LIVE MARKETS Powell put - poof?

  • All major U.S. stock indexes close down >1%
  • Comm svcs weakest of S&P sectors; utilities also slumps
  • Powell: time to retire word "transitory"
  • Dollar, gold, bitcoin dip; crude drops
  • U.S. 10-yr Treasury yield ~1.44%

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POWELL PUT - POOF? (1615 ET/2115 GMT)

Wall Street ended sharply lower on Tuesday as investors worried the Fed would tighten monetary policy faster than expected, just as the new Omicron coronavirus variant raises concerns about an extended pandemic that could hurt the economic recovery.

After months of describing a U.S. inflation spike as a temporary effect related to reopening the economy after the coronavirus pandemic, Powell on Tuesday said the word "transitory" is no longer the most accurate term for describing current high inflation. He also said the risk of higher inflation has increased, and that it would be appropriate for the central bank to consider wrapping up its "taper" of large-scale bond purchases at a faster pace.

Many investors in recent years have grown confident that the Fed and Powell would take steps to keep financial markets from falling deeply, the so-called Powell put, and a faster than expected tightening of monetary policy in the coming months could shake that faith.

"Powell came off as much more hawkish than many were assuming given the variant risk. He said now is the time to kind of abandon the transitory characterization of inflation and said that maybe a conversation about tapering earlier than previously assumed might be appropriate," said Ben Jeffery, an interest rate strategist at BMO Capital Market.

"The market's read through is a sooner end to tapering might imply a sooner liftoff for rate hikes. But he didn't say anything specific in regards to that," Jeffery said.

Tuesday was the third straight day that the S&P 500 rose or fell 1% or more.

The S&P 500 value index dropped 1.5%.

All 11 S&P 500 sector indexes fell, with communication services (.SPLRCL) slumping 3% and utilities (.SPLRCU) losing 2.9%.

One of only seven S&P 500 components to show a gain on the session, Apple (AAPL.O) rose over 3% to close at its highest ever. Declining issues outnumbered advancing ones on the NYSE by a 3.82-to-1 ratio; on Nasdaq, a 2.39-to-1 ratio favored decliners.

For the month, the S&P 500 lost 0.83%, the Dow fell 3.73% and the Nasdaq gained 0.25%.

Here is your closing snapshot:

Closing snapshot

(Noel Randewich)



TSMC (2330.TW) and GlobalFoundries (GFS.O) will likely be the biggest winners as the United States and other regional powers worried about national security re-shore semiconductor manufacturing over the next few years in a struggle to control production of increasingly vital hardware components, BofA Securities says in a new report.

Most U.S. chipmakers abandoned manufacturing decades ago to focus on design, and they now rely on TSMC and other contract manufacturers.

TMSC, or Taiwan Semiconductor Manufacturing Co, is by far the world's largest contract chip manufacturer, producing components used in smartphones, telecom, data centers and other industries, for companies including Apple (AAPL.O), Nvidia (NVDA.O) and Qualcomm (QCOM.O).

U.S. chipmakers account for 60% of global chip revenue, but just 13% of global production capacity, according to BofA.

Recently, with China-U.S. tensions increasing and the global supply chain crisis choking the supply of crucial semiconductors, the United States has attracted new and expanded fabrication plants from Intel (INTC.O), TSMC and Samsung Electronics (005930.KS), and other governments are following suit.

"Suppliers who can provide the most desirable and differentiated technology/products will have the priority to receive government subsidies, while also attracting top talent in the respective country/region," writes analyst Robin Cheng, the lead author of the report.

As countries push chip manufactures to bring more production to their shores, TSMC and GlobalFoundries are best positioned to gain, according to Cheng. Also likely to win from massive capex spending as the global chip supply chain restructures are ASML (ASML.AS), KLA Corp (KLAC.O), Applied Materials (AMAT.O), Lam Research (LRCX.O) and Teradyne (TER.O), Cheng says.

(Noel Randewich)



With the U.S. dollar recently hitting a near 15-month high, Stan Shipley, managing director for Evercore ISI, notes the move was an upside breakout of a narrow trading range after falling sharply in the second half of last year.

According to Shipley, the macro fundamentals - relative sovereign spreads and inflation - suggest the greenback will turn up, with the news flow regarding the Omicron variant giving the dollar even more of a tailwind.

Shipley notes the dollar did rally as the delta variant gained prominence in June through August, and while data on Omicron is sparse, "the most likely outcome seems about the same as associated with the delta variant."

Along with the new variant, Shipley points to other reasons for dollar strength, saying a "variety of metrics" on the coronavirus indicate the U.S. is equally or better protected than most other countries, particulary emerging ones.

Other factors include a trade gap that should widen as inventories are restocked as congestion at supply ports ease, the U.S. unwinding stimulative monetary policies sooner than the EU, UK and Japan, and higher U.S. inflation expectations.

(Chuck Mikolajczak)



U.S. stocks moved sharply lower on Tuesday after Fed Chair Jerome Powell effectively took the "transitory" out of "transitory inflation".

After months of describing a U.S. inflation spike as a temporary effect related to reopening the economy after the coronavirus pandemic, Powell on Tuesday said the word "transitory" is no longer the most accurate term for describing current high inflation.

"It is probably a good time to retire that word," Powell said during testimony to the Senate Banking Committee.

Stoking expectations that the Fed may need to tighten monetary policy sooner than previously predicted, Powell also said the risk of higher inflation has increased, and that it would be appropriate for the central bank to consider wrapping up its "taper" of large-scale bond purchases at a faster pace.

Those comments spooked a stock market that was already on edge over the new Omicron coronavirus variant that has policy makers and vaccine makers scrambling to evaluate.

"Until now, (Powell) has insisted inflation was transitory," said Rick Meckler, a partner Cherry Lane Investments, a family investment office in New Vernon, New Jersey. "Now he seems to be indicating there are more concerns. The presumption is they'll move forward faster with tightening and ending the cycle of easing that's dominated the market for the last decade."

The S&P 500 (.SPX) opened lower but sharply extended losses after Powell's comments. The pain was fairly evenly spread, with the S&P 500 growth index (.IGX) down 1.2% and the value index (.IVX) falling 1.6%.

Here is a snapshot of current index levels:


(Noel Randewich)



Data released on Tuesday revealed a few clouds in the sky with respect to consumer attitudes and factory activity, even as home prices zoom further into the stratosphere. To add insult to injury, the emergence of the Omicron COVID-19 variant suggests the pandemic is not inclined to give up the ghost just yet.

With the holiday shopping season in full swing, the mood of the consumer, who does the economic heavy lifting by contributing about 70% of U.S. GDP, continued to dim this month. read more

The Conference Board's (CB) consumer confidence index (USCONC=ECI) slid by 2.1 points in November to 109.5, undershooting economist forecasts.

"Expectations about short-term growth prospects ticked up, but job and income prospects ticked down," writes Lynn Franco, CB's senior director of economic indicators. "Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence."

But what about Omicron?

While Lynn expects "a good season for retailers," she adds that "confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months."

Delving into the report's subcomponents, survey respondents grew slightly more pessimistic about both their current situation and near-term expectations both slipped.

But the gap between those two measures remains unusually wide.

If past is prologue, that exaggerated gap could be a harbinger of impending recession, as shown in the graphic below:

Consumer confidence

Growth of U.S. home prices eased up a bit in September but are still running white-hot.

The S&P Case Shiller's 20 city composite (USSHPQ=ECI) shaved 0.5 percentage points to a year-on-year print of 19.1% coming in a shade below the 19.3% consensus.

The demand wave has been supported by a pandemic that seems to keep finding new ways to linger, and combined with still-low inventories and scarce building supplies, home prices show few signs of coming back to earth.

"Housing prices continued to show remarkable strength in September, though the pace of price increases declined slightly," writes Craig Lazzara, managing director at S&P DJI.

But is this a wave, or the new normal?

"More data will be required to understand whether this demand surge represents simply an acceleration of purchases that would have occurred over the next several years, or reflects a secular change in locational preferences," Lazzara adds.

Every city in the 20-city composite posted double-digit annual gains, with Phoenix in the lead for the 28th consecutive months, with 'valley of the sun' home prices up an astounding 33.1% over 12 months ago.

Case Shiller

Finally, activity and midwest factories has cooled this month.

Chicago purchasing managers' index (PMI) (USCPMI=ECI) slid by a steeper-than-expected 6.6 points to reading of 61.8, according to MNI Indicators.

A PMI number over 50 signifies expanded activity over the previous month.

While the Omicron variant outbreak is too recent to have affected the data, the stubborn longevity of health crisis and the effects its having on the global supply chain is likely to remain a drag on the manufacturing sector.

As Rubeela Farooqi, chief U.S. economist at High Frequency Economic observes, "potential moderation in momentum over coming months, if supply bottlenecks and shortages intensify in response to renewed Covid restrictions."

The graphic below compares Chicago PMI with the closely-watched, national PMI figure from the Institute for Supply Management, which is due to deliver its November figure on Wednesday. Analyst see that number inching up to an even 61 from October's 60.8.

Chicago PMI

Wall Street is taking the gathering Omicron storm to heart, with all three major U.S. stock indexes deep in red territory.

Transports (.DJT) and smallcaps (.RUT), both proxies of economic health, were suffering more than the broader market.

(Stephen Culp)



JPMorgan says emerging markets and European stock markets are likely to outperform those in the United States next year, even though U.S. stocks are likely to continue to gain albeit at a more modest pace.

Emerging markets suffered in 2021 “driven by slowdown in China, as well as policy tightening, inflation overhang, EM FX weakness and COVID-19 shocks,” analysts at the bank said in a note on Tuesday. However, “next year, a combination of better EM sentiment (from current lows), stronger earnings growth, and convergence of historical relative valuation, should lead to EM outperformance vs DM.”

In particular, JPMorgan prefers stocks in China, Indonesia, Russia and Brazil, over those in Malaysia and Peru. In developed markets the bank sees Europe as likely to outperform the U.S. and recommends the United Kingdom and Italy over Switzerland.

Sector wise, the bank maintains “a pro-cyclical tilt…with preference for reflation-sensitive sectors.” This includes favoring energy and financials over staples and utilities, consumer services over consumer goods, healthcare over other defensive sectors and small-caps over large-caps.

JPMorgan’s upside targets for 2022 are for the S&P 500 (.SPX) to reach 5050, an approximate 9% increase, while the MSCI Eurozone index (.MIEU00000NEU) will rise to 307, a 17% increase and the FTSE 100 (.FTSE) to reach 8150, a 15% increase.

In emerging markets, the bank expects the MSCI EM index (.MSCIEF) will reach 1500, a 23% increase, while the MSCI China index (.MICN00000PUS) will rise to 116, a 32% increase and the MSCI EMEA (.MIEE00000PUS) will increase to 360, a 34% increase.

(Karen Brettell)



Monday's bounce from Friday's sell-off is proving to be short-lived, with U.S. equity futures pointing to a sharply lower open on renewed concerns about the newly discovered COVID-19 variant, Omicron.

Comments from Moderna (MRNA.O) chief executive Stéphane Bancel to the Finanical Times cast doubt on the effectiveness of vaccines against the new variant, while Regeneron Pharma (REGN.O) said its antibody treatment and other similar drugs could be less effective. read more

Both Moderna and Regeneron shares were lower in premarket, as were travel-related stocks such as airlines and cruise operators while oil prices slumped about 5%. read more

Shortly after the market open 10 a.m. EST (1500 GMT), Fed Chair Jerome Powell and Treasury Secretary Janet Yellen are due to testify before the U.S. Senate Banking Committee, where they are expected to be questioned by lawmakers over high inflation and the potential impact of the new variant. read more

Economic data on tap for the day includes the Chicago PMI and consumer confidence readings for November.

Below is your premarket snapshot:

Renewed Omicron worries weight

(Chuck Mikolajczak)



Reporting by Chuck Mikolajczak

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