Stocks Fade Ahead of Wednesday’s Expected 75 bp Fed Rate Hike

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday fell by -0.41%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.24%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -1.02%.  U.S. stock indexes Tuesday gave up an early rally and turned lower on concern that Tuesday’s stronger-than-expected U.S. job openings and ISM reports may pressure the Fed to maintain its aggressive rate-hike regime.

U.S. stock indexes Tuesday initially opened higher, with the S&P 500 posting a 1-1/2 month high and the Dow Jones Industrials posting a 2-month high on carry-over support from a jump of more than +2% in China’s Shanghai Composite.  Chinese stocks soared Tuesday on speculation China is preparing to phase-out Covid Zero policies, even as China’s Foreign Ministry said it was unaware of such a plan. 

M&A activity Tuesday was a supportive factor for healthcare stocks.  Abiomed surged nearly +50% after Johnson & Johnson said it purchased the company for about $17.3 billion.  Also, Pfizer closed up more than +3%, and IDEXX Laboratories closed up more than +9% after raising their full-year revenue estimates.

The outlook for higher U.S. interest rates is a bearish factor for stocks.  The market has priced in a 100% chance the Fed will raise the federal funds target range by +75 bp on Wednesday after the 2-day FOMC meeting concludes.  The markets will also scour post-meeting comments from Fed Chair Powell for clues about the size of future rate hikes.  After Wednesday’s expected rate hike, the market is fully expecting at least another +50 bp rate hike at the following FOMC meeting in December.

Tuesday’s U.S. economic news was stronger than expected, which may keep the Fed hawkish.  The Sep JOLTS job openings report unexpectedly rose +437,000 to 10.717 million, showing a stronger labor market than expectations of a decline to 9.750 million. Also, the Oct ISM manufacturing index fell -0.7 to a 2-1/2 year low of 50.2, but that was slightly stronger than expectations of 50.0.  In addition, Sep construction spending unexpectedly rose +0.2% m/m, stronger than expectations of a -0.6% m/m decline.

An easing of inflation pressures is supportive for stocks after Tuesday’s Oct U.S. ISM prices-paid subindex unexpectedly fell -5.1 to a 2-1/2 year low of 46.6 versus expectations of an increase to 53.0.

Today’s stock movers…

Catalent (CTLT) closed down more than -24% Tuesday to lead losers in the S&P 500 after reporting Q1 net revenue of $1.02 billion, below the consensus of $1.09 billion and cutting its full-year net revenue forecast to $4.63 billion-$4.88 billion from a prior estimate of $4.98 billion-$5.23 billion. 

Zebra Technologies (ZBRA) closed down more than -15% Tuesday after reporting Q3 net sales of $1.38 billion, weaker than the consensus of $1.48 billion, and forecasting Q4 adjusted EPS of $4.50-$4.80, well below the consensus of $5.16. 

Intuit (INTU) closed down more than -7% Tuesday to lead losers in the Nasdaq 100 after the company said it is pausing all hiring at its Credit Karma unit as it sees “revenue challenges due to the uncertainty of the economic environment.” 

Amazon.com (AMZN) closed down more than -5% at a 2-1/2 year low as it remained under pressure from last Thursday when the company projected the slowest holiday-quarter growth in its history.

Ecolab (ECL) closed down more than -8% Tuesday after reporting Q3 adjusted gross margins of 37.7%, below the consensus of 39.7%. 

Molson Coors Beverage (TAP) closed down more than -3% Tuesday after reporting Q3 Ebitda of $593.5 million, below the consensus of $637.9 million. 

Eli Lilly & Co (LLY) closed down more than -2% Tuesday after cutting its full-year adjusted EPS forecast to $7.70-$7.85 from a prior view of $7.90-$8.05. 

Abiomed (ABMD) closed up nearly +50% Tuesday to lead gainers in the S&P 500 after Johnson & Johnson agreed to buy all of the outstanding shares of the company for an upfront payment of $380 per share in cash plus contingent payments of up to $35 per share if certain clinical and commercial milestones are achieved.

IDEXX Laboratories (IDXX) closed up more than +9% Tuesday to lead gainers in the Nasdaq 100 after reporting Q3 revenue of $842 million, above the consensus of $830.9 million, and raising its full-year revenue estimate to $3.33 billion-$3.37 billion from a previous estimate of $3.31 billion-$3.39 billion.

Hologic (HOLX) closed up more than +9% Tuesday after reporting Q4 adjusted EPS of 82 cents, stronger than the consensus of 63 cents, and forecast full-year adjusted EPS of $3.30-$3.60, the midpoint above the consensus of $3.41.

Pfizer (PFE) closed up more than +3% Tuesday after reporting Q3 revenue of $22.64 billion, stronger than the consensus of $21.12 billion.  Also, Pfizer raised its full-year revenue forecast to $99.5 billion-$102.0 billion from a previous forecast of $98.0 billion-$102.0 billion, above the consensus of $99.73 billion.

U.S. casino stocks with exposure to Macau rallied Tuesday on speculation China is preparing to phase-out Covid Zero policies, even as China’s Foreign Ministry said it was unaware of such a plan.  As a result, Wynn Resorts (WYNN) closed up more than +6%.  Also, Las Vegas Sands (LVS) and MGM Resorts International (MGM) closed up more than +1%. 

Across the markets…

Dec 10-year T-notes (ZNZ22) on Tuesday fell by -0.5 tick, and the 10-year T-note yield rose by +0.8 bp to 4.056%.  T-note prices Tuesday gave up an early advance and settled little changed.  Early Tuesday, T-notes moved higher on positive carry-over from a rally in European government bonds.  However, T-notes gave up all of their gains on stronger-than-expected U.S. job openings and ISM reports. 

An increase in inflation expectations also weighed on T-notes after Tuesday's 10-year breakeven inflation rate rose to a 1-week high of 2.549%.  The T-note market is also on edge as the FOMC is unanimously expected to raise rates by +75 bp on Wednesday and may indicate that its aggressive rate-hike regime will continue unimpeded. 

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