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Beyond the Numbers

Renewed Concerns About Economic Outlook May Weigh On Wall Street
9/17/2020 9:01 AM

The major U.S. index futures are pointing to a sharply open on Thursday, with stocks likely to extend the pullback seen late in the previous session.

Concerns about the economic outlook may weigh on the markets following indications the Federal Reserve plans to leave interest rates at near-zero levels for years to come.

The Fed’s dovish monetary policy announcement on Wednesday was expected to help calm the markets, although investors seem to be viewing the central bank’s projections as a sign the recovery will not be as swift as many were hoping.

In his post-meeting press conference, Fed Chair Jerome Powell cautioned that the pace of the economic recovery is expected to slow and urged for fiscal stimulus from Congress to sustain the recovery.

However, lawmakers have remained at an impasse over a new coronavirus stimulus bill for weeks, and the upcoming elections could make reaching a compromise more difficult.

Negative sentiment may also be generated in reaction to a report from the Labor Department showing first-time claims for U.S. unemployment benefits fell less than expected in the week ended September 12th.

After seeing strength for much of the session, stocks pulled back sharply in the final hour of trading on Wednesday. The tech-heavy Nasdaq showed a particularly steep drop, while the Dow managed to cling to a modest gain.

The major averages eventually ended the session mixed. While the Dow inched up 36.78 points or 0.1 percent to 28,032.38, the Nasdaq plunged 139.85 points or 1.3 percent to 11,050.47 and the S&P 500 slid 15.71 points or 0.5 percent to 3,385.49.

The late-day pullback came despite a dovish monetary policy announcement by the Fed, with the central bank leaving interest rates unchanged and signaling rates are likely to remain at near-zero levels for years to come.

The Fed announced its widely expected decision to keep the target range for the federal funds rate at zero to 0.25 percent.

The economic projections provided along with the announcement suggest most Fed officials expect interest rates to remain unchanged through at least 2023.

The central bank said it expects rates to remain at current levels until labor market conditions reach levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

The projections from Fed officials suggest consumer price inflation will remain below 2.0 percent until at least 2023.

The Fed's latest estimates point to a 3.7 percent contraction in GDP in 2020, reflecting an improvement from the 6.5 percent plunge forecast in June.

However, the Fed downwardly revised its estimates for GDP growth in 2021 and 2022 to 4.0 percent and 3.0 percent, respectively. GDP growth in 2023 was forecast at 2.5 percent.

The central bank reiterated its commitment to using its full range of tools to support the U.S. economy in this challenging time.

The sharp drop by the Nasdaq came as big-name tech companies like Apple (AAPL), Facebook (FB), Netflix (NFLX) and Amazon (AMZN) showed notable moves to the downside.

Ahead of the Fed announcement, the Commerce Department released a report showing a notable slowdown in the pace of retail sales growth in the month of August.

The Commerce Department said retail sales rose by 0.6 percent in August after climbing by a downwardly revised 0.9 percent in July.

Economists had expected retail sales to surge up by 1.0 percent compared to the 1.2 percent jump originally reported for the previous month.

Excluding sales by motor vehicles and parts retailers, retail sales climbed by 0.7 percent in August after leaping by a downwardly revised 1.3 percent in July.

Ex-auto sales were expected to increase by 0.9 percent compared to the 1.9 percent spike originally reported for the previous month.

The report also said closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, edged down by 0.1 percent in August after climbing by 0.9 percent in July.

"Consumers are being increasingly cautious with their outlays as the summer comes to a close," said Gregory Daco, Chief U.S. Economist at Oxford Economics.

He added, "If Congress is unable to extend fiscal aid to US households in the coming weeks, the US economy will be particularly susceptible to a cutback in consumer outlays - especially from the lowest income families."

A separate report from the National Association of Home Builders showed homebuilder confidence jumped to a record high in September.

The report said the NAHB/Wells Fargo Housing Market Index shot up to 83 in September from 78 in August. Economists had expected the index to come in unchanged.

With the unexpected increase, the index rose to its highest level in the 35-year history of the series, surpassing the previous record high of 78 that was set last month and also matched in December 1998.

Software stocks moved significantly lower over the course of the session, dragging the Dow Jones U.S. Software Index down by 1.8 percent.

Shares of Adobe (ADBE) showed a notable move to the downside even though the software company reported better than expected fiscal third quarter results.

Considerable weakness also emerged among retail stocks, as reflected by the 1.4 percent drop by the Dow Jones U.S. Retail Index.

On the other hand, substantial strength remained visible among energy stocks, which moved sharply higher along with the price of crude oil following the release of a report showing an unexpected weekly decrease in crude oil inventories.

Reflecting the strength in the energy sector, the Philadelphia Oil Service Index spiked by 3.7 percent, while the NYSE Arca Natural Gas Index and the NYSE Arca Oil Index both surged up by 3.5 percent.

Airline stocks also held on to strong gains despite the pullback by the broader markets, with the NYSE Arca Airline Index soaring by 3.1 percent.

Notable strength among housing and banking stocks also helped to partly offset the weakness that emerged in the aforementioned sectors.

Commodity, Currency Markets

Crude oil futures are slipping $0.23 to $39.93 a barrel after surging up $1.88 to $40.16 a barrel on Wednesday. Meanwhile, after rising $4.30 to $1,970.50 an ounce in the previous session, gold futures are plunging $19 to $1,951.50 an ounce.

On the currency front, the U.S. dollar is trading at 104.54 yen versus the 104.95 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1803 compared to yesterday’s $1.1816.

Asia

Asian stocks fell broadly on Thursday amid worries about the strength of the economic recovery after the U.S. Federal Reserve left interest rates unchanged and signaled rates are likely to remain at near-zero levels through 2023.

In his post-meeting press conference, Federal Reserve Chairman Jerome Powell cautioned that the pace of economic recovery is expected to slow and urged for fiscal stimulus from Congress to sustain the economic recovery.

Shares in China and Hong Kong extended losses from the previous session after the Federal Reserve offered a cautious outlook on the U.S. economy.

China's Shanghai Composite Index declined 13.49 points, or 0.4 percent, to finish at 3270.44, while Hong Kong's Hang Seng Index tumbled 384.78 points or 1.6 percent to 24,340.85.

Japanese shares fell even as the Bank of Japan maintained its massive monetary policy stimulus and slightly lifted its assessment about the economy after Yoshihide Suga took charge as Japan's new Prime Minister.

The Policy Board of the BoJ headed by Haruhiko Kuroda voted 8-1 to retain the interest rate at -0.1 percent on current accounts that financial institutions maintain at the central bank.

The benchmark Nikkei 225 Index slid 156.16 points, or 0.7 percent, to close at 23,319.37, and the broader Topix dipped 5.95 points or 0.4 percent to 1,638.40. Market heavyweight SoftBank Group and Fast Retailing lost 1.3 percent percent each.

Sony said it will launch the PlayStation 5 on November 12 in seven key markets, including Japan and the U.S. The company's shares dropped 0.9 percent.

Shares of Hitachi declined 0.6 percent after the company pulled out of a nuclear power plant project in Wales, citing a worsening investment environment due to the impact of COVID-19.

Australian stocks closed notably lower despite the release of data showing an unexpected drop in Australia's unemployment rate for August.

Meanwhile, the Organisation for Economic Cooperation and Development projected a smaller economic contraction for Australia this year, but lowered its growth forecast for Australia in 2021.

The benchmark S&P/ASX 200 Index lost 72.90 points, or 1.2 percent, to close at 5,883.20, and the broader All Ordinaries Index fell 77.70 points, or 1.3 percent, to 6,069.20.

In the tech space, Afterpay tumbled 5.4 percent, WiseTech Global dropped 4.0 percent and Appen lost 2.7 percent after their U.S. peers fell overnight.

Among the major miners, Fortescue Metals dropped 6.4 percent, Rio Tinto slid 3.4 percent and BHP Group lost 1.8 percent.

BHP will face a parliamentary inquiry on Thursday investigating the destruction of ancient heritage sites in Western Australia by its peer Rio Tinto.

On the economic front, the Australian Bureau of Statistics said that the jobless rate in Australia came in at a seasonally adjusted 6.8 percent in August. That blew away expectations for 7.7 percent and was down from 7.5 percent in July.

The Australian economy added 111,000 jobs last month to 12,583,400, again shattering expectations that called for a loss of 50,000 jobs following the addition of 114,700 jobs in the previous month.

New Zealand shares declined after data showed that the country's GDP tumbled 12.2 percent in the second quarter of 2020, marking New Zealand's largest single-quarter decline on record. However, that actually beat forecasts for a decline of 12.8 percent following the 1.6 percent drop in the previous three months.

The benchmark NZX 50 Index closed down 37.58 points, or 0.3 percent, at 11,777.13. Fisher & Paykel Healthcare fell 1.7 percent and A2 Milk slid 1.6 percent.

Seoul stocks extended losses to a second consecutive day. The benchmark Kospi lost 29.75 points, or 1.2 percent, to close at 2,406.17.

Market bellwether Samsung Electronics fell 2.5 percent and chemical maker LG Chem tumbled 6.1 percent, while chipmaker SK Hynix added 0.9 percent.

Europe

Despite coming off early lows, European markets continue to languish in negative territory in afternoon trading on Thursday.

Federal Reserve Chairman Jerome Powell's warning that the economic downturn due to the pandemic is "the most severe in our lifetime" and that more fiscal stimulus might be needed to sustain the economic recovery continued to weigh on sentiment. The Fed left its key rates unchanged as expected and said rates will be low through 2023.

Meanwhile, the Bank of England has left interest rates unchanged and maintained its current level of asset purchases.

The nine-member Monetary Policy Committee unanimously voted to hold the interest rate at 0.10 percent, as widely expected. The bank had altogether reduced the rate by 65 basis points at two unscheduled meetings in March.

The bank retained the size of the asset purchase programme at 745 billion pounds and said the existing stance on monetary policy remains appropriate and that it does not intend to tighten policy until there is clear evidence that significant progress is being made in sustainably achieving the 2% inflation target.

While the French CAC 40 Index has slumped by 1 percent, the German DAX Index is down by 0.8 percent and the U.K.’s FTSE 100 Index is down by 0.4 percent.

Automobile and banking stocks are among the most prominent losers in the European markets.

Data from the European Automobile Manufacturers Association, or ACEA, showed car registrations in Europe decrease 18.9% year-on-year in August following a 5.7% drop in July.

In economic news, Swiss exports rose for the third straight month in August and surpassed the CHF 18 billion mark for the first time since March, data from the Federal Customs Administration showed.

Exports increased by a real 2.9% month-on-month in August following a 2% rise in July, while imports declined 1.3% in August after a 0.5% rise in the previous month.

According to the Federation of the Swiss Watch Industry, watch exports declined 11.9% year-on-year in August.

Final data from Eurostat said Eurozone consumer prices declined in August, as initially estimated. Consumer prices fell 0.2% year-on-year in August, reversing a 0.4% rise in July. This was the first decline since May 2016. The rate came in line with the estimate released on September 1.

On a monthly basis, consumer prices decreased 0.4%, as initially estimated. Core inflation that excludes volatile energy, food, alcohol and tobacco, eased to 0.4% from 1.2% in July. The core rate also matched the preliminary estimate.

U.S. Economic Reports

A report released by the Labor Department on Thursday showed first-time claims for U.S. unemployment benefits fell less than expected in the week ended September 12th.

The Labor Department said initial jobless claims slipped to 860,000, a decrease of 33,000 from the previous week’s revised level of 893,000.

Economists had expected jobless claims to dip to 850,000 from the 884,000 originally reported for the previous week.

The Commerce Department also released a report showing new residential construction pulled back by much more than expected in the month of August.

The report said housing starts tumbled by 5.1 percent to an annual rate of 1.416 million in August after soaring by 17.9 percent to a revised rate of 1.492 million in July.

Economists had expected housing starts to pullback by 1.2 percent to a rate of 1.478 million from the 1.496 million originally reported for the previous month.

The Labor Department said building permits also fell by 0.9 percent to an annual rate of 1.470 million in August after spiking by 17.9 percent to a revised rate of 1.483 million in July.

Building permits, an indicator of future housing demand, had been expected to increase by 1.7 percent to a rate of 1.520 million from the 1.495 million originally reported for the previous month.

A separate report from the Federal Reserve Bank of Philadelphia showed a modest slowdown in the pace of growth in regional manufacturing activity.

The Philly Fed said its diffusion index for current activity slipped to 15.0 in September after dropping to 17.2 in August, although a positive reading still indicates growth in regional manufacturing. The dip by the index matched economist estimates.

Meanwhile, the report said nearly all of the future indexes increased, suggesting more widespread optimism among firms about growth over the next six months.

At 11 am ET, the Treasury Department is scheduled to announce the details of this month’s auctions of two-year, five-year and seven-year notes.

Stocks In Focus

Shares of Herman Miller (MLHR) are moving sharply higher in pre-market trading after the office furniture maker reported fiscal first quarter earnings that came in well above analyst estimates on better than expected revenues.

Moderna (MRNA) may also see initial strength after CEO Stephane Bancel told CNBC the company should have enough data to know whether its coronavirus vaccine is effective by November. The company also announced a collaboration with Vertex Pharmaceuticals (VRTX) to treat cystic fibrosis.

Shares of Apogee Enterprises (APOG) are also seeing pre-market strength after the glass products company reported better than expected fiscal second quarter earnings.

On the other hand, shares of Perrigo (PRGO) may move to the downside after the market of over-the-counter healthcare products announced a voluntary recall of albuterol sulfate inhalation aerosol after previously halting production and distribution.

Solar panel maker First Solar (FSLR) is also likely to come under pressure after announcing the pricing of its secondary offering of 8,649,074 shares of common stock at $69.00 per share. First Solar closed at $71.96 per share on Wednesday.
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