Stocks Erase Early Gains as Bond Yields Climb

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.21%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.43%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.16%.

Stocks on Tuesday settled mixed, with the S&P 500 and the Dow Jones Industrials falling to 1-3/4 year lows.  Stock indexes erased early gains Tuesday and closed mostly lower after hawkish Fed comments pushed the 10-year T-note yield up to a 12-year high of 3.990%.

Stocks found some support on Tuesday’s stronger-than-expected U.S. economic news.  Also, the strength in travel stocks Tuesday was positive for the overall market.

U.S. Aug capital goods new orders nondefense ex-aircraft, a proxy for capital spending, rose +1.3% m/m, stronger than expectations of +0.2% m/m and the biggest increase in 7 months.

The U.S. July S&P CoreLogic composite-20 home price index rose +16.06% y/y, weaker than expectations of +17.05% and the smallest increase in 15 months.

The Conference Board’s Sep U.S. consumer confidence index rose +4.4 to a 5-month high of 108.0, stronger than expectations of 104.6.

U.S. Aug new home sales unexpectedly rose +28.8% m/m to a 5-month high of 685,000, stronger than expectations of a decline to 500,000.

The U.S. Sep Richmond Fed manufacturing survey unexpectedly rose +8 to 0, stronger than expectations of a decline to -10.

St. Louis Fed President Bullard said, "inflation is a serious problem, and we need to be sure we respond to it appropriately.  We have increased the policy rate substantially this year, and more increases are indicated" in the Fed's latest forecasts.

Chicago Fed President Evans said Fed forecasts are not showing "recession-like numbers," and by spring 2023, we can sit and wait on interest rates.

Minneapolis Fed President Kashkari said we must not make the mistake of easing policy prematurely.  "We need to keep tightening policy until we see some compelling evidence that core inflation is actually having peaked and is on its way down."

Goldman Sachs Tuesday downgraded equities to underweight in its global cross-asset allocation for 3+ months, citing downward pressure on valuations and earnings due to rising real yields and the prospects of a recession.  Goldman said, "current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough."

Today’s stock movers…

Real estate stocks and property managers Tuesday retreated for a second day as interest rates continue to rise with expectations of further Fed tightening.  Digital Realty Trust (DRL) closed down more than -3% to lead losers in the S&P 500.  Also, Healthpeak Properties (PEAK) and Realty Income Corp (O) closed down by more than -2%.  In addition, Duke Realty (DRE), Mid-America Apartment Communities (MAA), Vornado Realty Trust (VNO), and Alexandria Real Estate Equities (ARE) closed down by more than -1%.

Keurig Dr. Pepper (KDP) closed down more than -3% Thursday to lead losers in the Nasdaq 100 after Goldman Sachs downgraded the stock to neutral. 

Consumer staple stocks moved lower Tuesday after Oppenheimer said it is cautious about the entire sector due to “prospects for a continued rising interest rate backdrop and still expensive valuations.”  As a result, Kraft Heinz (KHC), Domino’s Pizza (DPZ), Colgate-Palmolive (CL), and Clorox (CLX) closed down by more than -3%.  Also, Proctor & Gamble (PG), Coca-Cola (KO), International Flavors & Fragrances (IFF), and JM Smucker (SJM) closed down by more than -2%.

Fertilizer stocks rallied Tuesday on concern that Hurricane Ian will curb phosphate production in Florida, the main source of phosphate rock in the U.S.  CF Industries Holdings (CF) closed up more than +6% Tuesday to lead gainers in the S&P 500.  Also, Mosaic (MOS) and Intrepid Potash (IPI) closed up more than +4%.

Travel stocks pushed higher Tuesday, helped by global reopening, the easing of pandemic-related travel restrictions, and a broader market rebound.  Norwegian Cruise Line Holdings (NCLH) closed up more than +4%.  Also, Royal Caribbean Cruises (RCL), Carnival (CCL), and  American Airlines Group (AAL) closed up more than +3%.  In addition, United Airlines Holdings (UAL) and Expedia Group (EXPE) closed up more than +2%. 

Tesla (TSLA) closed up more than +2% Tuesday after Electrek reported that Tesla management, in an email to employees, said the company would be delivering a “very high volume of vehicles to customers during the final days” of the third quarter. 

Lucid Group (LCID) closed up more than +2% Tuesday after Cantor Fitzgerald initiated coverage on the stock with an overweight rating and a price target of $23.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Tuesday closed down -15 ticks, and the 10-year T-note yield rose +3.3 bp to 3.957%.  Dec T-notes Tuesday fell to a nearly 15-year nearest-futures low, and the 10-year T-note yield soared to a 12-year high of 3.990%.

A surge in European government bond yields Tuesday undercut T-note prices after the 10-year UK gilt yield Tuesday rose to a nearly 14-year high of 4.537%, and the 10-year German bund yield rose to a 10-year high of 2.254%.  Also, stronger-than-expected U.S. economic news weighed on T-notes. 

T-note losses accelerated Tuesday on hawkish comments from Minneapolis Fed President Kashkari, St. Louis Fed President Bullard, and Chicago Fed President Evans.  In addition, T-note prices fell to their lows Tuesday afternoon on weak demand for the Treasury’s $44 billion 5-year T-note auction with a bid-to-cover ratio of 2.27, weaker than the 10-auction average of 2.42 and the lowest in 1-1/2 years.

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