Stock Indexes End Q3 at 1-3/4 Year Lows

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -1.51%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.71%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.73%.

Stocks on Friday gave up an early advance and sold off the remainder of the day, with the S&P 500, the Dow Jones Industrials, and the Nasdaq 100 falling to 1-3/4 year lows.  Hawkish Fed comments Friday pushed T-note yields higher and undercut stocks.  The 10-year T-note yield rose +2.2 bp to 3.808%.

Stocks were also pressured Friday after 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 -12% in Nike Friday undercut apparel makers and weighed on the overall market after Nike reported a surge in inventory and disappointing profitability.  Also, cruise line operators sold off Friday, with Carnival plunging more than -22% after reporting a wider than expected Q3 loss.

Fed comments Friday were on the hawkish side, which pushed T-note yields higher and weighed on stocks.  Fed Vice Chair Brainard 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."

Also, Richmond Fed President Barkin said Fed officials had signaled more interest rate increases, and Fed tightening will persist until inflation eases.  He also said that stopping too early in raising interest rates is a bigger risk than stopping too late.

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%.

Today’s stock movers…

Cruise line operators sold off Friday 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) closed down more than -23% to lead losers in the S&P 500.  Also, Norwegian Cruise Line Holdings (NCLH) closed down by more than -18%, and Royal Caribbean Cruises Ltd (RCL) closed down by more than -13%.

Nike (NKE) closed down more than -12% Friday to lead losers in the Dow Jones Industrials after reporting Q1 gross margins of 44.3%, below the consensus of 45.4%.  Other athletic shoemakers also fell on the news, with Lululemon Athletica (LULU) closing down more than -6% to lead losers in the Nasdaq 100.  In addition, Skechers (SKX) closed down by more than -6%, and Foot Locker (FL) closed down by more than -4%. 

AbbVie (ABBV) closed down more than -5% Friday after SVB Leerink cut its price target on the stock to $135 from $140.

Rising T-note yields Friday undercut technology stocks.  Apple (AAPL) closed down -3%.  Also, Applied Materials (AMAT), ASML Holding NV (ASML), NXP Semiconductors (NXPI), Intuit (INTU), and Texas Instruments (TXN) closed down by more than -2%. 

Charles River Laboratories (CRL) closed up more than +3% Friday 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. 

Generac Holdings (GNRC) closed up more than +2% Friday after Cowen initiated coverage of the stock with a recommendation of outperform and a price target of $229. 

Across the markets…

Dec 10-year T-notes (ZNZ22) on Friday closed down -12.5 ticks, and the 10-year T-note yield rose +2.2 bp to 3.808%.  T-notes Friday erased early gains and turned lower on hawkish comments from Fed Vice Chair Brainard and Richmond Fed President Barkin.  T-notes were also under pressure on Friday’s news that the Aug core PCE deflator, the Fed’s preferred inflation measure, rose more than expected. 

T-note prices Friday morning initially moved higher on a drop in inflation expectations.  The 10-year breakeven inflation rate Thursday dropped to a 1-1/2 year low of 2.096%.   Also, Friday’s economic news showed the University of Michigan’s Sep 5-10 year inflation expectations dropped to a 17-month low of 2.7%.

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