Stocks Falter as Fed Officials Remain Hawkish

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -2.11%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.54%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -2.86%.

Stocks on Thursday closed sharply lower, with the S&P 500 falling to a 1-3/4 year low and the Nasdaq 100 dropping to a 3-1/2 month low.  Stocks fell on higher T-note yields, which were caused by hawkish Fed comments, record-high inflation in Europe, and stronger-than-expected U.S. economic news.  The 10-year German bund yield rose +6.1 bp to 2.181%, and the 10-year T-note yield rose +2.6 bp to 3.757%.

Thursday's weakness in technology stocks also weighed on U.S. stock index futures, with Apple closing down by more than -5% 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) closed down more than -24% Thursday 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) closing down by more than -5%. Also, Tesla (TSLA) closed down more than -6% to lead losers in the Nasdaq 100, and Lucid Group (LCID) closed down more than -6%.  The weaker outlook for auto sales, sparked by higher auto loan rates and doubts about consumer spending, had negative implications for the overall U.S. economy.

Apple (AAPL) closed down more than -4% Thursday after Bank of America Global Research downgraded the stock to neutral from buy. 

Rising T-note yields Thursday undercut technology stocks.  Advanced Micro Devices (AMD) closed down by more than -6%.  Also, Nvidia (NVDA) closed down by more than -4%.  In addition, Broadcom (AVGO), Qualcomm (QCOM), Meta Platforms (META), Illumina (ILMN), NXP Semiconductors (NXPI), and Marvel Technology (MRVL) closed down by more than -3%. 

Cruise operators retreated Thursday after Hurricane Ian forced ports in Florida to close and cruise operators to cancel departures.  Royal Caribbean Cruises Ltd (RCL) closed down by more than -7%.  Also,

Carnival (CCL) closed down more than -6%, and Norwegian Cruise Line Holdings (NCLH) closed down more than -5%. 

DXC Technology (DXC) closed up by more than +2% Thursday after a StreetInsider.com report said that the takeover price discussed for the company is around $45 per share.   Bloomberg reported last week that DXC Technology had been approached by at least one private equity firm on takeover interest.

Occidental Petroleum (OXY) closed up more than +1% Thursday after a regulatory filing showed Berkshire Hathaway purchased about 5.99 million shares of the stock from September 26 to 28.  Berkshire Hathaway is the top holder of Occidental Petroleum stock.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Thursday closed down -13 ticks, and the 10-year T-note yield rose +2.6 bp to 3.757%.  Inflation concerns in Europe Thursday pushed up German bund yields and undercut T-note prices after German Sep CPI rose more than expected to a record high +10.9% y/y.  Also, Thursday’s unexpected decline in U.S. weekly jobless claims to a 5-month low was hawkish for Fed policy and T-note prices.  In addition, hawkish Fed comments Thursday from Cleveland Fed President Mester and St. Louis Fed President Bullard pressured T-notes.

T-note prices Thursday recovered from their worst levels after the S&P 500 tumbled to a 1-3/4 year low, which boosted safe-haven demand for T-notes.  Also, a slump in inflation expectations was bullish for T-notes after the 10-year breakeven inflation rate Thursday dropped to a 1-1/2 year low of 2.176%. 

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