Stocks Mixed Ahead of FOMC Meeting

What you need to know…

The S&P 500 Index ($SPX) (SPY) this morning is down -0.12%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.11%. 

Stocks this morning are mixed.  Rising bond yields are bearish for technology stocks after the 10-year T-note today rose to an 11-year high of 3.516%.  Also, losses in drug makers and pharmaceutical stocks are negatively affecting the overall market.  However, a slide in crude oil prices to a 1-week low is boosting airline stocks. Also, homebuilders are climbing today after KeyBanc Capital Markets upgraded the sector to overweight from underweight. 

Market expectations are for the FOMC on Wednesday to raise its federal funds target range by +75 bp for the third consecutive meeting. 

Today’s U.S. economic news was bearish for stocks after the U.S. Sep NAHB housing market index fell -3 to a 2-1/4 year low of 46, weaker than expectations of 47.  The report illustrated reduced confidence among U.S. homebuilders.

Morgan Stanley said today that the headwinds for profitability are building and revisions to U.S. corporate earnings "are often glacial" amid dependence on corporate guidance.  There is still a long way to go “before reality is priced in."

Today’s stock movers…

Technology stocks are falling today after the 10-year T-note yield climbed to an 11-year high.  Dexcom (DXCM) and Align Technology (ALGN) are down more than -4%.  Illumina (ILMN) is down more than -3%, and Zoom Video Communications (ZM) is down more than -2%.  Adobe (ADBE), Atlassian Corp Plc (TEAM), and Okta (OKTA) are down more than -1%. 

Drug makers and pharmaceutical companies are under pressure today.  Moderna (MRNA) is down more than -7% today to lead losers in the S&P 500 and Nasdaq 100.  Also, Vertex Pharmaceuticals (VRTX) is down more than -3%.  Eli Lilly (LLY), Bristol-Meyers Squibb (BMY), Pfizer (PFE), West Pharmaceutical Services (WST), and Regeneron Pharmaceuticals (REGN) are down more than -2%.  Merck & Co (MRK) is down more than -1% to lead losers in the Dow Jones Industrials. 

Take-Two Interactive (TTWO) is down nearly -2% today after a hacker published pre-released footage from the development of the upcoming Grand Theft Auto VI video game. 

Homebuilders are climbing today after KeyBanc Capital Markets upgraded the sector to overweight from underweight.  Lennar (LEN) and PulteGroup (PHM) are all up more than +3%.  Also, DR Horton (DHI) and Toll Brothers (TOL) are up more than +2%. 

Airline stocks are moving higher today after crude prices dropped to a 1-week low, which reduces jet fuel costs and may boost corporate profits.  American Airlines Group (AAL), United Airlines Holdings (UAL), Southwest Airlines (LUV), and Alaska Air Group (ALK) are all up more than +2%.

Array Technologies (ARRY) is up more than +3% today after Piper Sandler upgraded the stock to overweight from neutral. 

Across the markets…

Dec 10-year T-notes (ZNZ22) today are down -11 ticks, and the 10-year T-note yield is up +3.7 bp at 3.487%.  Dec T-notes this morning dropped to a new 3-month low, and the 10-year T-note yield rose to an 11-year high of 3.516%.  T-notes are under pressure ahead of the 2-day FOMC meeting that begins on Tuesday. Technical selling in T-notes accelerated today after the 10-year yield rose above 3.50%.  T-notes recovered from their worst levels this morning after the 10-year breakeven inflation expectations rate fell to a 1-1/2 month low of 2.354%.  The markets have fully priced a +75 bp rate hike at this week’s FOMC meeting.

The dollar index (DXY00) this morning is up +0.25% and is just below last Friday’s 1-week high.  A jump in T-note yields today to an 11-year high is supporting the dollar.  Also, a slump in stocks today has boosted liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down -0.37% at a 1-week low.  A stronger dollar today is weighing on the euro. Also, the euro is being undercut by economic concerns after the Bundesbank said today that “there are increasing signs of a recession of the German economy.”  Energy crisis concerns eased today, and limited losses in EUR/USD, after European nat-gas prices fell to a 1-3/4 month.

ECB Vice President Guindos said, "the economic slowdown in the Eurozone will not reduce inflation by itself.  Monetary policy needs to contribute to ease inflation."

ECB Governing Council member and Bundesbank President Nagel said, "we are far away from interest rates that are at a level that is appropriate given the state of inflation.  We're still a good way off" from the neutral rate. 

In its monthly report today, the Bundesbank said, "there are increasing signs of a recession of the German economy in the sense of a clear, broad-based and longer-lasting decline in economic output."  The Bundesbank also said it sees a "noticeable" contraction in the winter months and that headline inflation could even enter a double-digit range.

Eurozone July construction output rose +0.3% m/m, the first increase in 5 months.

USD/JPY (^USDJPY) today is up +0.38%.  Higher T-note yields are weighing on the yen today after the 10-year T-note yield climbed to an 11-year high.  However, losses in the yen were limited by some short covering ahead of Thursday’s BOJ meeting results.  Trading activity in the yen is subdued today, with Japan closed for a holiday. 

October gold (GCV2) is down -9.7 (-0.58%), and December silver (SIZ22) is down -0.026 (-0.14%).  Precious metals this morning are moderately lower.  A stronger dollar today is weighing on metals prices.  Gold is also under pressure after the 10-year T-note yield rose to an 11-year high.  Fund liquidation of gold is another bearish factor for prices as long positions in gold ETF’s dropped to a 7-3/4 month low last Friday.  The outlook for the Fed and BOE to raise interest rates is negative for metals prices. 

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