Investors were left wanting this week as stocks fell as a Fed pivot failed to materialize, despite rising bets that smaller hikes were in sight.
This week’s headline was of course the Fed, while the October jobs report and services and manufacturing indices played second fiddle. Of course, earnings were in abundance and played a role in price movements as well.
The Fed did as expected and raised rates by 75 basis points, but left investors on the floor when Fed Chair Jerome Powell said there is “some ways to go” and that “the ultimate level of interest rates will be higher than previously expected.”
The most recent dot plot, which was released in late September, projected a cycle-high rate of 4.9%. Since this week's comments, investors are now pricing in a higher peak of 5.2%.
Looking forward, investors are currently pricing in a 61.5% chance at a smaller rate hike of 50 basis points in December.
The October jobs report was mixed. There were hefty upward revisions to September’s job growth, while both nonfarm payrolls and nonfarm private payrolls topped estimates. These both support a hawkish Fed, as it indicates a hot labor market.
However, the unemployment rate rose to 3.7% and the labor force participation rate fell to 62.3%. Ultimately, neither of these will convince the Fed to slow the pace of rate hikes, but they may represent some cracks starting to form in the labor market.
Manufacturing and Services
The ISM Manufacturing and Non-Manufacturing Indices told separate stories for October.
The Manufacturing index came in higher than expected with a reading of 50.2%. This kept the manufacturing sector in expansion territory - which is defined as readings over 50% - and topped estimates for a neutral 50.0%.
With manufacturing teetering just above the contraction line, the risk of a recession is rising. Encouragingly, prices contracted with a reading of 46.6%, following September’s 51.7%. This was the first contraction in prices since May 2020.
The Services index, on the other hand, came in at a reading of 54.4%. This was on the heels of September’s 56.7% reading and below estimates for 55.2%.
While easing prices to manufacturers was encouraging, prices rose for services - which was not helpful as it jumped to a reading of 70.7% from 68.7%.
Earnings went every which way this week. The gig economy had some interesting and unexpected reports, while brand loyalty shined through.
Etsy shares surged 9.53% Thursday after the company reported earnings. While earnings missed, revenues easily topped estimates rising 12% against estimates for half that growth. Etsy saw a flood of users during the pandemic, and it seems that they have held onto a significant portion as 49% of shoppers are repeats.
Uber and DoorDash rallied following earnings as well, as both saw strong demand. Uber fixed its driver shortage problem which contributed to lower fares that in turn improved demand for rides, while both companies noted surprising strength in food delivery.
While delivering takeout adds a lot of cost to the meal, and consumers returning to pre-pandemic life while facing rising costs seemed poised to knock demand, the pair onboarded a lot of people during the pandemic - which they seem to have gotten hooked, at least for the time being.
Last of the gig economy is Airbnb, which was a major letdown. The company plunged as it forecasted moderation in Nights and Experiences booked. The company topped estimates and provided in-line fourth-quarter guidance, so it wasn’t all bad. However, Airbnb trades at a hefty premium, meaning expectations were always going to be sky-high.
Finally, Starbucks rallied Friday following a strong earnings report. The coffee retailer has successfully raised prices without dampening demand as its average ticket price rose 10%. Encouragingly, CFO Rachel Ruggeri said that the resilient demand isn’t limited to coffee as they’ve seen “customers purchase more” add-ons.
All told, stocks fell this week. The S&P 500 dropped 3.89%, while the Dow outperformed by only falling 1.4%. Meanwhile, the Nasdaq plunged 5.65% and the Russell 2000 fell 2.78%.