Stocks Upended by Rising Inflation Expectations

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -2.37%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.34%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -3.10%.

Stocks on Friday gave up an early advance and sold off sharply. The S&P 500, Dow Jones Industrials, and the Nasdaq 100 retreated from 1-week highs Friday and moved sharply lower after T-note yields jumped when a gauge of inflation expectations rose more than expected.  Losses in stocks accelerated Friday after the 10-year T-note yield jumped above 4.0% on hawkish comments from San Francisco Fed President Daly, who said she’s “very supportive” of raising interest rates to restrictive levels. The 10-year T-note yield Friday rose by +6.0 bp to 4.004%.

Stocks Friday morning initially moved higher on positive quarterly earnings results from JPMorgan Chase, Wells Fargo, and UnitedHealth Group.  Also, the University of Michigan U.S. Oct consumer sentiment rose more than expected to a 6-month high.

U.S. Sep retail sales were unchanged m/m, weaker than expectations of +0.2% m/m.  However, Sep retail sales ex-autos unexpectedly rose +0.1% m/m, stronger than expectations of -0.1% m/m. 

The U.S. Sep import price index ex-petroleum fell -0.5% m/m, a bigger decline than expectations of -0.4% m/m.

The University of Michigan U.S. Oct consumer sentiment rose +1.2 to a 6-month high of 59.8, stronger than expectations of 58.8. However, the University of Michigan Oct 5-10 year inflation expectations rose to 2.9%, stronger than expectations of 2.8%.

Comments Friday from San Francisco Fed President Daly were hawkish for Fed policy and bearish for stocks when she said, "the most likely outcome" is for the Fed to raise interest rates to between 4.5% and 5.0% and to "hold at that point for some period of time" following a U.S. inflation reading that was "very disappointing."

Today’s stock movers…

Higher T-note yields Friday weighed on technology stocks.  Tesla (TSLA) and Lam Research (LRCX) closed down more than -7%.  Also, Atlassian Corp (TEAM) and Zscaler (ZS) closed down more than -6%.  In addition,  Nvidia (NVDA), ASML Holding NV (ASML), Applied Materials (AMAT), and  Marvel Technology (MRVL) closed down more than -5%.  Finally, Amazon.com (AMZN), KLA Corp (KLAC), and Advanced Micro Devices (AMD) closed down more than -4%.

First Republic Bank (FRC) closed down more than -16% Friday to lead losers in the S&P 500 after reporting Q3 revenue of $1.50 billion, weaker than the consensus of $1.54 billion.

Morgan Stanley (MS) closed down more than -5% Friday after reporting Q3 equities trading revenue of $2.46 billion, weaker than the consensus of $2.69 billion. 

Defense stocks fell Friday after Senator Coons said Congress is likely to halt arms sales to Saudi Arabia, the world’s largest purchaser of U.S. arms.  Also, Northrop Grumman was under pressure Friday after JPMorgan Chase downgraded the stock to neutral from overweight.  As a result, Northrop Grumman (NOC) closed down more than -7%.  Also, Lockheed Martin (LMT) closed down more than -4%, and Huntington Ingalls (HII) Industries closed down more than -4%.  In addition, Raytheon Technologies (RTX) closed down more than -2%.

Fertilizer and grain-handing stocks retreated Friday after Russian President Putin said no further mass strikes on Ukraine were planned “for now.”  As a result, intrepid Potash (IPI) closed down by more than -10%, and Mosaic (MOS) closed down by more than -9%.  Also, CF Industries (CF) closed down more than -8%, and Archer-Daniels-Midland (ADM) closed down more than -6%.

US Bancorp (USB) closed up more than +3% Friday to lead gainers in the S&P 500 after reporting Q3 net revenue of $6.33 billion, higher than the consensus of $6.22 billion.

JPMorgan Chase (JPM) closed up more than +1.6% Friday to lead gainers in the Dow Jones Industrials after reporting Q3 investment banking revenue of $1.71 billion, higher than the consensus of $1.59 billion. 

Delta Air Lines (DAL) closed up more than +2% Friday after Cowen upgraded the stock to outperform from market perform. 

UnitedHealth Group (UNH) closed up more than +0.6% Friday to lead gainers in the Dow Jones Industrials after reporting  Q3 EPS of $5.55, stronger than the consensus of $5.43.  It then raised its full-year adjusted EPS forecast to $31.85-$22.05 from a previous forecast of $21,40-$21.90.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Friday closed down -13.5 ticks, and the 10-year T-note yield rose +6.0 bp to 4.004%.  Dec T-note prices Friday gave up an early rally and moved moderately lower.  T-notes gave up their gains after Friday’s economic news showed the University of Michigan's 5-10 year inflation expectations rose more than expected.  Also, a reversal in UK gilt yields weighed on T-notes after the 10-year UK gilt yield jumped from a 1-week low Friday of 3.896% to 4.335%.  In addition, rising inflation expectations undercut T-notes after the 10-year breakeven inflation rate climbed to a 3-week high Friday at 2.423%.  Finally, comments from San Francisco Fed President Daly weighed on T-notes when she said, "the most likely outcome" is for the Fed to raise interest rates to between 4.5% and 5.0% and to "hold at that point for some period of time." 

T-notes Friday morning initially moved moderately higher after U.S. economic news showed Sep retail sales stagnated and the Sep import price index ex-petroleum fell more than expected.  T-notes recovered from their worst levels Friday after a sell-off in stocks sparked some safe-haven buying of T-notes.

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