Stocks Fell Sharply, Failing to Score a Fifth Consecutive Win…..

U.S. equities finished the day solidly lower, ending the four-day winning streak, as most sectors were in the red, led lower by Communication Services and Information Technology. The negative sentiment was set courtesy of earnings announcements headlined by Facebook parent, Meta Platforms, which missed earnings forecasts and offered disappointing guidance, causing shares to experience the biggest one-day drop and shedding a sizable chunk out of its market cap. Moreover, Dow member Merck & Co and Honeywell issued soft outlooks, while Qualcomm’s upbeat results appeared to be getting overshadowed by Street concerns about business activity outside smartphones. Today’s economic calendar offered some positive news, as jobless claims moderated more than expected, Q4 productivity came in stronger than anticipated and unit labor costs slowed from Q3’s surge, while January services sector growth slowed by smaller amounts than expected. The global markets tried to digest monetary policy decisions out of Europe, with the European Central Bank holding steady but President Lagarde sounding a hawkish tone, warning of an upside tilt to the inflation outlook, while the Bank of England hiked rates for a second-straight meeting, with some policymakers wanting a larger increase. The U.S. dollar fell as the euro spiked on Lagarde’s commentary and the British pound ticked higher. Treasuries fell, lifting yields and causing the yield curve to steepen following last week’s decisive flattening. Crude oil was higher and gold prices were lower. Europe finished broadly lower following monetary policy decisions in the area and earnings reports from the U.S., while Asia was mixed with markets in China and Hong Kong remaining closed for the lunar new year holiday.

The Dow Jones Industrial Average lost 518 points (1.5%) to 35,111, the S&P 500 Index decreased 112 points (2.4%) to 4,477, and the Nasdaq Composite fell 539 points (3.7%) to 13,879. In heavy volume, 4.2 billion shares of NYSE-listed stocks were traded, and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil was $2.01 higher at $90.27 per barrel. Elsewhere, the gold spot price declined $4.30 to $1,806.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.5% at 95.40.

Weekly initial jobless claims came in at a level of 238,000 for the week ended January 29, versus the Bloomberg estimate calling for 245,000, a larger-than-expected deceleration from the prior week’s upwardly-revised 261,000 level. However, the four-week moving average rose by 7,750 to 255,000, and continuing claims for the week ended January 22 fell by 44,000 to 1,628,000, north of estimates of 1,620,000. However, the four-week moving average of continuing claims dropped by 31,250 to 1,619,750.

Preliminary Q4 nonfarm productivity rose by 6.6% on an annualized basis, versus expectations of a 3.9% rise, and following the favorably-revised 5.0% drop seen in Q3. Unit labor costs increased by 0.3%, well below forecasts of a 1.0% rise. The figure slowed sharply from Q3’s 9.3% surge in unit labor costs which were revised positively from a previously-reported jump of 9.6%.

The January Institute for Supply Management (ISM) Services Index showed expansion in the key services sector (a reading above 50) slid but at a slower rate than expected. The index declined to 59.9, from the upwardly-revised 62.3 in December, and versus estimates of a decrease to 59.5. Growth in new orders, business activity, and employment growth all slipped month-over-month (m/m). Meanwhile, new export orders tumbled, inventories rose, and prices paid dipped but remained severely elevated, above the 80 mark. The ISM said, “Respondents continue to be impacted by coronavirus pandemic-related supply chain issues, including capacity constraints, demand-pull inflation, logistical challenges and labor shortages. Moreover, the COVID-19 omicron variant has disrupted operations, especially through reduced staffing levels. Despite these impediments, business activity and economic growth continue.”

The final January Markit U.S. Services PMI Index was unexpectedly revised higher to 51.2 from the preliminary 50.9 level, where it was forecasted to remain, but below December’s reading of 57.6. A reading above 50 denotes expansion. Markit noted that growth momentum waned notably, the omicron variant hampered the upturn in new business as domestic and foreign demand conditions weakened. However, the report said firms were able to expand their workforce, which helped soften the degree of pressure on business capacity, while there were signs of easing cost pressures, but they remained elevated and companies passed along higher costs to clients.

Factory orders declined 0.4% m/m in December, matching estimates. Durable goods orders—preliminarily reported last week—were revised favorably to a 0.7% decrease for December, and excluding transportation, orders were adjusted upward to a 0.6% advance. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were positively-revised to a 0.3% gain.

Treasuries were lower, as the yield on the 2-year note rose 4 bps to 1.19%, while the yield on the 10-year note advanced 7 bps to 1.83%, and the 30-year bond rate was up 6 bps at 2.15%.

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