Stocks Close Moderately Lower as Hawkish Fed Comments Boost Bond Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.31%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.02%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.19%. 

Stock indexes on Thursday closed moderately lower, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 Stock Index falling to 1-week lows. 

Rising bond yields Thursday weighed on stocks.  Comments from St. Louis Fed President Bullard and Minneapolis Fed President Kashkari helped push the 10-year T-note yield up +8.1 bp to 3.771%.  Bullard said interest rates might need to rise to 5% to 7% to attain a sufficiently restrictive level.  Even the mention of a 7% federal funds rate spooked the markets.

St. Louis Fed President Bullard said, "thus far, the change in the monetary-policy stance appears to have had only limited effects on observed inflation and to attain a sufficiently restrictive level, the policy rate will need to be increased further" to between 5% and 7%. Minneapolis Fed President Kashkari said he's not seeing much evidence of underlying demand cooling and that the Fed is "not there yet" on ending its progression of interest rate hikes.

Stock losses were limited Thursday on better-than-expected quarterly earnings results from Cisco Systems, Nvidia, Copart, and Macy’s. However, U.S. economic news Thursday was mixed for stocks.

Thursday’s economic news showing an unexpected decline in weekly jobless claims was hawkish for Fed policy.  U.S. weekly initial unemployment claims unexpectedly fell -4,000 to 222,000, showing a stronger labor market than expectations of an increase to 228,000.

U.S. Oct housing starts fell -4.2% m/m to 1.425 million, stronger than expectations of 1.410 million.  Oct building permits, a proxy for future construction, fell -2.4% m/m to a 2-year low of 1.526 million, although that was stronger than expectations of 1.514 million. 

The U.S. Nov Philadelphia Fed business outlook survey unexpectedly fell -10.7 to a 2-1/2 year low of -19.4, weaker than expectations of an increase to -6.0.

Today’s stock movers…

A jump in T-note yields Thursday weighed on technology stocks.  Atlassian Corp (TEAM) closed down more than -5% to lead losers in the Nasdaq 100.  Also, DocuSign (DOCU) closed down by more than -4%.  In addition, Netflix (NFLX), Align Technology (ALGN), Splunk (SPLK), Autodesk (ADSK), Illumina (ILMN), and Crowdstrike Holdings (CRWD) closed down more than -3%.  Finally, Amazon.com (AMZN), Tesla (TSLA), Intuit (INTU), and Okta (OKTA) closed down more than -2%. 

Cruise line operators fell back Thursday after Credit Suisse double-downgraded Norwegian Cruise Line Holdings stock to underperform from outperform. As a result, Norwegian Cruise Line Holdings (NCLH) closed down more than -6%.  Also,Royal Caribbean Cruises Ltd (RCL) closed down by more than -3%, and Carnival (CCL) closed down by more than -1%. 

Homebuilders were under pressure Thursday on a jump in bond yields and after U.S. Oct building permits fell to a 2-year low. As a result, PulteGroup (PHM),Toll Brothers (TOL), Lennar (LEN), and DR Horton (DHI) closed down more than -1%. 

Salesforce (CRM) closed down more than -3% to lead losers in the Dow Jones Industrials after Monness, Crespi, Hardt & Co downgraded the stock to neutral from buy.

Advanced Auto Parts (AAP) closed down more than -5% after Citigroup downgraded the stock to neutral from buy. 

Principal Financial Group (PFG) closed down more than -3% after Morgan Stanley downgraded the stock to underweight from equal weight.

Bath & Body Works (BBWI) closed up more than +24% Thursday to lead gainers in the S&P 500 after reporting Q3 net sales of $1.60 billion, above the consensus of $1.56 billion and raising its full-year EPS from continuing operations estimate to $3.00-$3.20 from a previous estimate of $2.70-$3.00, higher than the consensus of $2.95.

Cisco Systems (CSCO) closed up more than +4% to lead gainers in the Dow Jones Industrials after reporting Q1 revenue of $13.63 billion, better than the consensus of $13.31 billion and raising its full-year revenue forecast to up +4.5% to +6.5% from a prior estimate of up +4.0% to +6.0%. 

Macy’s (M) closed up more than +15% after reporting Q3 adjusted EPS of 52 cents, well above the consensus of 19 cents, and raising its full-year adjusted EPS estimate to $4.07-$4.27 from a previous estimate of $4.00-$4.20, higher than the consensus of $4.09.

Hasbro (HAS) closed up more than +4% after confirming that it has authorized a sale process for the part of its eOneTV and film business, not directly supporting the company’s Branded Entertainment strategy.

Copart (CPRT) closed up more than +3% after reporting Q1 revenue of $893.4 million, above the consensus of $890 million.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Thursday closed down -18.5 ticks, and the 10-year T-note yield rose +8.1 bp to 3.771%. T-notes were under pressure Thursday on hawkish comments from St. Louis Fed President Bullard and Minneapolis Fed President Kashkari.  Bullard said interest rates need to increase further to reach a restrictive level, and Kashkari said the Fed is "not there yet" on ending its progression of interest rate hikes.  In addition, signs of strength in the U.S. labor market weighed on T-notes after this morning’s economic news showed weekly jobless claims unexpectedly declined. 

T-notes recovered from their worst levels Thursday on mixed economic news after the Nov Philadelphia Fed business outlook survey unexpectedly fell to a 2-1/2 year low. Also, a decline in inflation expectations supported T-notes after the 10-year breakeven inflation rate fell to a 5-week low Thursday at 2.285%. 

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