The U.S. stock market closed slightly lower on Thursday as investors weighed the comments from Federal Reserve Chair Jerome Powell on inflation and the economy, while also monitoring the rise in the 10-year Treasury yield to near 5%.
Powell says inflation is still too high and growth may slow
In a speech at the Economic Club of New York, Powell said that inflation was still too high and would likely require lower economic growth to bring it down. He also said that recent data showed progress toward slowing prices, but more evidence was needed to build confidence that inflation was moving down sustainably toward the Fed’s 2% goal.
Powell’s remarks suggested that the Fed was not in a hurry to raise interest rates again, after hiking them three times this year. He said that monetary policy was not yet too tight and that the Fed would remain data-dependent and flexible in its approach.
However, he also warned that the risks of higher inflation were still present and that the Fed would not hesitate to act if needed. He said that supply chain disruptions, labor shortages, and rising energy prices were among the factors that could keep inflation elevated for longer than expected.
Bond yield nears 5% as investors anticipate higher rates
Meanwhile, the benchmark U.S. 10-year Treasury yield climbed to a high of 4.996% on Thursday, the highest level since 2007, as investors anticipated higher interest rates and inflation in the future. The yield later eased to around 4.98% after Powell’s speech.
The rise in bond yields reflects the expectations that the Fed will tighten its monetary policy more aggressively to combat inflation, as well as the strong demand for borrowing from the government and corporations. Higher bond yields also make stocks less attractive, especially those with high valuations and future earnings.
Some analysts said that the 5% level was a psychological barrier that could trigger more volatility and selling pressure in the stock market if breached. Others said that the stock market could withstand higher bond yields as long as the economic growth remained robust and corporate earnings continued to beat expectations.
Earnings season continues with mixed results
The third-quarter earnings season also continued on Thursday with mixed results from some of the major companies. More than 15% of companies in the S&P 500 have already reported their earnings, and more than 74% of them have surpassed Wall Street expectations, according to FactSet.
Netflix shares soared more than 16% after the streaming giant posted better-than-expected earnings and revenue in the third quarter. The company also added 4.4 million net subscribers, beating its own forecast of 3.5 million. Netflix also raised its guidance for the fourth quarter, saying that it expected to add 8.5 million net subscribers, well above analysts’ estimates of 6.4 million.
Tesla shares dropped more than 9% after the electric vehicle maker missed analyst expectations on earnings and revenue in the third quarter. The company also reported lower-than-expected deliveries of its Model 3 and Model Y vehicles, citing supply chain challenges and chip shortages. CEO Elon Musk also warned that the company’s Cybertruck would not produce much positive cash flow for more than a year after production starts.
Other notable earnings reports on Thursday included Goldman Sachs, which beat estimates on both earnings and revenue, driven by strong performance in its investment banking and asset management divisions; Lockheed Martin, which topped earnings expectations but missed on revenue, citing lower sales in its aeronautics segment; and Walgreens Boots Alliance, which reported better-than-expected earnings and revenue, boosted by higher pharmacy sales and cost savings.
The S&P 500 and Nasdaq Composite lost 0.2% and 0.3%, respectively, on Thursday, while the Dow Jones Industrial Average shed 36 points, or 0.1%. The major indexes were still near their record highs, despite the slight pullback.
The market also received some positive economic data on Thursday, as weekly jobless claims came in under 200,000 for the second week in a row, indicating continued strength in the labor market despite higher interest rates.
The market will be closed on Friday for Veterans Day, a federal holiday in the U.S.