Stocks Modestly Higher on Lower T-note Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) this morning is up +0.40%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.04%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.67%. 

Stocks this morning are modestly higher.  A fall in T-note yields today is boosting technology stocks, with the 10-year T-note yield down -4.8 bp at 3.738%.  Stocks are also receiving a lift from a decline in the University of Michigan’s Sep 5-10 year inflation expectations to a 17-month low of 2.7%.

However, this morning’s U.S. economic news showed August personal spending and inflation data topped expectations, bolstering inflation concerns and strengthening the likelihood for the Fed to maintain its aggressive monetary tightening campaign. 

A slump of more than -10% in Nike today is undercutting apparel makers and weighing on the overall market after Nike reported a surge in inventory and disappointing profitability.  Also, cruise line operators are sinking today, with Carnival plunging more than -19% after reporting a wider than expected Q3 loss.

U.S. Aug personal spending rose +0.4% m/m, stronger than expectations of +0.2% m/m.  Aug personal income rose +0.3% m/m, right on expectations. 

The U.S. Aug PCE core deflator rose +0.6% m/m and +4.9% y/y, stronger than expectations of +0.5% m/m and +4.7% y/y.

The U.S. Sep MNI Chicago PMI fell -6.5 to 45.7, weaker than expectations of 51.8 and the weakest level in 2-1/4 years.

The University of Michigan’s U.S. Sep consumer sentiment index was revised downward by -0.9 points to 58.6 from the previously reported 59.5.  Also, the 5-10 year inflation expectations were revised lower by -0.1 to a 17-month low of 2.7% from the previously reported 2.8%.

Comments today from Fed Vice Chair Brainard were hawkish for monetary policy and bearish for stocks when she said, "monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target.  For these reasons, we are committed to avoiding pulling back prematurely."

Today’s stock movers…

Cruise operators are sinking today after Carnival reported a Q3 adjusted net loss of $688 million, much worse than the consensus of a $363.4 million loss.  As a result, Carnival (CCL) is down more than -19% to lead losers in the S&P 500.  Also, Norwegian Cruise Line Holdings (NCLH) is down more than -13%, and  Royal Caribbean Cruises Ltd (RCL) is down more than -10%.

Nike (NKE) is down more than -10% today to lead losers in the Dow Jones Industrials after reporting Q1 gross margins of 44.3%, below the consensus of 45.4%.  Other athletic shoe makers also fell on the news, with Lululemon Athletica (LULU) down more than -5% to lead losers in the Nasdaq 100. In addition, Foot Locker (FL) and Skechers (SKX) are down more than -3%.

AbbVie (ABBV) is down more than -4% today after SVB Leerink cut its price target on the stock to $135 from $140.

Charles River Laboratories (CRL) is up more than +7% to lead gainers in the S&P 500 after Jeffries upgraded the stock to buy from hold, saying that pricing escalation at one of its units should continue. 

Micron (MU) is up more than +2% today after Summit Insights Group upgraded the stock to buy from hold, predicting dynamics in the memory chips (DRAM) industry to improve “once channel inventory correction is completed by the first half of 2023.” 

Generac Holdings (GNRC) is up more than +3% today after Cowen initiated coverage of the stock with a recommendation of outperform and a price target of $229.

Meta Platforms (META) is up more than +2% today after CEO and owner Zuckerberg said his company would freeze hiring and restructure some teams to cut costs and shift priorities. 

Across the markets…

Dec 10-year T-notes (ZNZ22) today are up +3 ticks, and the 10-year T-note yield is down -4.8 bp at 3.738%. Lower European government bond yields today are providing carry-over support to T-note prices.  Also, a drop in inflation expectations is supportive for T-notes after the 10-year breakeven inflation expectations rate dropped to a 1-1/2 year low today at 2.096%.  However, gains in T-notes were contained by news that the Aug core PCE deflator, the Fed’s preferred inflation measure, rose more than expected. 

The dollar index (DXY00) this morning is up +0.25%.   Weakness in stocks today has boosted the liquidity demand for the dollar.  Also, hawkish comments from Vice Chair Brainard boosted the dollar when she said the Fed needs to “be restrictive for some time.” In addition, record-high inflation in the Eurozone is undercutting the euro to the benefit of the dollar. 

EUR/USD (^EURUSD) today is down -0.41%.  Dollar strength today is weighing on EUR/USD along with lower European government bond yields.  The 10-year German bund yield is down -9.6 bp at 2.085%, which weakens the euro’s interest rate differentials.  In addition, soaring European consumer prices are bearish for EUR/USD after today’s economic news showed the Eurozone Sep CPI rose a record +10.0% y/y. 

The Eurozone Sep CPI rose a record +10.0% y/y, stronger than expectations of +9.7% y/y.  The Eurozone Sep core CPI rose a record  +4.8% y/y, stronger than expectations of +4.7% y/y.

USD/JPY (^USDJPY) today is up +0.02%.  The yen today is slightly lower.  The yen was undercut after the BOJ bought 550 billion yen ($3.8 billion) of 5 to 10-year JGBs in a regular operation today, above expectations of 500 billion yen.  Also, the BOJ said it would step up its bond buying in the coming quarter to cap upward pressure on bond yields.  However, losses in the yen were limited by lower T-note yields.

October gold (GCV2) is up +9.8 (+0.59%), and December silver (SIZ22) is up +0.438 (+2.34%).  Precious metals this morning are moderately higher.  Lower global bond yields today are supporting gains in gold.  Also, global inflation concerns are boosting demand for gold as an inflation hedge after Eurozone Sep CPI rose to a record +10.0% y/y and the U.S. Aug core PCE deflator rose more than expected.  Continued fund liquidation of gold limited gains in gold prices as long positions in gold ETF’s dropped to a 2-1/4 year low Thursday. 

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