U.S. stocks drop before Fed; QQQ climbs in late trading

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Stocks slumped after paltry economic figures and a weaker outlook from the world’s largest retailer underscored the impacts of inflation pressures on consumer spending, with recession fears running rampant as the Federal Reserve gets ready to deliver another jumbo-sized hike.

Walmart Inc.’s rout engulfed industry peers, with Morgan Stanley saying its forecast is a “potential warning signal” for Amazon.com Inc.’s merchandise margins. In late trading, a US$166 billion exchange-traded fund tracking the Nasdaq 100 (QQQ) rose as Google’s parent Alphabet Inc. and Texas Instruments Inc. surged after earnings. Microsoft Corp. fell amid its slowest sales growth since 2020.

Traders also braced for another 75-basis-point hike by Fed officials on Wednesday, with a combined increase of 150 basis points over June and July representing the steepest rise in rates since the early 1980s when then chairman Paul Volcker was battling sky-high inflation. Dimming views on the economy sank US consumer confidence to the lowest level since February 2021, while a gauge of new home sales fell for the fifth time this year.

US officials are likely to stay hawkish for longer amid persistently high inflation, according to Goldman Sachs Group Inc. strategists, the latest to enter the debate around a potential central bank pivot as growth slows. They echoed the views from Morgan Stanley’s Michael Wilson, who noted Monday it’s too early to expect the Fed to stop hiking. Meantime, JPMorgan Chase & Co. strategists said bets that prices have peaked will lead to a Fed pivot and improve the picture for equities in the second half.

“A soft landing feels like a long shot from here,” wrote Seema Shah, chief global strategist at Principal Global Investors. “In the last 11 tightening cycles, the Fed has only skirted recession three times (1965, 1984 and 1994). In each of those cycles, inflation was lower and the Fed funds rate was meaningfully higher at the point of liftoff, so Fed tightening didn’t need to be as dramatic as it does today.”

Other corporate highlights:

  • United Parcel Service Inc. posted disappointing package deliveries.
  • General Motors Co. reported weaker profit than analysts’ estimates as semiconductor shortages kept production volumes in check.
  • 3M Co. plans to spin off its multibillion-dollar health-care operations.
  • McDonald’s Corp. and Coca-Cola Co.’s sales exceeded expectations.
  • General Electric Co. beat estimates for profit and reported surprise positive cash flow as sales at the key jet-engine division soared.
  • Archer-Daniels-Midland Co. sees robust demand for food crops through at least the end of 2022 after posting its record profit.

Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter.

The annual summer lull combined with steadily deteriorating economic conditions and recession fears are also keeping junk-bond borrowers on the sidelines, with the month-to-date supply at US$1.06 billion, the slowest July at least since 2006.

Here are some key events to watch this week:

  • Apple, Amazon, Meta earnings due this week
  • Fed policy decision, briefing, Wednesday
  • Australia CPI, Wednesday
  • US GDP, Thursday
  • Euro-area CPI, Friday
  • US PCE deflator, personal income, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.2 per cent as of 4 p.m. New York time
  • The Nasdaq 100 fell 2 per cent
  • The Dow Jones Industrial Average fell 0.7 per cent
  • The MSCI World index fell 0.9 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4 per cent
  • The euro fell 1 per cent to US$1.0117
  • The British pound fell 0.2 per cent to US$1.2023
  • The Japanese yen was little changed at 136.82 per dollar

Bonds

  • The yield on 10-year Treasuries was little changed at 2.80 per cent
  • Germany’s 10-year yield declined nine basis points to 0.92 per cent
  • Britain’s 10-year yield declined two basis points to 1.92 per cent

Commodities

  • West Texas Intermediate crude fell 1.8 per cent to US$94.96 a barrel
  • Gold futures fell 0.2 per cent to US$1,733.70 an ounce