Key Takeaways
- Major US stock indices showed slight gains as markets awaited the Federal Open Market Committee (FOMC) meeting outcome.
- Markets anticipate a 98% chance of a 25 basis point rate cut at the current FOMC meeting, with further cuts expected.
- Positive developments in US-China trade relations, including a tentative agreement, provided support to the market.
- A significant earnings week for S&P 500 companies, including several Magnificent Seven members, is underway, with Q3 earnings showing strong performance but a slowdown in growth.
- Several individual stocks experienced notable movements due to company-specific news and earnings reports.
Market Performance Ahead of FOMC Decision
The S&P 500 Index, tracked by SPY, is trading up by +0.08%, while the Dow Jones Industrials Index, also known as DIA, has risen by +0.53%. The Nasdaq 100 Index (QQQ) is also showing positive momentum, up +0.30%. Futures for the December E-mini S&P 500 (ESZ25) indicate a +0.11% increase, and December E-mini Nasdaq futures (NQZ25) are up +0.34%.
US stocks are experiencing a slight uplift as they approach the conclusion of the two-day FOMC meeting on Wednesday. The market is forecasting a 98% probability of a 0.25% rate cut at this week’s meeting. Should the Fed proceed with this measure, the market anticipates a 94% chance of another 0.25% rate reduction at the subsequent FOMC meeting on December 10. Projections suggest a total rate cut of 1.15% by the end of 2026, bringing the effective federal funds rate down to 2.95% from its current level of 4.10%.
FOMC Meeting and Market Expectations
The current FOMC meeting will not include the release of a Summary of Economic Projections, commonly known as the Fed’s dot plot. Consequently, market participants will hear from Fed Chair Powell during his post-meeting press conference but will not receive updated forecasts on interest rate trajectories from other Fed officials.
💡 However, there is anticipation for an update on the Fed’s quantitative tightening program, which involves reducing its balance sheet. A cessation of quantitative tightening could be a bullish signal for both stock and bond markets, as it would reduce the outflow of liquidity from the US financial system.
Economic Data Insights
📊 The August FHFA US House Price Index showed a stronger-than-expected increase of +0.4% month-over-month, compared to an anticipated -0.1%. Similarly, the S&P CoreLogic CS US 20-city House Price Index rose by +0.19% month-over-month and +1.58% year-over-year, surpassing expectations of -0.10% and +1.30%, respectively.
📊 The October Richmond Fed Manufacturing Index climbed 13 points to -4, indicating an improvement from market expectations of a 5-point rise to -12.
📍 The October Conference Board US Consumer Confidence Index registered 94.6, a slight decrease of 1.0 point from a revised 95.6, but still outperformed the expected figure of 93.4.
Geopolitical and Trade Developments
⚡ Stocks are benefiting from positive carry-over sentiment from Monday’s news regarding a tentative trade agreement between the US and China, reached over the weekend in Malaysia. This agreement is expected to be formally announced at the upcoming summit between Presidents Trump and Xi on the sidelines of the APEC conference in South Korea. Treasury Secretary Bessent indicated that the agreement effectively removes the threat of a 100% tariff on US imports from China, which was scheduled to take effect on November 1. China has also agreed not to restrict the export of rare earth metals for at least a year and to purchase a substantial quantity of US soybeans. Progress has also been made on shipping fees and US demands for China to curb the export of fentanyl and its precursors. Discussions are also ongoing regarding an agreement that could allow US consumers to continue accessing TikTok.
Earnings Season and Corporate Performance
Major Earnings Reports Amid Economic Uncertainty
This week is packed with earnings reports, with 173 S&P 500 companies scheduled to announce their results. Notably, five of the Magnificent Seven companies are reporting: Alphabet and Microsoft on Wednesday, followed by Apple and Amazon.com on Thursday.
Q3 earnings have shown robust performance so far. According to Bloomberg Intelligence, 84% of S&P 500 companies that have reported have exceeded forecasts, setting the stage for the best quarter since 2021. However, Q3 profits are projected to have increased by +7.2% year-over-year, representing the smallest rise in two years. Furthermore, Q3 sales growth is anticipated to slow to +5.9% year-over-year, down from +6.4% in Q2.
Trade Relations and Tariffs
📍 Markets are closely monitoring US-Canada trade relations following President Trump’s announcement of a potential 10% tariff on US imports from Canada. This proposed tariff is a response to an advertisement released by the provincial government of Ontario criticizing tariffs. While President Trump initially suggested halting US trade negotiations with Canada due to the ad, he escalated the situation over the weekend by proposing the new tariff, despite Ontario agreeing to withdraw the campaign.
📍 Regarding President Trump’s reciprocal tariffs, market participants are looking ahead to oral arguments at the Supreme Court scheduled for November 5. The central question is the legality of these tariffs, as lower courts have already ruled them unlawful, citing a dubious claim of emergency authority. If the Supreme Court upholds these rulings, the US government would be required to refund collected reciprocal tariffs, and President Trump’s authority to impose tariffs would be confined to established sections of US trade law. Experts anticipate the Supreme Court’s final decision on reciprocal tariffs by late 2025 or early 2026.
US Government Shutdown Impact
⚡ The ongoing US government shutdown, now in its fifth week, continues to weigh on market sentiment and the broader US economy. The shutdown is causing delays in the release of crucial government reports, including weekly unemployment claims, the September unemployment and payroll report, August trade balance, September retail sales, September PPI, September housing starts, September industrial production, and September leading indicators, among others. Bloomberg Economics estimates that approximately 640,000 federal workers will be furloughed, potentially increasing jobless claims and pushing the unemployment rate to 4.7%.
International Market Performance
📌 Overseas stock markets are trading lower today. The Euro Stoxx 50 has declined by -0.08%. China’s Shanghai Composite closed down -0.22%, following a rally of +1.18% on Monday. Japan’s Nikkei Stock 225 finished the day down -0.58%, after a significant rally of +2.46% on Monday.
Interest Rate Watch
Treasury Yields and FOMC Anticipation
December 10-year T-notes (ZNZ5) are up +0.5 ticks, with the 10-year T-note yield slightly higher at 3.981%. T-note prices are trading with caution ahead of Wednesday’s FOMC decision. The positive news regarding a US-Chinese trade agreement has reduced safe-haven demand for Treasury securities, exerting downward pressure on T-note prices. Additionally, stronger-than-expected economic data from the Richmond Fed and a US consumer confidence report are also contributing to this pressure.
📍 Underlying support for T-note prices exists due to the ongoing US government shutdown. This shutdown poses risks of increased job losses, reduced consumer spending, and a weakened US economy, scenarios that could prompt the Federal Reserve to continue its interest rate cuts.
European Bond Market
Eurozone government bond yields are mixed. The 10-year German bund yield has edged up +0.3 basis points to 2.619%, while the 10-year UK gilt yield has decreased by -1.1 basis points to 4.391%.
⚡ Swaps markets are pricing in a 1% chance of a -0.25% rate cut by the European Central Bank (ECB) at its upcoming policy meeting on October 30.
US Stock Market Movers
Magnificent Seven and Tech Sector
The Magnificent Seven stocks are showing mixed performance. Microsoft (MSFT) and Tesla (TSLA) are notable gainers, with increases exceeding +2%. Microsoft’s stock is trading higher following news that it will acquire a 27% ownership stake, valued at approximately $135 billion, in the restructured for-profit OpenAI entity.
Intel (INTC) has seen a significant rise of over +5%. However, most other semiconductor stocks are experiencing losses, giving back some of the gains achieved on Monday.
⚡ PayPal (PYPL) is up more than +10% and stands as the largest gainer in the Nasdaq 100 index. This surge is attributed to a CNBC report indicating that OpenAI has agreed to integrate PayPal’s digital wallet into ChatGPT.
Other Notable Stock Movements
✅ United Parcel Service (UPS) is up more than +7% after reporting favorable adjusted earnings.
🔻 D.R. Horton (DHI) is down approximately -1% following an earnings miss.
🔻 Royal Caribbean (RCL) has fallen more than -7% after it reported an earnings miss.
Expert Summary
US stock markets are showing modest gains as investors await the Federal Reserve’s interest rate decision. Positive developments in US-China trade relations are providing a supportive backdrop, while a significant week for corporate earnings is underway. Economic data has been mixed, with some indicators exceeding expectations, while others signal continued economic and geopolitical uncertainties.