Stocks Fall as Investors Remain Worried About Hawkish Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed -1.07%, the Dow Jones Industrials Index ($DOWI) (DIA) closed -1.07%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed -1.44%.

Stocks on Friday were initially buoyed by news that the U.S. Aug unemployment rate rose +0.2 points to 3.7% due to the return of some people back into the labor market.  That could give the Fed an opening for a less hawkish approach to monetary policy and allowed U.S. interest rates to drop on Friday. 

However, the U.S. labor market remains generally strong, with Friday’s +315,000 rise in Aug nonfarm payrolls, stronger than expectations of +298,000.  The markets are still discounting about a 50-50 chance of a +75 bp rate hike at the next FOMC meeting on Sep 20-21.

Stocks were also undercut after U.S. July factory orders unexpectedly fell -1.0% m/m, weaker than expectations of a +0.2% m/m increase and the biggest decline in 2-1/4 years.

Stocks were undercut Friday by disappointment that the Biden administration apparently does not plan to drop tariffs on Chinese goods anytime soon. The Office of the U.S. Trade Representative said in a statement Friday that it will extend the Trump-era Section 301 tariffs on China due to requests for an extension by hundreds of affected U.S. companies.

While the protectionist tariffs are beneficial for some U.S. companies, the tariffs represent a deadweight loss for the U.S. economy, according to standard economic principles.  Unfortunately, U.S. consumers are the ones who generally end up paying the ultimate price for the tariffs.  Trade Office officials have said the office will spend months reviewing whether the tariffs continue to be necessary.

There have recently been some hopes that the Biden administration might drop at least some of the Chinese tariffs to reduce the upward inflation pressure on U.S. consumers, which would be a dovish factor for Fed policy.  However, recent flare-up of U.S.-Chinese tensions over Taiwan is a factor that likely caused the Biden administration to delay any easing of the tariffs.

According to EPFR Global data, global equity funds had outflows of $9.4 billion in the week ended Aug 31, the fourth-largest redemptions this year, with U.S equities having the largest outflow in 10 weeks.

Today’s stock movers…

Energy stocks and energy service providers saw support Friday with the +0.30% rally in Oct WTI crude oil prices and the +3.28% rally in Oct RBOB gasline prices.  Haliburton (HAL) rallied +3.39%, Marathon Oil (MRO) rallied +2.86%, and Exxon Mobil (XOM) rallied +1.53%.

Broadcom (AVGO) rallied +1.37% after reporting Q3 net revenue of $8.46 billion, above the consensus of $8.41 million, and forecast Q4 revenue of $8.90 billion, stronger than the consensus of $8.72 billion.

Lululemon Athletica (LULU) rallied +6.38% to lead gainers in the Nasdaq 100 index after reporting Q2 adjusted EPS of $2.20, stronger than the consensus of $1.87. The company also raised its 2023 adjusted EPS forecast to $9.75-$9.90 from an earlier forecast of $9.35-$9.50, above the consensus of $9.45.

U.S.-listed Chinese stocks were undercut Friday by a Financial Times report that said Tencent Holdings would sell 100 billion yuan ($14.5) of its stock holdings as it shifts strategy. Baidu (BIDU) on Friday fell -3.07%, JD.com (JD) fell -2.88%, and Alibaba Group Holding (BABA) fell -2.04%.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Friday closed up +21.5 ticks, and the 10-year T-note yield fell -6.0 bp to 3.193%.  Sep T-notes rallied on Friday’s net-dovish U.S. unemployment report, which also featured weaker than expected average hourly earnings.  The markets took a less hawkish view of Fed policy, with the Dec 2023 federal funds futures contract falling by -15 bp on a yield basis.

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