Stocks Fall on Hawkish Fed Rhetoric and Higher Bond Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) this morning is down -2.38%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.87%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -2.98%. 

Stocks this morning are sharply lower, with the Nasdaq 10 falling to a 3-1/4 month low.  Hawkish Fed comments, record-high inflation in Europe, and stronger-than-expected U.S. economic news pushed T-note yields higher today and weighed on stocks.  The 10-year German bund yield is up +11.7 bp at 2.237%, and the 10-year T-note yield is up +5.6 bp at 3.788%.

Weakness in technology stocks is also weighing on U.S. stock index futures today, with Apple down by more than -4% today after Bank of America Global Research downgraded the stock to neutral from buy. 

St. Louis Fed President Bullard said the Fed expects to tighten policy further in the coming months, and the markets have understood that.  He added, "if you look at the Fed's dot plot, it does look like the FOMC is expecting a fair amount of additional moves this year.  I think that was digested by markets and does seem to be the right interpretation."

Cleveland Fed President Mester said it appears that U.S. labor demand is still outpacing supply, and interest rates are still not in restrictive territory.  She added that "real interest rates, judged by the expectations over the next year of inflation, have to be in positive territory and held there for a time."

U.S. weekly initial unemployment claims unexpectedly fell -16,000 to a 5-month low of 193,000, showing a stronger labor market than expectations of an increase to 215,000.

U.S. Q2 GDP was left unrevised at -0.6% (q/q annualized).  Q2 personal consumption was revised upward to +2.0% from +1.5%, and the Q2 core PCE deflator was revised upward to +4.7% q/q from 4.4% q/q.

Today’s stock movers…

CarMax (KMX) is down more than -21% today to lead losers in the S&P 500 after reporting Q2 net sales and operating revenue of $8.14 billion, well below the consensus of $8.56 billion.  The weak CarMax earnings also hammered automakers, with General Motors (GM) and Ford Motor (F) down more than -5%.  Also, Lucid Group (LCID) is down more than -5% to lead losers in the Nasdaq 100, and Tesla (TSLA) is down more than -4%.  The weaker outlook for auto sales, sparked by higher auto loan rates and doubts about consumer spending, has negative implications for the overall U.S. economy.

Apple (AAPL) is down more than -4% today to lead losers in the Dow Jones Industrials after Bank of America Global Research downgraded the stock to neutral from buy. 

Rising T-note yields today are undercutting technology stocks.  Advanced Micro Devices (AMD), Atlassian Corp Plc (TEAM), Nvidia (NVDA), and NXP Semiconductors NV (NXPI) are down more than -4%.  Also, Alphabet (GOOGL), Amazon.com (AMZN), Qualcomm (QCOM), Meta Platforms (META), Lam Research (LRCX), and Marvel Technology (MRVL) are down more than -3%. 

Cruise operators are tumbling today after Hurricane Ian forced ports in Florida to close and cruise operators to cancel departures.  Royal Caribbean Cruises Ltd (RCL) is down more than -5%.  Also, 

Carnival (CCL) and Norwegian Cruise Line Holdings (NCLH) are down more than -4%. 

Across the markets…

Dec 10-year T-notes (ZNZ22) today are down -23 ticks, and the 10-year T-note yield is up +5.6 bp at 3.788%.  Inflation concerns in Europe have pushed up German bund yields and undercut T-note prices. Also, today’s unexpected decline in U.S. weekly jobless claims to a 5-month low was hawkish for Fed policy and T-notes.  In addition, hawkish comments today from Cleveland Fed President Mester pressured T-notes when she said U.S. labor demand is still outpacing supply and interest rates are still not in restrictive territory.

The dollar index (DXY00) this morning is up +0.24% and is moderately below Wednesday’s 20-year high.  A jump in T-note yields today is supporting the dollar.  Also, weakness in stocks today has boosted the liquidity demand for the dollar.  The dollar remained moderately higher today on hawkish Fed comments and stronger-than-expected U.S. unemployment claims news.

EUR/USD (^EURUSD) today up +0.02%.  EUR/USD today recovered from overnight losses and is little changed.  The euro found support today on hawkish ECB comments that signal most policymakers favor a +75 bp rate hike at the October ECB meeting.  Also, record high German consumer prices boosted German bund yields, strengthening the euro’s interest rate differentials.  EUR/USD today initially posted moderate losses after a gauge of Eurozone economic confidence fell to a 1-3/4 year low and after Germany's leading research institutes cut their 2022 and 2023 German GDP forecasts.   

Hawkish ECB comments today were bullish for the euro.  ECB Governing Council member Rehn said the ECB needs a "significant" rate increase at its meeting in October as small rate hike steps "aren't enough" in the current situation.  Also, ECB Governing Council member Simkus said he "wouldn't be surprised to see even higher inflation for September for the Eurozone," and a "75 bp rate hike" would be his choice for the ECB's October meeting.

Eurozone Sep economic confidence fell -3.6 to a 1-3/4 year low of 93.7, weaker than expectations of 95.0.

German Sep CPI (EU harmonized) rose a record +10.9% y/y, stronger than expectations of +10.2% y/y.

Germany's leading research institutes cut their German 2022 GDP forecast to 1.4% from an April forecast of 2.7% and cut their German 2023 GDP forecast to -0.4% contraction from an April forecast of a 3.1% expansion, due to the drastic increase in energy costs.

USD/JPY (^USDJPY) today is up +0.29%.  The yen is posting moderate losses today on higher T-note yields. The yen is also under pressure today on concern the BOJ may ramp up its bond purchase after Mizuho Securities said the BOJ is likely to raise its purchase amounts of super-long bonds in the October-December quarter when it announces the plan Friday. 

October gold (GCV2) is down -6.7 (-0.41%), and December silver (SIZ22) is down -0.125 (-0.66%).  Precious metals this morning are moderately lower.  The strength of the dollar today is undercutting gold and silver prices. Gold is also under pressure today from higher global bond yields.  Also, continued fund liquidation of gold is bearish for prices as long positions in gold ETF’s dropped to a 2-1/4 year low Wednesday.  Losses in gold were limited after today’s economic news showed German Sep CPI jumped to a record high, which boosted demand for gold as an inflation hedge. 

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