The U.S. equity markets started the shortened week on a down note, with stocks solidly lower, as investors continue to struggle with heightened expectations that the Fed may be more aggressive with its monetary policy tightening campaign to combat persistent inflation pressures. As such, Treasuries fell, putting noticeable upward pressure on yields. Moreover, the ongoing spread of the omicron variant remains a drag on global supply chains and economic activity, further exacerbating sentiment. On the corporate front, Q4 earnings season is ramping up and Dow member Goldman Sachs Group missed earnings estimates due to lower-than-expected trading activity and higher expenses. Meanwhile Dow component Microsoft Corporation announced a near $69.0 billion agreement to acquire video game maker, Activision Blizzard. In economic news, New York manufacturing output for this month unexpectedly tumbled into contraction territory, while homebuilder sentiment ticked lower. The U.S. dollar was higher, and crude oil prices traded to the upside, while gold was slightly lower. Stocks in Europe finished with widespread losses, and markets in Asia were also lower amid the dampened conviction. 

The Dow Jones Industrial Average fell 543 points (1.5%) to 35,368, the S&P 500 Index declined 86 points (1.8%) to 4,577, and the Nasdaq Composite tumbled 387 points (2.6%) to 14,507. In heavy volume, 4.7 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.53 to $84.83 per barrel. Elsewhere, the gold spot price lost $3.50 to $1,813.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.6% to 95.79.

Dow member Goldman Sachs Group Inc. (GS $354) reported Q4 earnings-per-share (EPS) of $10.81, below the $11.77 FactSet estimate, as revenues rose 8.0% year-over-year (y/y) but were 7.0% lower quarter-over-quarter (q/q) at $12.6 billion, above the Street's forecast of $12.0 billion. The company said its higher y/y revenues reflected significantly higher new revenues in investment banking and higher net revenues in consumer & wealth management, partially offset by lower net revenues in asset management and global markets. Trading revenues unexpectedly fell and missed estimates, with its equity unit seeing a slowdown after getting a boost from elevated activity during the pandemic, while it also saw higher expenses reflecting "significantly" higher compensation and benefits expenses, professional fees and net provisions for litigation and regulatory proceedings. In addition, GS said technology expenses, transaction based expenses and market development expenses were all higher. Shares were lower. 

PNC Financial Services Group Inc. (PNC $217) reported adjusted Q4 EPS of $3.68, just above the expected $3.66, as revenues dipped 1.3% q/q to $5.1 billion, modestly short of the $5.2 billion expectation. The company's net interest margin came in at 2.27%, slightly below the forecasted 2.29%. Shares of PNC traded to the downside.

Dow member Microsoft Corporation (MSFT $303) announced an agreement to acquire Activision Blizzard Inc. (ATVI $82) for $95.00 per share, in an all-cash transaction valued at about $68.7 billion. MSFT said when the transaction closes, it will become the world's third-largest gaming company by revenue. The company said Bobby Kotick will continue to serve as CEO of Activision Blizzard, and he and his team will maintain their focus on driving efforts to further strengthen the company's culture and accelerate business growth. MSFT was lower, while shares of ATVI traded over 25% higher.

As noted in our latest, Schwab Market Perspective: Bumps in the Road, the effects of the COVID-19 virus have continued to drive—and brake—economic growth. Stocks sank in early January as investors reacted to the fast-spreading omicron variant and the Federal Reserve’s signals around inflation, including the possibility it will begin "quantitative tightening" much faster than previously expected. However, there are signs that inflation pressures already may be peaking in the United States and Europe.

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

New York manufacturing activity unexpectedly falls in contraction

The Empire Manufacturing Index, a measure of activity in the New York region, showed the index surprisingly fell into a level depicting contraction (a reading below zero). The index tumbled to -0.7 in January from 31.9 that was posted in December, and compared to the Bloomberg estimate of a decrease to 25.0. The drop came as new orders and employment both fell, with the former moving below zero, while the expansion in inventories accelerated, and prices paid dropped but continued to be severely elevated.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in January slid to 83 from December's 84 level, where it was forecasted to remain. The NAHB said, "While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled labor shortages and higher mortgage rates point to declines for housing affordability in 2022." Further, the report noted, “Higher material costs and lack of availability are adding weeks to typical single-family construction times.”

Treasuries were lower, with the yields on the 2-year and 10-year notes up 9 basis points (bps) at 1.05% and 1.88%, respectively, while the 30-year bond rate rose 7 bps to 2.19%.

The Treasury yield curve is flattening more as the short end is rising much more than the medium-to-longer end as the markets grapple with how aggressive the Fed will be in its response to combating surging inflation and Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy.

Tomorrow's economic calendar will focus on housing, beginning with the MBA Mortgage Applications Index for the week ended January 14. Shortly thereafter, housing starts and building permits will be released, with starts forecasted to have declined 1.7% month-over-month (m/m) to an annual rate of 1,650,000 units and permits to have ticked 0.7% lower m/m to an annual rate of 1,705,000 units.

Europe and Asia lower to begin the week

European equities finished lower, as the markets remained hamstrung by rising global bond yields and increasing expectations that monetary policies, led by the Fed in the U.S., are set to move aggressively down the tightening path. The expectations have ramped up as inflation pressures continue to surge and the rapidly-spreading omicron variant has also exacerbated global supply chain issues and hampered economic activity. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Omicron: Will the Virus Wave Pattern Repeat?, how we shouldn't necessarily expect this wave to unfold the same as the others. Jeff adds that the rest of the month may hold policymaker responses to what we don't yet know about omicron's effects, resulting in continued volatility. He also notes that this may be tempered by a potential delay in monetary policy tightening and a backdrop of strong global economic growth. In economic news, the markets are digesting a mixed read on January German investor expectations, which showed investors' assessment of the current situation continued to deteriorate, but investors' outlook for the future jumped much more than expected. Moreover, Eurozone new car registrations fell in December, and the U.K. employment change rose by a smaller amount than anticipated for November. The euro and British pound were lower versus the U.S. dollar, while bond yields in the Eurozone and the U.K. were higher.  

The U.K. FTSE 100 Index was down 0.6%, France's CAC-40 Index lost 0.9%, Germany's DAX Index dropped 1.0%, Italy's FTSE MIB Index and Spain's IBEX 35 Index declined 0.7%, and Switzerland's Swiss Market Index fell 0.8%.

Stocks in Asia finished mostly lower, as the markets look to the U.S. markets returning to action following a long holiday weekend, while the rise in global bond yields and increasing expectations that monetary policies are set to tighten also appeared to dampen conviction. The Bank of Japan held its monetary policy stance steady but increased its inflation outlook. Meanwhile, China warned against aggressive monetary policy tightening due to its potential impact on the global recovery. Schwab's Jeffrey Kleintop in his latest article, Top Global Risks of 2022, touches on how future COVID waves may not resemble those of 2021, while also offering four additional risks, in no particular order: shortages turn into gluts, rate hikes slower than expected, China goes from cracking down to propping up, and geopolitical surprises. Whether or not these risks come to pass remains to be seen, Jeff adds, but a new year almost always brings new surprises.

Japan's Nikkei 225 Index declined 0.3%, with the yen rising late in the session versus the U.S. dollar. Elsewhere, the Hong Kong Hang Seng Index decreased 0.4%, and South Korea's Kospi Index dropped 0.9%. Australia's S&P/ASX 200 Index dipped 0.1%, and India's S&P BSE Sensex 30 Index finished 0.9% to the downside. However, China's Shanghai Composite Index rose 0.8%, following China's decision this week to ease monetary policy and pledged to roll out more policy tools to stabilize economic growth.

Reports on tomorrow's international economic calendar include CPI, PPI and the Retail Sales Index out of the U.K., CPI from Germany and construction output from the Eurozone.