Rising T-Note Yields Weigh on Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) this morning is down -0.79%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.71%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.27%. 

Stocks this morning are moderately lower.  Rising T-note yields are weighing on technology stocks after the 10-year T-note yield rose to a 2-1/2 month high today of 3.349%.  Also, semiconductor stocks are under pressure today after monthly sales data from the Semiconductor Industry Association showed weakness in memory-related products in July. 

Today’s U.S. economic news was hawkish for Fed policy and pushed T-note yields higher.  The Aug ISM services index unexpectedly rose +0.2 to a 4-month high of 56.9, stronger than expectations of a decline to 55.3.

Morgan Stanley today said they expect S&P 500 company earnings to fall 3% in 2023, even in the absence of a recession.  Also, Morgan Stanley said, “the next several quarters will end up containing some of the most significant downward revisions to forward EPS forecasts we have seen in the past several cycles.”  In addition, Morgan Stanley predicts “the lows for this bear market will likely arrive in Q4,” and the S&P 500 will fall to at least 3,400, about 13% below current levels, and could fall to 3,000 in the event of a recession.

Today’s stock movers…

Weakness in bank stocks today is weighing on the overall market.  Morgan Stanley (MS) and SVB Financial Group (SIVB) are down more than -3%.  Also, Goldman Sachs (GS),  Fifth Third Bank (FITB), and Huntington Bancshares (HBAN) are down more than -2%.

Semiconductor chip stocks are falling today after monthly sales data from the Semiconductor Industry Association showed weakness in memory-related products in July with “below-seasonal sales across the board.”  As a result, align Technology (ALGN) and Palo Alto Networks (PANW) are down more than -3%.  Intel (INTC) is down more than -2% to lead losers in the Dow Jones Industrials.  Micron Technology (MU), Advance Micro Devices (AMD), Applied Materials (AMAT), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) are down more than -1%.

U.S.-listed Chinese stocks are showing weakness today after China imposes lockdowns in more cities due to an increase of Covid cases, which will slow economic activity. Pinduoduo (PDD) is down more than -7% to lead losers in the Nasdaq 100. Also, Alibaba Group Holding (BABA), JD.com (JD), and Baidu (BIDU) are down more than -3%. 

Discover Financial Services (DFS) is down more than -3% today after JPMorgan Chase downgraded the stock to neutral from overweight.

Rollins (ROL) is up more than +4% today to lead gainers in the S&P 500 after RBC Capital Markets raised its recommendation on the stock to outperform from sector perform. 

Illumina (ILMN) is up more than +4% today to lead gainers in the Nasdaq 100 after the European Union voted against Illumina’s acquisition of Grail Inc, a decision that makes a divestiture more likely.

NextEra Energy (NEE) is up more than +3% today after Morgan Stanley named the stock its top pick in the renewable energy sector.

Across the markets…

Dec 10-year T-notes (ZNZ22) today are down -20 ticks, and the 10-year T-note yield is up +9.7 bp at 3.286%.  A rally in stocks this morning is weighing on T-note prices.  Also, negative carry-over from a surge in UK gilt yields is undercutting T-note prices after the 10-year UK gilt yield jumped to an 8-1/2 year high today at 3.038%.

The dollar index (DXY00) this morning is up +0.63% and posted a new 20-year high.  Higher T-note yields today are supporting gains in the dollar.  Also, the dollar has support from a decline in the Chinese yuan to a 2-year low today against the dollar and a plunge in the Japanese yen to a 24-year low against the dollar.

EUR/USD (^EURUSD) today is down -0.35%.  The euro today is moderately lower and just above Monday’s 20-year low.  Weaker-than-expected Eurozone economic data today and dovish comments from several ECB policymakers are weighing on EUR/USD.  A supportive factor for the euro was an easing of energy crisis concerns, with the price of European nat-gas down more than -8% today. 

Eurozone economic news today was bearish EUR/USD.  German July factory orders fell -1.1% m/m, weaker than expectations of -0.7% m/m, and the sixth consecutive month that orders have declined.  Also, the German Aug S&P Global construction PMI fell -1.1 to 42.6, the steepest pace of contraction in 1-1/2 years.

Comments today from several ECB policymakers were dovish for ECB policy and bearish for EUR/USD.  ECB Governing Council member Kazaks said the ECB might slow the pace of interest rate increases if a deep recession dampens inflation.  Also, ECB Governing Council member Centeno said the ECB's inflation goal might be achieved with a slow normalization of monetary policy.  In addition, ECB Governing Council member Stournaras said Eurozone inflation is close to its peak and will start a steady deceleration.

USD/JPY (^USDJPY) today is up +1.31%.  The yen today tumbled to a fresh 24-year low against the dollar. Higher T-note yields today are undercutting the yen along with divergent central bank policies as the Fed is in the middle of a rate-hike cycle while the BOJ is maintaining QE and record low-interest rates.  

Weaker-than-expected Japanese economic reports today were bearish for the yen.  Japan July household spending rose +3.4% y/y, weaker than expectations of +4.6% y/y.  Also, Japan July real cash earnings fell -1.3% y/y, weaker than expectations of -1.2% y/y.

October gold (GCV22) is down -3.9 (-0.23%), and September silver (SIU22) is up +0.239 (+1.34%).  Precious metals this morning are mixed.  A rally in the dollar today to a new 20-year high is bearish for metals prices.  Also, higher global bond yields are negative for gold prices.  Gold is also suffering from continued long liquidation pressure after long gold positions in ETFs fell to a 6-1/2 month low Monday.  Silver prices rose today after the U.S. Aug ISM services index unexpectedly rose to a 4-month high, a bullish factor for industrial metals demand. 

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