Stocks Slightly Lower as Solid U.S. Economic News Keeps Aggressive Fed in Play

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.20%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.08%.

Stocks on Wednesday rebounded from sharp early losses and closed only slightly lower.  Stocks recovered most of their losses Wednesday afternoon after a large derivative trade sparked short covering in stock index futures.  The derivative trade involved the buying of more than 20,000 SPX Oct and Mar calls versus the selling of Jan calls.  Wells Fargo said dealers who took the other side of the derivative trade bought a large amount of stock index futures to offset their risk, which fueled stop-loss buying, and stock prices recovered. 

Stock indexes Wednesday morning initially retreated after stronger than expected U.S. economic news on Sep ADP employment change and Sep ISM services index pushed T-note yields sharply higher and dampened optimism that the Fed will pivot to a more dovish policy.  The 10-year T-note yield rose +11.6 bp Wednesday to 3.749%.

Stocks were also under early pressure Wednesday after Citigroup sent a note to clients late Tuesday saying, "we are still in the early stage of positioning for recession," and there's "more downside risk for the market and the earnings season.”

The U.S. Sep ADP employment change rose +208,000, stronger than expectations of +200,000.  Also, the Aug ADP employment change was revised upward to +185,000 from the previous reported +132,000.

The U.S. Aug trade deficit shrank to -$67.4 billion from a revised -$70.5 billion in July, narrower than expectations of -$67.7 billion and the smallest deficit in 15 months.

The U.S. Sep ISM services index fell -0.2 to 56.7, stronger than expectations of 56.0.

Comments Wednesday from San Francisco Fed President Daly were hawkish for Fed policy and bearish for stocks when she said the Fed is "resolute" in raising interest rates to curb inflation.  She added that market anticipation of interest rate cuts next year is "misplaced," as the Fed aims to keep policy tight to secure 2% inflation.

Today’s stock movers…

Money center banks were under pressure Wednesday after Atlantic Equities downgraded Goldman Sachs to underweight from neutral and downgraded Morgan Stanley to neutral from overweight.  JPMorgan Chase (JPM) closed down more than -2% to lead losers in the Dow Jones Industrials.  Also, Goldman Sachs (GS) and Morgan Stanley (MS) closed down by more than -1%.

Lumen Technologies (LUMN) closed down more than -9% Wednesday to lead losers in the S&P 500 after the company’s long-term credit rating was downgraded by S&P to BB- from BB, and Wells Fargo cut its recommendation on the stock to equal weight from overweight.

Tesla (TSLA) closed down more than -3% Wednesday on negative carry-over from Monday when the company reported fewer vehicles delivered in Q3.  Tesla was also under pressure Wednesday on concern that CEO Musk’s plan to go ahead with his purchase of Twitter may require him to sell shares of Tesla to help finance the deal. 

A rally in WTI crude oil Wednesday to a 2-1/2 week high underpinned energy stock and energy service providers. Schlumberger (SLB) closed up more than +6%.  Also, Halliburton (HAL) and APA Corp (APA) closed up more than +3%.  In addition, Devon Energy (DVN), Phillips 66 (PSX), Marathon Oil (MRO), Occidental Petroleum (OXY), Baker Hughes (BKR), and Diamondback Energy (FANG) closed up more than +2%. 

Nike (NKE) closed up more than +2% Wednesday to lead gainers in the Dow Jones Industrials after Chinese state media reported that the Beijing marathon would be held on November 6.  The marathon will be one of the largest public events in China since last February’s Olympics and a sign of easing pandemic restrictions in China that have hurt consumer demand.

Exxon Mobil (XOM) closed up more than +4% Wednesday after the company said it expects a positive impact from natural gas prices of up to $2.2 billion in Q3, which prompted Citigroup to say the company’s Q3 guidance implies a quarterly result beat when it reports earnings later this month.

Lamb Weston Holdings (LW) closed up more than +4% Wednesday after reporting Q1 adjusted EPS of 75 cents, stronger than the consensus of 50 cents.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Wednesday closed down -31 ticks, and the 10-year T-note yield rose +11.6 bp to 3.749%.  T-notes on Tuesday fell moderately after stronger-than-expected U.S. economic news on Sep ADP employment and Sep ISM services dampened speculation that the Fed will pivot to a more dovish policy.  Also, higher European government bond yields Wednesday undercut T-note prices.   

T-note prices remained under pressure Wednesday on hawkish comments from San Francisco Fed President Daly, who said market anticipation of interest rate cuts next year is "misplaced," as the Fed aims to keep policy tight to secure 2% inflation.

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