DocuSign (DOCU), Mission Produce (AVO), RH (RH), Smith & Wesson Brands (SWBI), Sprinklr (CXM), and Zscaler (ZS) are expected to report quarterly results after equities stop trading today. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar. 

On the Horizon

 Friday, September 9

• China: Consumer Price Index, Producer Price Index – August
• Japan: Machine Tool Orders – August
• US: Wholesale Inventories – July

Thought for the Day

“Don’t be upset by the losses. Be disappointed by not following your trading rules.” ~Chris Liew

Disclosures

• Zscaler (ZS) is a constituent of the Foxberry Tematica Research Cybersecurity & Data Privacy Index
• Mission Produce (AVO) is a constituent of the Foxberry Tematica Research Sustainable Future of Food Index
• Mission Produce (AVO) is a constituent of the Tematica BITA Cleaner Living Index
• Mission Produce (AVO) is a constituent of the Tematica BITA Cleaner Living Sustainability Screened Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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