After a two-day bounce from a lackluster start to 2022, U.S. equities finished lower, as the recent rebound for Information Technology issues broke down. Investors sifted through some mixed economic data that showed that while producer prices moderated more than expected compared to last month, they remained severely elevated versus last year. As well, jobless claims unexpectedly rose for a second-straight week, likely due to the impact of the festering spread of the omicron variant, but continuing claims remained in a downtrend. Q4 earnings season kicked off, with Delta Air Lines and KB Home rising following their results, while Ford said it plans to increase its electric vehicle production. Treasuries were higher, seeing downward pressure in yields, and the U.S. dollar was slightly lower to extend a recent decline, while gold and crude oil prices traded to the downside. Markets in Europe and Asia finished mixed following yesterday's broad-based gains.

The Dow Jones Industrial Average fell 177 points (0.5%) to 36,114, the S&P 500 Index lost 67 points (1.4%) to 4,659, and the Nasdaq Composite was 382 points (2.5%) lower at 14,807. In heavy volume, 4.2 billion shares of NYSE-listed stocks were traded, and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.52 to $82.12 per barrel. Elsewhere, the gold spot price declined $6.20 to $1,821.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.1% to 94.87.

Delta Air Lines Inc. (DAL $41) reported adjusted Q4 earnings-per-share (EPS) of $0.22, above the $0.14 FactSet estimate, as revenues of $9.5 billion, were north of the Street's forecast of $9.0 billion, but 17.2% below pre-pandemic levels of the same period in 2019. The company said, while the rapidly spreading omicron variant has significantly impacted staffing levels and disrupted travel across the industry, Delta's operation has stabilized over the last week and returned to pre-holiday performance. DAL added that omicron is expected to temporarily delay the demand recovery 60 days, but as it looks past the peak, it is confident in a strong spring and summer travel season with significant pent-up demand for consumer and business travel. DAL finished higher. 

KB Home (KBH $49) posted Q4 EPS of $1.91, exceeding the expected $1.77, with revenues jumping 40.0% year-over-year (y/y) to $1.7 billion, roughly in line with expectations. The company said homes delivered rose 28.0%, average selling price increased 9.0%, and ending backlog value grew 67.0%. KBH issued full-year housing revenues that had a midpoint just above expectations. The company said, during the past year, it significantly expanded its production capabilities as it scaled its business to meet the healthy demand that is driving the housing market and align its starts to net orders. KBH added that although operating conditions in 2021 were extremely challenging, with labor shortages and supply chain disruptions, along with municipal and related delays, its teams remained resilient in working through solutions with its trade partners and suppliers. Shares rallied over 15%.

Shares of Ford Motor Company (F $25) were higher after it said it plans to up its electric vehicle production, including its Mustang crossover and a new version of its F-150 pickup truck. As well, the automaker's market cap hit $100 billion for the first time in today's trading.

As noted in our 2022 Schwab Market Outlook: Ebb Tide, while overall stock market performance was strong in 2021, there has been a lot of churn beneath the surface. We look at the question of will U.S. stock indices begin to reflect more of that weakness in 2022? It's possible, especially as the world's major central banks begin to drain the liquidity that has supported financial markets since the start of the COVID-19 pandemic in March 2020. But major uncertainties remain, including the pace of inflation, how central banks will react to it, and the direction of the virus.

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

Producer price inflation moderates versus last month but remains hot versus last year

The Producer Price Index (PPI) (chart), showed prices at the wholesale level in December rose 0.2% month-over-month (m/m), below the Bloomberg consensus estimate of a 0.4% gain, and south of November's upwardly-revised 1.0% increase. The core rate, which excludes food and energy, gained 0.5% m/m, in line with estimates but below the prior month's upward adjustment to a 0.9% rise. Y/Y, the headline rate was 9.7% higher, south of projections calling it to match November's upwardly-revised 9.8% gain. The core PPI increased 8.3% y/y last month, above estimates of 8.0% and November's 7.7% increase.

Weekly initial jobless claims (chart) came in at a level of 230,000 for the week ended January 8, versus estimates of 200,000, and versus the prior week's unrevised 207,000 level. The four-week moving average increased by 6,250 to 210,750, and continuing claims for the week ended January 1 dropped by 194,000 to 1,559,000, below of estimates of 1,733,000. The four-week moving average of continuing claims fell by 77,000 to 1,721,500.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, We Can Work It Out: Update on Labor Market, the labor market remains tight—hence the stepped-up pace of balance sheet tapering by the Federal Reserve, and the market now expecting multiple rate hikes this year. One historical nugget of truth to keep in the back of your mind as the Fed embarks on its rate hiking cycle: in the post-WWII era, every time (12 occurrences) that the Fed was raising rates—and the three-month moving average of the unemployment rate rose by at least .35 percentage points—a recession has unfolded. For now, the good news is that the unemployment rate continues to descend; but keen observers will understand the potential economic implications of an eventual turn back up—especially if rate hikes are still underway.

Treasuries finished higher, as the yield on the 2-year note lost 1 basis point (bp) to 0.89%, while the yields on the 10-year note and the 30-year bond rate fell 3 bps to 1.70% and 2.04%, respectively. 

The bond markets have been volatile as the markets grapple with the prospect of Fed tightening and the rapid spread of the omicron variant, while last week's hawkish minutes from the Fed's December meeting, suggested along with accelerated tapering and multiple rate hikes this year, it may begin to reduce its balance sheet sooner than expected.

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.

The economic calendar will close out the week in robust fashion, beginning with advance retail sales for December, forecasted to have declined 0.1% m/m, while sales ex-autos is estimated to have increased 0.2% m/m and sales ex-autos and gas to have declined 0.2% m/m. As well, the Import Price Index will complete the December inflation picture, with economists calling for a gain of 0.2%. The Fed's industrial production and capacity utilization report will come just before the opening bell, with the former expected to post a 0.2% m/m rise and the latter to tick higher to 77.0%. Rounding out the heavy docket will be business inventories for November, projected to have increased 1.3% m/m, and finally the preliminary University of Michigan Consumer Sentiment Index for January, which is estimated to nudge lower to 70.0 from last month's 70.6 level.

Europe and Asia mixed following yesterday's broad-based gains

European equities were mixed, with the Energy sector slipping after a recent jump, and Industrials seeing pressure, while Financials and Information Technology issues moved to the upside. The markets continued to grapple with increased expectations of tighter global monetary policies and the uncertainty regarding the ultimate impact of the rapidly-spreading omicron variant. 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, Italian industrial production rose much more than expected for November. The euro and British pound were slightly higher versus the U.S. dollar, which has extended a recent drop, and bond yields in the Eurozone and the U.K. saw downside pressure.  

The U.K. FTSE 100 Index and Germany's DAX Index rose 0.1%, France's CAC-40 Index decreased 0.5%, and Switzerland's Swiss Market Index traded 0.4% lower, while Italy's FTSE MIB Index and Spain's IBEX 35 Index were 0.5% higher.

Stocks in Asia finished mixed, following yesterday's broad gains as the markets continued to contend with hotter-than-expected inflation in the U.S., along with the rapidly-spreading omicron variant which has bolstered the prospect of tighter global monetary policies. 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. In economic news, Japan's machine tool orders slowed in December but remained strong, while India's exports accelerated for last month.  

Japan's Nikkei 225 Index fell 1.0%, trimming yesterday's rally with the yen gaining solid ground versus the U.S. dollar. Elsewhere, China's Shanghai Composite Index dropped 1.2%, the Hong Kong Hang Seng Index nudged 0.1% to the upside, South Korea's Kospi Index declined 0.4%, Australia's S&P/ASX 200 Index advanced 0.5%, and India's S&P BSE Sensex 30 Index ticked 0.1% higher.

Tomorrow's international economic calendar will hold trade figures for China, industrial production and November GDP from the U.K., as well as CPI from France and Spain.