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The Dow soars, Big Tech tumbles: What’s next for stocks as investors await Fed guidance

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The past week offered a tale of two markets, with gains for the Dow Jones Industrial Average putting the blue-chip gauge on track for its best October on record while Big Tech heavyweights suffered a shellacking that had market veterans recalling the dot-com bust in the early 2000s.

“You have a tug of war,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC (RBA), in a phone interview.

For the technology sector, particularly the megacap names, earnings were a major drag on performance. For everything else, the market was short-term oversold at the same time optimism was building over expectations the Federal Reserve and other major global central banks will be less aggressive in tightening monetary policy in the future, he said.

Read: Market expectations start to shift in direction of slower pace of rate hikes by Fed

What’s telling is that the interest-rate sensitive tech sector would usually be expected to benefit from a moderation of expectations for tighter monetary policy, said Suzuki, who contends that tech stocks are likely in for a long period of underperformance versus their peers after leading the market higher over the last 12 years, a performance capped by soaring gains following the onset of COVID-19 pandemic in 2020.

RBA has been arguing that there was “a major bubble within major portions of the equity market for over a year now,” Suzuki said. “We think this is the process of the bubble deflating and we think there’s probably further to go.”

The Dow
DJIA,
+2.59%
surged nearly 830 points, or 2.6%, on Friday to end at a two-month high and log a weekly gain of more than 5%. The blue-chip gauge’s October gain was 14.4% through Friday, which would mark its strongest monthly gain since January 1976 and its biggest October rise on record if it holds through Monday’s close, according to Dow Jones Market Data.

While it was a tough week for many of Big Tech’s biggest beasts, the tech-heavy Nasdaq Composite
COMP,
-8.39%
and tech-related sectors bounced sharply on Friday. The tech-heavy Nasdaq swung to a weekly gain of more than 2%, while the S&P 500
SPX,
+2.46%
rose nearly 4% for the week.

Big Tech companies lost more than $255 billion in market capitalization in the past week. Apple Inc.
AAPL,
+7.56%
escaped the carnage, rallying Friday as investors appeared okay with a mixed earnings report. A parade of disappointing earnings sank shares of Facebook parent Meta Platforms Inc.
META,
+1.29%,
Google parent Alphabet Inc.
GOOG,
+4.30%

GOOGL,
+4.41%,
Amazon.com Inc.
AMZN,
-6.80%
and Microsoft
MSFT,
+4.02%.

Mark Hulbert: Technology stocks tumble — this is how you will know when to buy them again

Together, the five companies have lost a combined $3 trillion in market capitalization this year, according to Dow Jones Market Data.

Opinion: A $3 trillion loss: Big Tech’s horrible year is getting worse

Aggressive interest rate increases by the Fed and other major central banks have punished tech and other growth stocks the most this year, as their value is based on expectations for earnings and cash flow far into the future. The accompanying rise in yields on Treasurys, which are viewed as risk-free, raises the opportunity cost of holding riskier assets like stocks. And the further out those expected earnings stretch, the bigger the hit.

Excessive liquidity — a key ingredient in any bubble — has also contributed to tech weakness, said RBA’s Suzuki.

And now investors see an emerging risk to Big Tech earnings from an overall slowdown in economic growth, Suzuki said.

“A lot of people have the notion that these are secular growth stocks and therefore immune to the ups and downs of the overall economy — that’s not empirically true at all if you look at the history of profits for these stocks,” he said.

Tech’s outperformance during the COVID-inspired recession may have given investors a false impression, with the sector benefiting from unique circumstances that saw households and businesses become more reliant on technology at a time when incomes were surging due to fiscal stimulus from the government. In a typical slowdown, tech profits tend to be very economically sensitive, he said.

The Fed’s policy meeting will be the main event in the week ahead. While investors and economists overwhelmingly expect policy makers to deliver another supersize 75 basis point, or 0.75 percentage point, rate increase when the two-day gathering ends on Wednesday, expectations are mounting for Chairman Jerome Powell to indicate a smaller December may be on the table.

However, all three major indexes remain in bear markets, so the question for investors is whether the bounce this week will survive if Powell fails to signal a downshift in expectations for rate rises next week.

See: Another Fed jumbo rate hike is expected next week and then life gets difficult for Powell

Those expectations helped power the Dow’s big gains over the past week, alongside solid earnings from a number of components, including global economic bellwether Caterpillar Inc.
CAT,
+3.39%.

Overall, the Dow benefited because it’s “very tech-light, and it’s very heavy in energy and industrials, and those have been the winners,” Art Hogan, chief market strategist at B. Riley Wealth Management told MarketWatch’s Joseph Adinolfi on Friday. “The Dow just has more of the winners embedded in it and that has been the secret to its success.”

Meanwhile, the outperformance of the Invesco S&P 500 Equal Weight ETF
RSP,
+2.08%,
up 5.5% over the week, versus the market-cap-weighted SPDR S&P 500 ETF Trust
SPY,
+2.38%,
underscored that while tech may be vulnerable to more declines, “traditional parts of the economy, including sectors that trade at a lower valuation, are proving resilient since the broad markets bounced nearly two weeks ago,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.

“Stepping back, this market and the economy more broadly are starting to remind me of the 2000-2002 setup, where extreme tech weakness weighed on the major indices, but more traditional parts of the market and the economy performed better,” he wrote.

Suzuki said investors should remember that “bear markets always signal a change of leadership” and that means tech won’t be taking the reins when the next bull market begins.

“You can’t debate that we’ve already got a signal and the signal is telling up that next cycle not going to look anything like the last 12 years,” he said.

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Why stock-market investors fear ‘something else will break’ as Fed attacks inflation

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Some investors are on edge that the Federal Reserve may be overtightening monetary policy in its bid to tame hot inflation, as markets look ahead to a reading this coming week from the Fed’s preferred gauge of the cost of living in the U.S.  

“Fed officials have been scrambling to scare investors almost every day recently in speeches declaring that they will continue to raise the federal funds rate,” the central bank’s benchmark interest rate, “until inflation breaks,” said Yardeni Research in a note Friday. The note suggests they went “trick-or-treating” before Halloween as they’ve now entered their “blackout period” ending the day after the conclusion of their November 1-2 policy meeting.

“The mounting fear is that something else will break along the way, like the entire U.S. Treasury bond market,” Yardeni said.

Treasury yields have recently soared as the Fed lifts its benchmark interest rate, pressuring the stock market. On Friday, their rapid ascent paused, as investors digested reports suggesting the Fed may debate slightly slowing aggressive rate hikes late this year.

Stocks jumped sharply Friday while the market weighed what was seen as a potential start of a shift in Fed policy, even as the central bank appeared set to continue a path of large rate increases this year to curb soaring inflation. 

The stock market’s reaction to The Wall Street Journal’s report that the central bank appears set to raise the fed funds rate by three-quarters of a percentage point next month – and that Fed officials may debate whether to hike by a half percentage point  in December — seemed overly enthusiastic to Anthony Saglimbene, chief market strategist at Ameriprise Financial. 

“It’s wishful thinking” that the Fed is heading toward a pause in rate hikes, as they’ll probably leave future rate hikes “on the table,” he said in a phone interview. 

“I think they painted themselves into a corner when they left interest rates at zero all last year” while buying bonds under so-called quantitative easing, said Saglimbene. As long as high inflation remains sticky, the Fed will probably keep raising rates while recognizing those hikes operate with a lag — and could do “more damage than they want to” in trying to cool the economy.

“Something in the economy may break in the process,” he said. “That’s the risk that we find ourselves in.”

‘Debacle’

Higher interest rates mean it costs more for companies and consumers to borrow, slowing economic growth amid heightened fears the U.S. faces a potential recession next year, according to Saglimbene. Unemployment may rise as a result of the Fed’s aggressive rate hikes, he said, while “dislocations in currency and bond markets” could emerge.

U.S. investors have seen such financial-market cracks abroad.

The Bank of England recently made a surprise intervention in the U.K. bond market after yields on its government debt spiked and the British pound sank amid concerns over a tax cut plan that surfaced as Britain’s central bank was tightening monetary policy to curb high inflation. Prime minister Liz Truss stepped down in the wake of the chaos, just weeks after taking the top job, saying she would leave as soon as the Conservative party holds a contest to replace her. 

“The experiment’s over, if you will,” said JJ Kinahan, chief executive officer of IG Group North America, the parent of online brokerage tastyworks, in a phone interview. “So now we’re going to get a different leader,” he said. “Normally, you wouldn’t be happy about that, but since the day she came, her policies have been pretty poorly received.”

Meanwhile, the U.S. Treasury market is “fragile” and “vulnerable to shock,” strategists at Bank of America warned in a BofA Global Research report dated Oct. 20. They expressed concern that the Treasury market “may be one shock away from market functioning challenges,” pointing to deteriorated liquidity amid weak demand and “elevated investor risk aversion.” 

Read: ‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown, BofA says

“The fear is that a debacle like the recent one in the U.K. bond market could happen in the U.S.,” Yardeni said, in its note Friday. 

“While anything seems possible these days, especially scary scenarios, we would like to point out that even as the Fed is withdrawing liquidity” by raising the fed funds rate and continuing quantitative tightening, the U.S. is a safe haven amid challenging times globally, the firm said.  In other words, the notion that “there is no alternative country” in which to invest other than the U.S., may provide liquidity to the domestic bond market, according to its note.


YARDENI RESEARCH NOTE DATED OCT. 21, 2022

“I just don’t think this economy works” if the yield on the 10-year Treasury
TMUBMUSD10Y,
4.228%
note starts to approach anywhere close to 5%, said Rhys Williams, chief strategist at Spouting Rock Asset Management, by phone.

Ten-year Treasury yields dipped slightly more than one basis point to 4.212% on Friday, after climbing Thursday to their highest rate since June 17, 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.

Williams said he worries that rising financing rates in the housing and auto markets will pinch consumers, leading to slower sales in those markets.

Read: Why the housing market should brace for double-digit mortgage rates in 2023

“The market has more or less priced in a mild recession,” said Williams. If the Fed were to keep tightening, “without paying any attention to what’s going on in the real world” while being “maniacally focused on unemployment rates,” there’d be “a very big recession,” he said.

Investors are anticipating that the Fed’s path of unusually large rate hikes this year will eventually lead to a softer labor market, dampening demand in the economy under its effort to curb soaring inflation. But the labor market has so far remained strong, with an historically low unemployment rate of 3.5%.

George Catrambone, head of Americas trading at DWS Group, said in a phone interview that he’s “fairly worried” about the Fed potentially overtightening monetary policy, or raising rates too much too fast.

The central bank “has told us that they are data dependent,” he said, but expressed concerns it’s relying on data that’s “backward-looking by at least a month,” he said.

The unemployment rate, for example, is a lagging economic indicator. The shelter component of the consumer-price index, a measure of U.S. inflation, is “sticky, but also particularly lagging,” said Catrambone.

At the end of this upcoming week, investors will get a reading from the  personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge, for September. The so-called PCE data will be released before the U.S. stock market opens on Oct. 28.

Meanwhile, corporate earnings results, which have started being reported for the third quarter, are also “backward-looking,” said Catrambone. And the U.S. dollar, which has soared as the Fed raises rates, is creating “headwinds” for U.S. companies with multinational businesses.

Read: Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.

“Because of the lag that the Fed is operating under, you’re not going to know until it’s too late that you’ve gone too far,” said Catrambone. “This is what happens when you’re moving with such speed but also such size,  he said, referencing the central bank’s string of large rate hikes in 2022.

“It’s a lot easier to tiptoe around when you’re raising rates at 25 basis points at a time,” said Catrambone.

‘Tightrope’

In the U.S., the Fed is on a “tightrope” as it risks over tightening monetary policy, according to IG’s Kinahan. “We haven’t seen the full effect of what the Fed has done,” he said.

While the labor market appears strong for now, the Fed is tightening into a slowing economy. For example, existing home sales have fallen as mortgage rates climb, while the Institute for Supply Management’s manufacturing survey, a barometer of American factories, fell to a 28-month low of 50.9% in September.

Also, trouble in financial markets may show up unexpectedly as a ripple effect of the Fed’s monetary tightening, warned Spouting Rock’s Williams. “Anytime the Fed raises rates this quickly, that’s when the water goes out and you find out who’s got the bathing suit” — or not, he said.

“You just don’t know who is overlevered,” he said, raising concern over the potential for illiquidity blowups. “You only know that when you get that margin call.” 

U.S. stocks ended sharply higher Friday, with the S&P 500
SPX,
+2.37%,
Dow Jones Industrial Average
DJIA,
+2.47%
and Nasdaq Composite each scoring their biggest weekly percentage gains since June, according to Dow Jones Market Data. 

Still, U.S. equities are in a bear market. 

“We’ve been advising our advisors and clients to remain cautious through the rest of this year,” leaning on quality assets while staying focused on the U.S. and considering defensive areas such as healthcare that can help mitigate risk, said Ameriprise’s Saglimbene. “I think volatility is going to be high.”

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Business

Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.

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So far, so good?

Stocks ended the first full week of the earnings season on a strong note Friday, pushing the Dow Jones Industrial Average
DJIA,
+2.47%,
S&P 500
SPX,
+2.37%
and Nasdaq Composite
COMP,
-0.81%
to their strongest weekly gains since June. It gets more hectic in the week ahead, with 165 S&P 500 companies, including 12 Dow components, due to report results, according to FactSet, making it the busiest week of the season.

The bar for earnings was set high last year as the global economy reopened from its pandemic-induced state. “Fast forward to this year, and earnings are facing tougher comparisons on a year-over-year basis. Add in the elevated risk of a recession, still hot inflation, and an aggressive Fed tightening cycle, and it is of little surprise that the sentiment surrounding the current 3Q22 earnings season is cautious,” said Larry Adam, chief investment officer for the private client group at Raymond James, in a Friday note.

“We have reason to believe the 3Q22 earnings season will be better than feared and could become a positive catalyst for equities just as the 2Q22 results were,” he wrote.

Read: Stocks are attempting a bounce as earnings season begins. Here’s what it will take for the gains to stick.

Better-than-feared earnings were credited with helping to fuel a stock-market rally from late June to early August, with equities bouncing back sharply from what were then 2020 lows before succumbing to fresh rounds of selling that, by the end of September, took the S&P 500 to its lowest close since November 2020.

While earnings weren’t the only factor in the past week’s gains, they probably didn’t hurt.

The number of S&P 500 companies reporting positive earnings surprises and the magnitude of these earnings surprises increased over the past week, noted John Butters, senior earnings analyst at FactSet, in a Friday note.

Even with that improvement, however, earnings beats are still running below long-term averages.

Through Friday, 20% of the companies in the S&P 500 had reported third-quarter results. Of these companies, 72% reported actual earnings per share, or EPS, above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%, Butters said. In aggregate, companies are reporting earnings that are 2.3% above estimates, which is below the 5-year average of 8.7% and below the 10-year average of 6.5%.

Meanwhile, the blended-earnings growth rate, which combines actual results for companies that have reported with estimated results for companies that have yet to report, rose to 1.5% compared with 1.3% at the end of last week, but it was still below the estimated earnings growth rate at the end of the quarter at 2.8%, he said. And both the number and magnitude of positive earnings surprises are below their 5-year and 10-year averages. On a year-over-year basis, the S&P 500 is reporting its lowest earnings growth since the third quarter of 2020, according to Butters.

The blended-revenue growth rate for the third quarter was 8.5%, compared with a revenue growth rate of 8.4% last week and a revenue growth rate of 8.7% at the end of the third quarter.

Next week’s lineup accounts for over 30% of the S&P 500’s market capitalization, Adam said. And with the tech sector accounting for around 20% of the index’s earnings, reports from Visa Inc.
V,
+1.68%,
Google parent Alphabet Inc.
GOOG,
+0.94%

GOOGL,
+1.16%,
Microsoft Corp.
MSFT,
+2.53%,
Amazon.com Inc.
AMZN,
+3.53%
and Apple Inc.
AAPL,
+2.71%
will be closely watched.

Away from the backward-looking numbers, guidance from executives on the path ahead will be crucial against a backdrop of recession fears, Adam wrote, noting that so far guidance has remained resilient, with the net percentage of companies raising rather than lowering their outlook remaining positive.

“For example, the ‘Summer of Revenge Travel’ was known to benefit the airlines, but commentary from United
UAL,
+3.56%,
American
AAL,
+1.86%
and Delta Airlines
DAL,
+1.34%
suggests demand remains strong for the months ahead and into 2023. Ultimately, the broader based and better the forward guidance, the higher the confidence in our $215 S&P 500 earnings target for 2023,” Adam said.

The soaring U.S. dollar
DXY,
-0.89%,
which remains not far off a two-decade high set at the end of last month, also remains a concern.

See: How the strong dollar can affect your financial health

“While the degree of the impact depends on the blend of costs versus sales overseas and how much of the currency risk is hedged, a stronger dollar typically impairs earnings,” Adam wrote.

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Business

Elon Musk’s Twitter Takeover Debt to Be Held by Banks Amid Turbulent Markets

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Banks that committed to help finance

Elon Musk’s

takeover of Twitter Inc. plan to hold all $13 billion of debt backing the deal rather than syndicate it out, according to people familiar with the matter, in another blow to a market that serves as a crucial source of corporate funding.

Twitter could have the dubious distinction of being the biggest so-called hung deal of all time, surpassing a crop of them in the global financial crisis, when banks were stuck with around $300 billion of committed debt they struggled to sell to investors.

Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse

The Twitter move threatens to bring the faltering leveraged-buyout pipeline to a standstill by tying up capital that Wall Street could otherwise use to back new deals.

The $44 billion Twitter takeover is backed by banks including Morgan Stanley,

Bank of America Corp.

and Barclays PLC, which signed agreements in April to provide Mr. Musk with the debt financing he needed to buy the company. They had originally intended to find third-party investors, such as loan asset managers and mutual funds, who would ultimately lend the money as is customary in leveraged buyouts.

But rising interest rates and growing concerns about a recession have cooled investors’ appetite for risky loans and bonds. Mr. Musk’s past criticism of Twitter’s alleged misrepresentation of the condition of its business and the number of fake accounts on the platform aren’t helping either—nor is a deterioration in Twitter’s business, the people added.

Banks would likely face losses of around $500 million or more if they tried to sell Twitter’s debt at current market prices, The Wall Street Journal previously reported. If all the banks hold the debt instead, they can mark it at a higher value on their books on the premise that prices will eventually rebound.

Banks also face a timing problem: Mr. Musk and Twitter have until Oct. 28 to close his planned purchase, and there is still no guarantee the unpredictable billionaire will follow through or some other trouble won’t arise. (If the deal doesn’t close by that time, the two parties will go to court in November.) That means the banks wouldn’t have enough time to market the debt to third-party investors, a process that normally takes weeks, even if they wanted to sell it now.

Assuming the deal closes, banks hope to be able to sell some of Twitter’s debt by early next year, should market conditions improve by then, some of the people said. Twitter’s banks are discussing how to potentially slice up the debt into different pieces that could be easier for hedge-fund investors or direct lenders to swallow, one of these people said.

The banks have good reason to want to hold the debt for as short a time period as possible.

Holding loans and bonds can force them to set more capital aside to meet regulatory requirements, limiting the credit banks are able to provide to others. Banks also face year-end stress tests, and they will want to limit their exposure to risky corporate debts before regulators evaluate the soundness of their balance sheets.

So far this year, banks have already taken hundreds of millions of dollars worth of losses and been forced to hold a growing amount of buyout debt.

Twitter’s debt, including $6.5 billion of term loans and $6 billion of bonds, would add to the increasing pile banks eventually intend to syndicate, recently estimated by

Goldman Sachs

at around $45 billion.

Banks’ third-quarter earnings showed a steep drop-off in revenue tied to deal-making. Goldman’s debt-underwriting revenue dropped to $328 million in the third quarter from $726 million a year earlier.

Morgan Stanley CEO

James Gorman

said recently that his bank has been “quite cautious in the leveraged-finance arena” for new deals, while Bank of America’s

Brian Moynihan

said “there’s been a natural retrenching” in the leveraged-loan market and the bank “was working to get through the pipeline” of existing deals.

Private-equity firms, which rely heavily on debt to fund their buyouts, have increasingly turned to private-credit providers such as Blackstone Credit and

Blue Owl Capital Inc.

These firms don’t have to split up and sell debt and can provide funding from investment vehicles established to do so. Although it is more expensive and harder to come by than earlier this year, private-credit providers have been the main source of buyout financing recently.

To deal with debts they have already committed to, banks have gotten increasingly creative.

In a take-private of Citrix Systems Inc., banks agreed to turn some $6 billion of syndicated term loans into a more traditional bank loan that they chose to keep on their balance sheets, but they sold around $8 billion of bonds and loans at a loss of more than $500 million, the Journal reported. There was also a revision in the financing structure of the Nielsen Holdings PLC take-private, with $3 billion in unsecured bonds becoming a junior secured loan that private-credit provider

Ares Capital Corp.

agreed to lead. The banks held the remainder of Nielsen’s roughly $9 billion of debt on their balance sheets.

—Matt Wirz contributed to this article.

Write to Laura Cooper at laura.cooper@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com

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Business

Dow Surges 900 Points in Volatile Trading

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U.S. stocks turned sharply higher Thursday, a head-spinning reversal after major indexes spent much of the morning deep in negative territory.

Stocks tumbled in early trading after new data showed that inflation remains persistently high, strengthening expectations for continued large interest-rate increases from the Federal Reserve. At their lows, the Nasdaq Composite had fallen more than 3%, the S&P 500 had dropped more than 2%, and the Dow Jones Industrial Average had declined nearly 2%, according to Dow Jones Market Data.

The morning’s declines followed what had been a dismal stretch for stocks. The S&P 500 on Wednesday fell for the sixth day in a row, hitting its lowest closing level since November 2020.

Traders appeared to decide that the selling had gone too far. Stocks pared their losses throughout the morning, then turned green shortly after 11 a.m. The S&P 500 recently was up 2.8% while the Dow industrials were up about 3%, or about 900 points. The Nasdaq Composite advanced 2.3%.

“What the market is experiencing is the influences of a lot of short-term traders,” said Tom Galvin, chief investment officer at wealth management firm City National Rochdale. While some traders dumped stocks after the inflation data, “once they were done selling, I think markets started to stabilize.”

The turn higher came as a relief after another punishing span in the markets.

The Nasdaq Composite, like the S&P 500, closed lower on Wednesday for a sixth consecutive trading day. On Tuesday those losses tipped the tech-heavy equities gauge into a bear market—Wall Street parlance for a decline of 20% or more from a recent peak—for the second time this year.

Still, such heart-stopping moves—sharp gains as well as steep drops—can be a sign of trouble. Markets were rocked by similar gyrations as they tumbled early in the pandemic.

Investors have been fixated on any signals about the path of inflation and the trajectory of the Federal Reserve’s campaign to tame the price increases by raising interest rates. Rising rates put pressure on the valuations that investors are willing to pay for stocks, while also raising concerns about companies’ future earnings.

Earlier Thursday, new data from the Labor Department showed that a reading of U.S. consumer inflation excluding volatile energy and food prices accelerated to a new four-decade high. The so-called core measure of the consumer-price index gained 6.6% in September from a year earlier, the biggest increase since August 1982.

The overall consumer-price index, meanwhile, increased 8.2% in September from the same month a year ago, down from 8.3% in August and 9.1% in June.

That move lower could be welcome news for investors looking to justify buying back into a stock market that is trading much more cheaply than in the recent past.

“The fact that you’re seeing some peaking out in inflation to where maybe we just don’t have to fight the Fed so much, people will feel comfortable buying in at these levels,” said Dan Genter, chief executive and chief investment officer at Genter Capital Management.

Investors have debated whether signs of stress creeping into some markets might cause the Fed to slow its pace of interest-rate increases. Volatility in U.K. government-bond markets, following government plans for large, debt-funded tax cuts, has sparked margin calls for pension funds and rippled into U.S. junk-debt markets. 

Mortgage rates hit a 20-year high on Thursday, a development that is likely to add to the pressure on the cooling housing market, potentially accelerating the shakeout of this cyclical industry.

Federal Reserve officials expressed concern at their meeting last month over the persistence of high inflation. They revised higher their expectations for rate increases, though some signaled caution about overdoing them amid risks of economic and financial volatility. The International Monetary Fund has warned that global central banks’ moves to quickly raise interest rates have fueled increased risks to the financial system.

A series of interest-rate rises have rippled through the U.S. economy, and more are projected to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond. Photo: Elise Amendola/Associated Press

“Market volatility and financial stability is something we’re following closely,” said

Carsten Brzeski,

ING Groep’s

global head of macro research, adding that the fast rise in interest rates “is clearly a potential risk.” 

Additional data from the Labor Department showed that 228,000 Americans applied for unemployment benefits in the week ended Oct. 8, up from 219,000 the week prior.

In bond markets, the yield on the benchmark 10-year U.S. Treasury note rose to 3.939% from 3.901% Wednesday, reversing earlier losses ahead of the inflation data. Yields and prices move inversely. 

In energy markets, Brent crude, the international benchmark for oil prices, rose 2.3% to $94.57 a barrel. 

Overseas, the pan-continental Stoxx Europe 600 rose 0.8%.

Traders worked on the floor of the New York Stock Exchange last week.



Photo:

BRENDAN MCDERMID/REUTERS

In Asia, major indexes closed with losses. Hong Kong’s Hang Seng fell 1.9% and South Korea’s Kospi declined 1.8%. Japan’s Nikkei 225 and China’s Shanghai Composite edged down 0.6% and 0.3%, respectively.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Karen Langley at karen.langley@wsj.com

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Business

Stocks Slip After Fed Minutes and Inflation Data

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U.S. stocks slipped Wednesday in the wake of new inflation data and the release of the minutes of the September meeting of the Federal Reserve’s rate-setting board.

The S&P 500 edged down 11.81 points, or 0.3%, to 3577.03, a nearly two-year low. The Dow Jones Industrial Average lost 28.34 points, or 0.1%, closing at 29210.85. The Nasdaq Composite dropped 9.09 points, or 0.1%, to 10417.10, a day after the tech-heavy index entered its second bear market of 2022, marking a drop of more than 20% from its recent high on Aug. 15.

Investors have been on edge this week ahead of the release of Thursday’s report on consumer prices in the U.S. that will shed light on how much work the Fed has left to do in containing decades-high price rises. In recent months, inflation gauges have shown widespread pricing pressures on categories such as food and housing, while energy prices have eased.

U.S. suppliers increased the prices they charge customers by 0.4% in September from a month earlier, according to data released Wednesday. Economists polled by The Wall Street Journal had expected a 0.2% increase.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

“Inflation certainly broadened out and entered into areas that were more sticky,” said

Kiran Ganesh,

a multiasset strategist at

UBS.

“That’s why there’s been an increase in expectations…that the Fed needs to keep rates at a higher level for longer to get inflation down.”

The Fed released Wednesday afternoon the minutes of its September meeting, which showed officials concerned over the persistence of high inflation and expecting that bringing prices and wages down would likely require the labor market to weaken.

The Fed’s stance has heightened the risk of a recession, but it doesn’t appear the economy is in one now, said Merk Investments strategist Nicholas Reece. A recession may in fact come as late as the second half of next year, he said. That, however, likely means the market may churn along for several more months before finally hitting a cycle low. “That’s one of the things hanging over this market,” he said.

Corporate earnings over the next several weeks will also provide insight into how businesses are dealing with price pressures.

PepsiCo

on Wednesday again lifted its sales outlook for the year as it continues to push through price increases on its snacks and drinks, sending shares up $6.80, or 4.2%, to $169.39.

Traders working on the floor of the New York Stock Exchange last week.



Photo:

BRENDAN MCDERMID/REUTERS

The coming days will bring updates from a range of companies including

Delta Air Lines

and banks such as JPMorgan Chase and Citigroup.

Mr. Ganesh said earnings estimates for the remainder of the year and 2023 are too optimistic, posing another risk for stocks in the months ahead.

“If you look at market performance so far this year, it’s pretty much fully explained by the move in rates and bond yields,” said Mr. Ganesh. “Higher rates should mean lower expectations for growth and earnings, and that’s not priced into the market yet.”

Investors also continue to watch turmoil in U.K. government-bond markets, which have been highly volatile since the government set plans for large, debt-funded tax cuts last month. The Bank of England’s attempt to prevent broader market dysfunction that had hit pension funds particularly hard has had mixed results. 

On Tuesday, BOE Gov. Andrew Bailey confirmed the central bank plans to wind down its bond-market intervention program by Friday as planned, sparking a selloff in the British pound. The message was reiterated by BOE officials on Wednesday.

U.K. markets were mixed. The pound rebounded 1.2% to $1.1099, but U.K. government bonds, known as gilts, remained under pressure. The 30-year U.K. gilt yield briefly topped 5%, a level last seen before the central bank’s intervention. Yields rise as prices fall.

The U.S. 10-year Treasury note was down slightly at 3.901%.

“Bond markets think the BOE isn’t doing enough,” said

Viraj Patel,

a global macro strategist at Vanda Research. Despite the BOE’s pledge to wind down bond-buying, Mr. Patel still believes the central bank would step in with support if volatility again threatens financial stability.

“They won’t let this get to some sort of chaos that spirals out of control,” he said.

The U.K.’s FTSE 100 fell 0.9% to 6826.15, while the pan-European Stoxx Europe 600 lost 0.5% to 385.88.

Asian stocks were mixed. China’s benchmark Shanghai Composite gained 1.5% to 3025.51, while Hong Kong’s Hang Seng declined 0.8% to 16701.03 and Japan’s Nikkei 225 index was little changed at 26396.83.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com and Paul Vigna at Paul.Vigna@wsj.com

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Business

Fed’s Mester says there’s been no progress on inflation, so interest rates need to move higher

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With little or no progress made on bringing inflation down, the Federal Reserve needs to continue raising interest rates, Cleveland Fed President Loretta Mester said Tuesday.

“At some point, you know, as inflation comes down, them my risk calculation will shift as well and we will want to either slow the rate increases, hold for some time and assess the cumulative impact on what we’ve done,” Mester told reporters after a speech to the Economic Club of New York.

“But at this point, my concerns lie more on – we haven’t seen progress on inflation , we have seen some moderation- but to my mind it means we still have to go a little bit further,” Mester said.

In her speech, the Cleveland Fed president said the central bank needed to be wary of wishful thinking about inflation that would lead the central bank to pause or reverse course prematurely.

“Given current economic conditions and the outlook, in my view, at the point the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy,” Mester said.

She said she thinks inflation will be more persistent than some of her colleagues.

As a result, her preferred path for the Fed’s benchmark rate is slightly higher than the median forecast of the Fed’s “dot-plot,” which points to rates getting to a range of 4.5%-4.75% by next year.

Mester, who is a voting member of the Fed’s interest-rate committee this year, repeated she doesn’t expect any cuts in the Fed’s benchmark rate next year. She stressed that this forecast is based  on her current reading of the economy and she will adjust her views based on the economic and financial information for the outlook and the risks around the outlook.

Opinion: Fed is missing signals from leading inflation indicators

Mester said she doesn’t rely solely on government data on inflation because some of it was backward looking. She said supplements her research with talks with business contacts about their price-setting plans and uses some economic models.

The Fed is also helped by some real-time data, she added.

“I don’t see the signs I’d like to see on the inflation,” she added,

Mester said she didn’t see any “big, pending risks” in terms of financial stability concerns.

“There is no evidence that there is disorderly market functioning going on at present,” she said.

U.S. stocks were mixed on Tuesday afternoon with the Dow Jones Industrial Average
DJIA,
+0.12%
up a bit but the S&P 500 in negative territory. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.936%
inched up to 3.9%

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Business

Bank of England Further Expands Bond-Market Rescue to Restore U.K.’s Financial Stability

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LONDON—The Bank of England extended support targeted at pension funds for the second day in a row, the latest attempt to contain a bond-market selloff that has threatened U.K. financial stability.

The central bank on Tuesday said it would add inflation-linked government bonds to its program of long-dated bond purchases, after an attempt on Monday to help pension funds failed to calm markets.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to U.K. financial stability,” the BOE said.

The yield on a 30-year U.K. inflation-linked bond has soared above 1.5% this week, up from 0.851% on Oct. 7, according to

Tradeweb.

Just weeks ago, the yield on the gilt, as U.K. government bonds are known, was negative. Because yields rise as prices fall, the effect has been punishing losses for bond investors.

Turmoil in the U.K. bond market created a feedback loop that left investors like pension funds short on cash and rippled out into other markets. WSJ’s Chelsey Dulaney explains the type of investment at the heart of the crisis. Illustration: Ryan Trefes

On Tuesday, after the BOE expanded the purchases, the yield on inflation-linked gilts held mostly steady but at the new, elevated levels. The central bank said it bought roughly £2 billion, equivalent to about $2.21 billion, in inflation-linked gilts, out of a £5 billion daily capacity.

The bank’s bond purchases, however, are meant to run out on Friday. The Pensions and Lifetime Savings Association, a trade body that represents the pension industry, urged the central bank on Tuesday to extend its purchases until the end of the month.

The near-daily expansion of the Bank of England’s rescue plan highlighted the challenges facing central banks in stamping out problems fueled by a once-in-a-generation increase in inflation and interest rates. It also raised questions about whether the BOE was providing the right medicine to address the problem.

The turmoil sparked fresh demands on Monday for pension funds to come up with cash to shore up LDIs, or liability-driven investments, derivative-based strategies that were meant to help match the money they owe to retirees over the long term.

LDIs were at the root of the bond selloff that prompted the BOE’s original intervention. Pension plans in late September saw a wave of margin calls after Prime Minister

Liz Truss’s

government announced large, debt-funded tax cuts that fueled an unprecedented bond-market selloff.

The BOE launched its original bond-purchase program on Sept. 28, but it only restored calm for a couple of days before selling resumed. An expansion of the program on Monday backfired, with yields again soaring higher.

The selloff on Monday was “very reminiscent of two weeks ago,” said

Simeon Willis,

chief investment officer of XPS, a company that advises pension plans.

LDI strategies use leveraged financial derivatives tied to interest rates to amplify returns. The outsize moves in U.K. bond markets last month led to huge collateral calls on pensions to back up the leveraged investments. The pension funds have sold other assets, including government and corporate bonds, to meet those calls, adding to pressure on yields to rise and creating a spiral effect on markets.

Pensions are typically big holders of inflation-linked government bonds, which help protect the plans from both inflation and interest-rate changes. But these weren’t eligible in the BOE’s bond-buying program until Tuesday.

The U.K. helped pioneer bonds with payouts linked to inflation, sometimes referred to as linkers, in the 1980s. Linkers were originally sold exclusively to pensions, but the U.K. opened them to other investors over the years.

Pensions remain a dominant force in the market because the bonds offer long-term protection against both inflation and interest-rate changes. Their outsize role left the market vulnerable to shifts in pension-fund demand like that seen in recent weeks.

Adam Skerry, a fund manager at Abrdn with a focus on inflation-linked government bonds, said his firm has struggled to trade those assets in recent days.

“We were trying to sell some bonds this morning, and it was virtually impossible to do that,” he said. “The LDI issue that’s facing the market, the fact that the market is moving to the degree that it did, particularly yesterday, suggests that there’s still an awful lot [of selling] there.”

Pensions have also appeared hesitant to sell their bonds to the BOE, reflecting a mismatch in what the central bank is offering and what the market needs.

“The way that the bank has structured this intervention is they can only buy assets if people put offers into them, but nobody is putting offers in,” said Craig Inches, head of rates and cash at Royal London Asset Management. He said the pension funds would rather sell their riskier assets, including corporate bonds or property.

Mr. Willis of XPS said many pensions want to hold on to their government bonds because it helps protect pensions against changes in interest rates, which impact the way their liabilities are valued.

“If they sell gilts now, they’re doing it in the likelihood that they’ll need to buy them back in the future at some point and they might be more expensive, and that’s unhelpful,” he said.

Also plaguing the program: Pension funds are traditionally slow-moving organizations that make decisions with multidecade horizons. The market turmoil has hurtled them into the warp-speed-style moves usually reserved for traders at swashbuckling hedge funds.

To make decisions about the sale of assets, industry players describe a game of telephone playing out among trustees, investment advisers, fund managers and banks. Pension funds spread their assets among multiple managers, which are in turn held by separate custodian banks. Calling everyone for the necessary signoffs is creating a lengthy and involved process.

To give themselves more time, pension funds are pushing the BOE to extend the bond-buying program at least to the end of the month. That is when the U.K.’s Treasury chief,

Kwasi Kwarteng,

is expected to lay out the government’s borrowing plans for the coming year.

The Institute for Fiscal Studies, a nonpartisan think tank that focuses on the budget, warned Tuesday that borrowing is likely to hit £200 billion in the financial year ending March, the third highest for a fiscal year since World War II and £100 billion higher than planned in March of this year. Increased borrowing increases the supply of bonds and generally causes bond yields to rise.

Mr. Kwarteng on Tuesday declared his confidence in BOE Gov. Andrew Bailey as he faced questions from lawmakers for the first time in his new job.

“I speak to the governor very frequently and he is someone who is absolutely independent and is managing what is a global situation very effectively,” he said.

—Caitlin Ostroff contributed to this article.

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com, Anna Hirtenstein at anna.hirtenstein@wsj.com and Paul Hannon at paul.hannon@wsj.com

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Business

Bank of England Offers More Support for Pension Funds Amid Crisis

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LONDON—The Bank of England expanded its support of pension funds at the heart of the U.K.’s bond-market crisis even as borrowing costs leapt higher, a sign that stress in the financial system wasn’t going away.

The U.K.’s central bank said Monday that it would increase the daily amounts it was willing to buy in long-dated bonds before ending the program as scheduled on Friday. It also unveiled two types of lending facilities aimed at freeing up cash for pension funds beyond the end of the bond buying.

The moves failed to calm markets, with yields on 30-year U.K. gilts, as government bonds are known, jumping to as high as 4.64%, from 4.39% on Friday. Outside the past two weeks such moves would be considered unusually large for a single day.

The Bank of England launched its initial foray into markets on Sept. 28 when it offered to buy up to £5 billion, or around $5.55 billion, a day of long-dated government bonds. The program was aimed at stanching the damage from a furious selloff in U.K. government debt over previous days in the aftermath of a surprise package of tax cuts announced by the government.

“The underlying message is that there’s been too little risk reduction so far,” said Antoine Bouvet, senior rates strategist at ING. “There’s a message to pension funds and potential sellers that the window is closing and they need to hurry up.”

Turmoil in the U.K. bond market created a feedback loop that left investors like pension funds short on cash and rippled out into other markets. WSJ’s Chelsey Dulaney explains the type of investment at the heart of the crisis. Illustration: Ryan Trefes

He attributed Monday’s bond selloff to disappointment among investors who had expected the BOE to extend the bond-buying facility.

The original intervention in late September at first calmed markets, with government bond yields plunging in response. But yields shot back up in recent days after it appeared the bank was buying far less than the £5 billion a day, a possible sign that the program wasn’t working as intended.

In the history of crisis interventions, central banks often have to make multiple stabs at solving problems with different types of bond buying or lending programs before markets become convinced that a viable backstop has been created. During the Covid-19 meltdown in March 2020, the Federal Reserve expanded its lending programs several times before calm was restored.

The BOE said it would increase the daily amount of purchases on offer until the program ends, starting with £10 billion Monday, though it was unclear if there would be take-up by distressed sellers.

The lending programs announced Monday included what the BOE called a temporary expanded collateral repo facility. This lends cash to pension funds in exchange for an expanded menu of collateral than was previously available to the pension plans, including index-linked gilts, whose returns are tied to inflation, and corporate bonds.

The operations would be processed through banks working on behalf of the pension funds. The BOE also made an existing, permanent repo lending facility available to banks acting to help pension-fund clients.

The crisis centers on a corner of the market known as LDIs, or liability-driven investments. LDIs became popular in recent years among U.K. defined-benefit pension plans to make enough money in the long term to match what they owed retirees. These strategies use financial derivatives tied to interest rates.

LDIs also contain leverage, or borrowing, that amplifies pension-fund investments by as much as six or seven times. When the long-dated U.K. government bond yield that undergird LDI investments surged more than they ever have in a single day at the end of September, LDI fund managers required pension funds to post massive amounts of fresh collateral to back up the investments.

To generate that collateral, pension funds have been selling non-LDI bonds, stocks and other investments.

In a letter to lawmakers last week, BOE Deputy Gov.

Jon Cunliffe

said the bank acted to stop forced selling by LDI investors and a “self-reinforcing spiral of price falls.”

The point of the new lending programs and the bond buying is to make it easier for the pension funds to drum up cash so they can pay down the leverage on their LDI funds without causing wider market disruption.

“The Bank of England has been listening to schemes and the challenges they’re facing right now in still struggling to access liquidity quickly enough to recapitalize LDI,” said Ben Gold, head of investment at

XPS Pensions Group,

a U.K. pensions consultant. The measures also help funds avoid having to sell assets at poor prices, he said.

Mr. Gold estimates that it is going to take between £100 billion and £150 billion for the industry to shore up its collateral on LDI funds.

“I would estimate that we’re probably about halfway there,” he said. “There is still a lot of activity that’s needed to get it done before 14th October.”

Soaring inflation and expectations of swelling government bond issuance pushed bond yields up sharply in recent months. Investors in U.K. government bonds were troubled by the tax cuts announced by Prime Minister

Liz Truss’s

government in part because they weren’t accompanied by a customary analysis of the impact on borrowing by the independent budget watchdog.

U.K. Treasury chief

Kwasi Kwarteng

on Monday said he would announce further budgetary measures on Oct. 31 that will be accompanied by forecasts from the Office for Budget Responsibility, which provides independent analysis of government spending. He previously said that wouldn’t happen until Nov. 23.

—Caitlin Ostroff contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com, Chelsey Dulaney at Chelsey.Dulaney@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

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Business

Elon Musk’s Revived Twitter Deal Could Saddle Banks With Big Losses

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Banks that agreed to fund

Elon Musk’s

takeover of

Twitter Inc.

TWTR -3.72%

are facing the possibility of big losses now that the billionaire has shifted course and indicated a willingness to follow through with the deal, in the latest sign of trouble for debt markets that are crucial for funding takeovers.

As is typical in leveraged buyouts, the banks planned to unload the debt rather than hold it on their books, but a decline in markets since April means that if they did so now they would be on the hook for losses that could run into the hundreds of millions, according to people familiar with the matter.

Banks are presently looking at an estimated $500 million in losses if they tried to unload all the debt to third-party investors, according to 9fin, a leveraged-finance analytics firm.

Representatives of Mr. Musk and Twitter had been trying to hash out terms of a settlement that would enable the stalled deal to proceed, grappling with issues including whether it would be contingent on Mr. Musk receiving the necessary debt financing, as he is now requesting. On Thursday, a judge put an impending trial over the deal on hold, effectively ending those talks and giving Mr. Musk until Oct. 28 to close the transaction.

The debt package includes $6.5 billion in term loans, a $500 million revolving line of credit, $3 billion in secured bonds and $3 billion in unsecured bonds, according to public disclosures. To pay for the deal, Mr. Musk also needs to come up with roughly $34 billion in equity. To help with that, he received commitment letters in May for over $7 billion in financing from 19 investors including

Oracle Corp.

co-founder and

Tesla Inc.

then-board member

Larry Ellison

and venture firm Sequoia Capital Fund LP.

Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse

The Twitter debt would be the latest to hit the market while high-yield credit is effectively unavailable to many borrowers, as buyers of corporate debt are demanding better terms and bargain prices over concerns about an economic slowdown.

That has dealt a significant blow to a business that represents an important source of revenue for Wall Street banks and has already suffered more than $1 billion in collective losses this year.

The biggest chunk of that came last month, when banks including Bank of America,

Goldman Sachs Group Inc.

and

Credit Suisse Group AG

sold debt associated with the $16.5 billion leveraged buyout of Citrix Systems Inc. Banks collectively lost more than $500 million on the purchase, the Journal reported.

Banks had to buy around $6 billion of Citrix’s debt themselves after it became clear that investors’ interest in the total debt package was muted.

“The recent Citrix deal suggests the market would struggle to digest the billions of loans and bonds contemplated by the original Twitter financing plan,” said Steven Hunter, chief executive at 9fin.

People familiar with Twitter’s debt-financing package said the banks built “flex” into the deal, which can help them reduce their losses. It enables them to raise the interest rates on the debt, meaning the company would be on the hook for higher interest costs, to try to attract more investors to buy it.

However, that flex is usually capped, and if investors still aren’t interested in the debt at higher interest rates, banks could eventually have to sell at a discount and absorb losses, or choose to hold the borrowings on their books.

Elon Musk has offered to close his acquisition of Twitter on the terms he originally agreed to.



Photo:

Mike Blake/REUTERS

The leveraged loans and bonds for Twitter are part of $46 billion of debt still waiting to be split up and sold by banks for buyout deals, according to Goldman data. That includes debt associated with deals including the roughly $16 billion purchase of

Nielsen Holdings

PLC, the $7 billion acquisition of automotive-products company

Tenneco

and the $8.6 billion takeover of media company

Tegna Inc.

Private-equity firms rely on leveraged loans and high-yield bonds to help pay for their largest deals. Banks generally parcel out leveraged loans to institutional investors such as mutual funds and collateralized-loan-obligation managers.

When banks can’t sell debt, that usually winds up costing them even if they choose not to sell at a loss. Holding loans and bonds can force them to add more regulatory capital to protect their balance sheets and limit the credit banks are willing to provide to others.

In past downturns, losses from leveraged finance have led to layoffs, and banks took years to rebuild their high-yield departments. Leveraged-loan and high-yield-bond volumes plummeted after the 2008 financial crisis as banks weren’t willing to add on more risk.

Indeed, many of Wall Street’s major banks are expected to trim the ranks of their leveraged-finance groups in the coming months, according to people familiar with the matter.

Still, experts say that banks look much better positioned to weather a downturn now, thanks to postcrisis regulations requiring more capital on balance sheets and better liquidity.

“Overall, the level of risk within the banking system now is just not the same as it was pre-financial crisis,” said Greg Hertrich, head of U.S. depository strategy at Nomura.

Last year was a banner year for private-equity deal making, with some $146 billion of loans issued for buyouts—the most since 2007.

However, continued losses from deals such as Citrix and potentially Twitter may continue to cool bank lending for M&A, as well as for companies that have low credit ratings in general.

“There’s going to be a period of risk aversion as the industry thinks through what are acceptable terms for new deals,” said Richard Ramsden, an analyst at Goldman covering the banking industry. “Until there’s clarity over that, there won’t be many new debt commitments.”

—Cara Lombardo contributed to this article.

Write to Alexander Saeedy at alexander.saeedy@wsj.com, Laura Cooper at laura.cooper@wsj.com and Ben Dummett at ben.dummett@wsj.com

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