Stocks rose early Thursday, recovering some of the ground lost Thursday, as a sharply stronger U.S. dollar and weaker economic data fuelled expectations for further interest rate cuts from the Federal Reserve, following its first cut in more than a decade on Wednesday.
Technology shares led the bounce, helped by good earnings results from General Motors Co.
How are the benchmarks faring?
The Dow Jones Industrial Average DJIA, +0.95% rose 303 points, or 1.3%, to 27,168, while S&P 500 index SPX, +0.95% advanced 33 points, or 1.1% at 3,013. The Nasdaq Composite index COMP, +1.43% added 133 points, or 1.6%, to 8,307.
The Dow and S&P 500 on Thursday suffered their biggest one-day percentage losses since May 31. The Dow ended Thursday with a loss of 333.75 points, or 1.2%, at 26,864.27, while the S&P 500 fell 32.8 points, or 1.1%, to close at 2,980.38. The Nasdaq fell 98.19 points to 8,175.42, a drop of 1.2% — the biggest one-day fall for the tech-heavy gauge since June 25.
Read: How the Fed and Jerome Powll sent ‘a bit of a shock wave’ through financial markets
What’s driving the market?
For U.S. stocks the old adage that “bad news is good news” appeared to hold Thursday, after the Fed disappointed markets with its “insurance rate cut” on Wednesday which pushed up the U.S. dollar overnight, and pressured U.S. Treasury yields lower, along with commodity prices.
The stronger dollar was seen impacting earnings of companies with international operations and lower U.S. Treasury yields supported stock market valuations.
“The minimal size of the cut, the dissents (by two FOMC members), and Powell’s press conference disappointed markets, and undercut our expectation,” Morgan Stanley economist Ellen Zentner said in a note. “We expect a follow-up cut of 25bp this year, and we judge October as the most likely timing”.
Read: Fed’s hawkish rate cut could be good for the stock market in the long run, analysts say
The prospect of further Fed rate cuts was enhanced also by data showing a further weakening in the U.S. manufacturing sector.
In the U.S., the Institute for Supply Management said its manufacturing index slipped to 51.2% in July, the lowest reading since August 2016. Meanwhile the IHS Markit U.S. manufacturing index fell to its lowest since September 2009 at 50.4%. Of further concern, the employment subindexes showed employment contracting for the first time since June 2013.
“US manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter,” IHS Markit chief economist, Chris Williamson said. The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualised rate in excess of 3%.
Separate data Thursday also showed a weekly climb in jobless claims and a fall in June construction spending.
Friday brings the U.S. Labor Department’s monthly payrolls and unemployment data for markets to consider. Economists surveyed by MarketWatch, on average, look for July nonfarm payrolls to rise 171,000, while the unemployment rate is forecast to decline to 3.6% from 3.7%. Average hourly earnings are forecast to show a 0.2% rise.
“An upside surprise in Friday’s nonfarm payrolls report may significantly lower expectations of further easing in the upcoming FOMC meeting in September, especially if wage growth beats market expectations,” said Hussein Sayed, chief market strategist at FXTM, in a note. “So, expect an upside surprise in tomorrow’s data releases to be negative news for equity markets and vice versa.”
Meanwhile investors were also digesting more second quarter corporate earnings reports. Over 65% of S&P 500 companies have now reported and actual results blended with estimates for the remaining companies showed a negative earnings growth rate for the quarter of 1.7%, according to FactSet. As Morgan Stanley noted, S&P 500 index companies first quarter EPS growth was minus 0.3% year on year.
See: Economic Calendar
Which stocks are in focus?
On the earnings front, shares of Dow component Verizon Communications Inc. VZ, +0.89% rose early Thursday, after the telecommunications giant beat Wall Street expectations for second-quarter earnings, but fell short on revenue.
Qualcomm Inc. QCOM, +0.41% fell Thursday after the chip maker provided a downbeat outlook for fourth-quarter results, due in part to the recently instituted export ban to China’s Huawei Technologies Co., late Thursday.
Shares of General Motors Co. GM, +3.10% rose after reporting second-quarter earnings Thursday.
Yum Brands Inc. YUM, +4.67% stock was up after the operator of Taco Bell, Pizza Hut and KFC Restaurants reported declining earnings and revenue year-over-year, though both were better than expected.
Shares of DuPont de Nemours Inc. rose after the chemicals and materials company reported an adjusted earnings-per-share that beat Wall Street expectations, but revenue that fell below forecasts.
Dunkin’ Brands Group Inc. DNKN, -2.59% stock fell after the company reported a second-quarter profit and Dunkin’ same-store sales that beat expectations, while revenue and Baskin-Robbins same-store sales missed.
What’s happening in other markets ?
The U.S. dollar rallied in the wake of the Fed decision, with the ICE U.S. Dollar Index DXY, +0.01% hitting a two-year high. The gauge, which measures the dollar against a basket of six major rivals, was up 0.1% on Thursday.
The 10-year U.S. Treasury note yield e TMUBMUSD10Y, -2.84% fell to 1.99% after the news of the weak U.S. manufacturing sector data.
A stronger U.S. dollar got the blame for weaker oil prices Thursday, with the price of crude oil CLU19, -3.41% fell 2.4% to $55.85 per barrel, while gold prices GCQ19, -0.48% retreated 1.7% to $1402 per ounce.
In Asia overnight, stocks closed mostly lower, with China’s CSI 300 000300, -0.83% declining 0.8%, Japan’s Nikkei 225 NIK, +0.09% rose 0.1% and Hong Kong’s Hang Seng index HSI, -0.76% retreated 0.8%. In Europe, stocks were virtually unchanged, as measured by the Stoxx Europe 600 SXXP, +0.50%.