Stock Give Up Early Gains on Recession Fears

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.60%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.68%.  

Stocks this morning gave up an early advance and moved moderately lower. Concern that Fed tightening will push the U.S. economy into recession weighed on stocks after today’s economic news showed the Nov ISM manufacturing index contracted at its steepest pace in 2-1/2 years.

Also, a plunge of more than -10% in Salesforce Inc today is weighing on the S&P 500 and Dow Jones Industrials after it forecasted weaker-than-expected Q4 revenue.  In addition, chip stocks are under pressure today after the CEO of Micron Technology gave a downbeat assessment of near-term demand for memory chips.  

U.S. stock indexes initially moved higher this morning on positive carry-over from Wednesday when Fed Chair Powell confirmed the Fed would slow its interest rate hikes. The markets expect a +50 bp rate hike at the upcoming December 13-14 meeting after the FOMC has raised rates by +75 bp at each of its last four meetings.

Market sentiment also improved today after China’s Shanghai Composite Stock Index rallied to a new 2-1/2 month high on signs that China is continuing to ease its Covid restrictions.  Optimism about a quicker economic reopening in China also boosted energy stocks as crude prices are up more than +2% at a 1-week high.

 A decline in T-note yields today is bullish for stocks after the 10-year T-note yield dropped to an 8-week low of 3.563%. Today’s U.S. economic news was mixed for stocks.

U.S. weekly initial unemployment claims fell -16,000 to 225,000, showing a stronger labor market than expectations of 235,000.

U.S. Oct personal spending rose +0.8% m/m right on expectations and the largest increase in 4 months.  Oct personal income rose +0.7% m/m, stronger than expectations of +0.4% m/m and the biggest increase in a year.

The U.S. Oct PCE core deflator, the Fed's preferred inflation gauge, rose +5.0% y/y, right on expectations, and eased from Sep’s +5.2% y/y pace.

U.S. Oct construction spending fell -0.3% m/m, weaker than expectations of -0.2% m/m.

The U.S. Nov ISM manufacturing index fell -1.2 to 49.0, weaker than expectations of 49.7 and the steepest pace of contraction in 2-1/2 years.  The Nov ISM prices paid sub-index fell -3.6 to a 2-1/2 year low of 43.0, weaker than expectations of 45.9.

Comments today from Fed Governor Bowman were hawkish for Fed policy and bearish for stocks when she said, "until I see our actions actually having some impact that would lower the rate of inflation, I think that my expectation would be that we would have a slightly higher peak interest rate than I had anticipated in September."

Today’s stock movers…

Salesforce (CRM) is down more than -10% to lead losers in the S&P 500 and Dow Jones Industrials after forecasting Q4 revenue of $7.93 billion-$8.03 billion, weaker than the consensus of $8.03 billion.  The stock also fell after CEO Taylor said he is stepping down, effective Jan 31.

Dollar General (DG) is down more than -9% after cutting its 2023 EPS growth forecast to +7% to +8% from a prior view of +12% to +14%.

Costco Wholesale (COST) is down more than -6% to lead losers in the Nasdaq 100 after reporting November total comparable sales rose +4.3%, weaker than the consensus of +7.7%.

Capital One Financial (COF), Ally Financial (ALLY), and Synchrony Financial (SYF) are down more than -4% after Morgan Stanley downgraded the stocks to underweight from equal weight. 

Chip stocks are under pressure today after Stifel said the comments from CEO of Micron Technology at a Wells Fargo event were “incrementally downbeat” on near-term conditions for memory chips. Micron Technology (MU), Marvell Technology (MRVL), and Applied Materials (AMAT) are down more than -3%.  Also, Texas Instruments (TXN), Lam Research (LRCX), and ON Semiconductor (ON) are down more than -2%.

Synopsys (SNPS) is up more than +3% today to lead gainers in the S&P 500 after reporting Q4 adjusted EPS of $1.91, higher than the consensus of $1.84, and forecasting 2023 adjusted EPS of $10.28-$10.35, stronger than the consensus of $10.13.

Splunk (SPLK) is up more than +14% today to lead gainers in the Nasdaq 100 after reporting Q3 revenue of $929.8 million, well above the consensus of $846.7 million, and raising its 2023 revenue forecast to $3.46 billion-$3.49 billion from $3.35 billion-$3.40 billion, above the consensus of $3.39 billion.

Okta (OKTA) surged more than +23% after reporting Q3 revenue of $481.0 million, better than the consensus of $464.2 million, and raised its 2023 revenue forecast to $1.84 billion from a prior forecast of $181 billion-$1.82 billion, stronger than the consensus of $1.82 billion. 

Five Below (FIVE) is up more than +13% after reporting Q3 net sales of $645.0 million, stronger than the consensus of $613.9 million, and raising its 2023 net sales forecast to $3.04 billion-$3.06 billion from a prior estimate of $2.97 billion-$3.02 billion, above the consensus of $3.0 billion. 

Pentair PLC (PNR) is up more than +2% after Barclays upgraded the stock to overweight from equal weight. 

Newmont  Corp (NEM) is up more than +2% as metals prices surged, with silver soaring to a 5-3/4 month high and gold climbing to a 3-1/2 month high.

Across the markets…

March 10-year T-notes (ZNH23) today are up +16 ticks, and the 10-year T-note yield is down -0.1 bp at 3.606%.  March T-notes rallied to a 2-1/4 month high today, and the 10-year T-note yield fell to an 8-week low of 3.563%.  T-note prices extended Wednesday’s gains on comments from Fed Chair Powell, who confirmed the Fed would begin to slow its pace of interest rate hikes.  However, T-notes fell back from their best levels on better-than-expected U.S. unemployment claims and personal spending reports.  Also, an increase in inflation expectations weighed on T-notes after the 10-year breakeven inflation rate today climbed to a 2-1/2 week high of 2.413%. 

The dollar index (DXY00) this morning is down sharply by -1.03% at a 3-1/2 month low.  The dollar today continued lower on carry-over from Fed Chair Powell’s comments on Wednesday, which cemented expectations for the Fed to slow its pace of interest rate hikes.  Also, a rally in the yuan to a 2-week high today undercut the dollar as the easing of Covid restrictions in some parts of China sparked optimism about an economic reopening. 

EUR/USD (^EURUSD) today is up +1.15% at a 5-month high.  A slump in the dollar today has sparked a rally in the euro.  Also, an unexpected decline in the Eurozone Oct unemployment rate to a record low of 6.5% has bolstered optimism in the Eurozone’s economic outlook and improved sentiment in EUR/USD. 

Today’s Eurozone economic news was mixed for EUR/USD.  On the bullish side, the Eurozone Oct unemployment rate unexpectedly fell -0.1 to a record low of 6.5%, showing a stronger labor market than expectations of no change at 6.6%.  Conversely, the Eurozone Nov S&P Global manufacturing PMI was revised downward by -0.2 to 47.1 from the initially reported 47.3.  Also, German Oct retail sales fell -2.8% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 10 months.

Comments today from ECB Governing Council member Stournaras were bearish for the euro when he said "additional ECB rate increases must be gradual and depend on the inflation outlook while considering the recession risks and the impact on financial stability."

USD/JPY (^USDJPY) this morning is down sharply by -1.60%.  The yen rallied to a 3-1/2 month high today as a slump in the dollar sparked short covering in the yen.  Also, a fall in the 10-year T-note yield to an 8-week low today has boosted the yen.  The yen raced to its high this morning after comments from BOJ board member Tamura sparked speculation the BOJ would soon adjust monetary policy when he said the BOJ should conduct a policy assessment and the right moment for it could come soon.

Today’s Japanese economic news was mixed for the yen.  On the bullish side, Japan's Q3 capital spending ex-software rose +8.0% y/y, stronger than expectations of +6.2% y/y and the biggest increase in more than four years.  However, on the bearish side, the Japan Nov consumer confidence index unexpectedly fell -1.3 to a 2-1/2 year low of 28.6, weaker than expectations of an increase to 30.0.  Also, the Japan Nov Jibun Bank manufacturing PMI was revised downward by -0.4 to 49.0 from the initially reported 49.4, the steepest pace of contraction in 2 years.

February gold (GCG3) this morning is up +55.7 (+3.16%), and March silver (SIH23) is up +1.059 (+4.86%).  Precious metals prices this morning are sharply higher, with gold jumping to a 3-1/2 month high and silver soaring to a 5-3/4 month high.  A slump in the dollar index today to a 3-1/2 month low is bullish for metals prices.  Also, the outlook for the Fed to slow its pace of interest rate hikes is bullish for metals after Wednesday’s comments from Fed Chair Powell confirmed a less aggressive Fed policy.  Silver prices also rallied today after China eased Covid restrictions in some parts of the country, which will boost economic activity that is positive for industrial metals demand.

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