U.S. equities closed mostly higher in a somewhat cautious session as the S&P 500 and Dow continued to flirt with all-time highs. Much of the cautious tone early was attributed to the afternoon reveal of the Fed’s Beige Book report. The report noted modest to moderate growth across the majority of districts, but also saw prices characterized as “significantly elevated” in most districts. Concerns about supply-chain and labor challenges featured predominantly in the report as well and have fostered expectations from the markets that the Fed and other global central banks may soon begin to tighten monetary policies. Q3 earnings results remained in focus, as Netflix posted better-than-expected bottom-line figures and bested the Street's forecasts on subscriber growth, while United Airlines reported a smaller loss than what analysts were expecting, but revenues and passenger capacity remained below pre-pandemic levels. Meanwhile, M&A grabbed late headlines after reports that PayPal is weighing a possible deal for Pinterest.  Treasuries were mixed after the yield curve has steepened somewhat lately, and the U.S. dollar ticked lower, while gold gained ground, and crude oil prices added to a recent run. In economic news, mortgage applications dropped last week amid an increase in interest rates. Asia finished mixed, with weakness in Chinese markets coming up against a rally in Hong Kong stocks, while Europe closed higher in a relatively lackluster trading session.

The Dow Jones Industrial Average was up 152 points (0.4%) to 35,609, the S&P 500 Index increased 17 points (0.4%) to 4,536, and the Nasdaq Composite lost 7 points (0.1%) to 15,122. In moderate volume, 738 million shares were traded on the NYSE and 4.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.98 to $83.42 per barrel. Elsewhere, the gold spot price increased $14.40 to $1,784.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.1% to 93.61.

Netflix Inc. (NFLX $625) reported adjusted Q3 earnings-per-share (EPS) of $3.19, topping the $2.57 FactSet estimate, with revenues rising 16.2% year-over-year (y/y) to $7.48 billion, matching the Street's forecast. The online media content provider reported subscriber growth of 4.4 million during the quarter, above estimates of 3.8 million, and said it expects to add 8.5 million subscribers during Q4. Shares of NFLX were lower.

United Airlines Holdings Inc. (UAL $46) posted an adjusted Q3 loss of $1.02 per share, less than the expected $1.58 shortfall, but revenues of $7.8 billion were down roughly 32% compared to the same period in 2019, before the COVID-19 pandemic began. The company said capacity was down 28% compared to the same period in 2019, and total revenue per available mile, a key industry metric, was 5.1% lower. UAL announced plans to increase international capacity by 10% in 2022, citing a "rebound in premium leisure travel, the re-opening of European borders next month, continued recovery of business travel and early indications of loosening travel restrictions in key Pacific markets," while domestic capacity will likely remain flat. However, CEO Scott Kirby warned that it sees increased fuel costs in Q4, which will lead to higher ticket prices. UAL traded lower.

PayPal Holdings Inc. (PYPL $258) shares traded noticeably lower following several reports that the digital payments company was weighing an offer to acquire social media platform Pinterest, Inc. (PINS $63). Reports indicated that talks are in the early stages and may not lead to a deal. Shares of PINS traded over 10% higher.

Schwab's Chief Investment Strategist Liz Ann Sonders provides her latest commentary, The Beast of Burden of Inflation, discussing how the age of abundance has given way to an age of scarcity, while the pro-cyclical version of inflation may have given way to the counter-cyclical version.

Q3 earnings season has kicked into high gear, and although early, of the 69 S&P 500 companies that have reported thus far, roughly 68% have topped revenue forecasts and approximately 84% have bested profit projections. Compared to last year, sales growth has been nearly 13% higher and earnings are up about 36%.

Director and Senior Investment Strategist with the Schwab Center for Financial Research (SCFR), David Kastner, CFA, provides his latest Schwab Sector Insights: A View on 11 Equity Sectors, offering a look at what we expect to see over the next three to six months.

Find all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Mortgage applications tumble, Fed Beige book sees modest to moderate growth

In afternoon action, the Federal Reserve released its Beige Book, an anecdotal read on the nation's business activity used as a policy tool to prep for the Fed's next two-day monetary policy meeting set to conclude on November 3. The report noted that economic growth continued at a moderate to modest pace; however, several Districts noted a slowed pace of growth for the period. The majority of Districts indicated positive growth in consumer spending, yet auto sales declined. Employment continued to increase at a similarly modest to moderate pace, as demand for workers persisted, but was tempered by a low supply of workers. Regarding inflation, most Districts reported significantly elevated prices, with supply-chain issues contributing to rising input costs across industry sectors, and increased transportation, labor constraints and commodity shortages also adding to pricing pressures. 

The MBA Mortgage Application Index dropped 6.3% last week, following the prior week's 0.2% increase. The decline came as a 7.1% fall in the Refinance Index was met with a 4.9% decrease for the Purchase Index. The average 30-year mortgage rate rose 5 basis points (bps) to 3.23%.

Treasuries were mixed, as the yield on the 2-year note declined 2 bps to 0.38%, while the yield on the 10-year note was 1 bp higher at 1.64%, and the 30-year bond rate ticked 4 bps higher 2.12%.

The Treasury yield curve has steepened as of late, and Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, Bond Market Blues: High Inflation and Low Yields, that coming into the fourth quarter, we were expecting a rise in yields and volatility. She points out how bond yields appeared to be too low in the face of rising inflation and investors too complacent about the potential for tighter monetary policy.

She adds that we continue to suggest keeping average duration low due to our expectation for yields to push higher as we see the potential for 10-year Treasury yields to move up to 1.75% this year and above 2.00% in the first half of next year. Kathy also discusses how over the next six to twelve months, we suggest investors look for opportunities to extend duration if yields move higher, as anticipated. "The early stages of rising yield cycles are usually characterized by rising longer-term rates and steepening yield curves. However, once the prospect of tighter policy is on the horizon, long-term yields have tended to peak well before the initial rate hike of the cycle," she adds.

Tomorrow, the economic calendar will offer the October release of the Philadelphia Fed Outlook Survey as well as the release Weekly initial jobless claims for the week ended October 15 with analyst consensus estimates expecting an increase of 297,000 new unemployment applications filed. Additionally, the release of the Index of Leading Economic Indicators (LEI) for September will be revealed after the bell, which is anticipated to show a 0.4% month-over-month (m/m) increase. Existing home sales for September are also on the schedule, forecasted to have advanced 3.6% m/m to an annual rate of 6.09 million units.

Asia mixed and Europe higher amid earnings results and inflation data

European equities closed higher, as the defensively-natured sectors—Consumer Staples and Utilities—moved higher as the markets digested a plethora of earnings results on both sides of the pond. Meanwhile, bond yields in the Eurozone and the U.K. fell following a recent run higher, while the euro and British pound nudged higher versus the U.S. dollar. The persistent supply-chain challenges continued to boost inflation pressures and expectations that global central banks may soon begin to take down some of the extraordinary monetary policy measures put in place to combat the pandemic. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Inflation: Persistently Transitory, noting how persistently going from one transitory source of inflation to the next may keep inflation elevated for longer than markets currently anticipate. In economic news, September reads in inflation in the region were mixed, as German PPI came in hotter than expected, consumer prices out of the U.K. were slightly below forecasts, and the final read on Eurozone CPI matched expectations.

The U.K. FTSE 100 Index and Germany's DAX Index ticked 0.1% higher, France's CAC-40 Index gained 0.5%, Italy's FTSE MIB Index was up 0.9%, Spain's IBEX 35 Index rose 0.2%, and Switzerland's Swiss Market Index increased 0.6%. 

Stocks in Asia finished mixed, with markets in Hong Kong leading to the upside, as the rally in growth-related sectors continued to come up against festering inflation concerns and elevated expectations that global central banks could begin to rein in extremely loose monetary policies. Continued upbeat results amid the ramp-up of Q3 earnings season also added to sentiment. Japan's Nikkei 225 Index nudged 0.1% higher, with the yen losing modest ground during the session, and after data showed the country's trade deficit widened more than forecasts. Japanese stocks have seen increased volatility after strong September and Q3 performances as discussed by Schwab's Jeffrey Kleintop in his article, It's All Over for Japan (and That's Good).

China's Shanghai Composite Index lost 0.7% after a report showed growth in the nation's housing prices stalled during September, adding to the list of disappointing data this week, including softer-than-expected industrial production and Q3 GDP growth that was well below estimates. The country's central bank also opted to keep its 1-year and 5-year loan prime rates unchanged, as was expected. The Hong Kong Hang Seng Index rallied 1.4% amid strength in technology issues. Australia's S&P/ASX 200 Index gained 0.5%, countering yesterday's losses that came following the release of the minutes from the Reserve Bank of Australia's (RBA) monetary policy meeting earlier this month, which showed that while policymakers expected the economy to return to growth in Q4, inflation pressures could build more quickly than currently estimated. Elsewhere, South Korea's Kospi Index traded 0.5% lower and India's BSE Sensex 30 Index declined 0.7%, pausing its run to fresh record highs ahead of the release of some key earnings results this week.

Tomorrow’s international economic calendar will include French business climate data, U.K. industrial trends numbers, and the consumer confidence report from the Eurozone.