Stocks Retreat as Strength in U.S. PPI Boosts Bond Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday fell -0.73%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.90%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -0.64%.  

Stocks on Friday closed moderately lower after U.S. November producer prices rose more than expected, bolstering speculation the Fed will keep monetary policy tighter for longer.  U.S. Nov PPI final demand rose +7.4% y/y, above expectations of +7.2% y/y. 

Friday’s stronger-than-expected U.S Nov PPI report boosted T-note yields, which weighed on stocks.  The 10-year T-note yield rose +8.5 bp to 3.567%.  Fed officials have recently signaled that the Fed will downshift to a +50 bp rate hike at next week’s FOMC meeting after four straight +75 bp increases. 

A slump in WTI crude oil to a new 1-year low Friday also weighed on energy stocks and the overall market.  However, stock indexes recovered from their worst levels after the University of Michigan U.S. Dec consumer sentiment rose more than expected.

Stock indexes initially moved higher in overnight trading on strength in technology stocks, as Broadcom closed more than +2% Friday after reporting better-than-expected Q4 revenue and forecasting Q1 revenue above expectations.  Also, DocuSign surged more than +12% after reporting stronger-than-expected Q3 billings and raising its full-year billings forecast. 

Friday’s U.S. producer price report was above expectations, hawkish for Fed policy, and negative for stocks.  Nov PPI final demand rose +0.3% m/m and +7.4% y/y, above expectations of +0.2% m/m and +7.2% y/y.  Also, Nov PI ex-food & energy rose +0.4% m/m and +6.2% y/y, above expectations of +0.2% m/m and +5.9% y/y.

The University of Michigan’s U.S. Dec consumer sentiment index rose +2.3 to 59.1, stronger than expectations of 57.0. 

Today’s stock movers…

Energy stocks and energy service providers sold off Friday after crude prices tumbled to a 1-year low.  Devon Energy (DVN) closed down more than -6% to lead losers in the S&P 500.  Also, Schlumberger (SLB) and Haliburton (HAL) closed down more than -5%.  In addition, Chevron (CVX) closed down more than -3% to lead losers in the Dow Jones Industrials.  Finally, Marathon Oil (MRO), Phillips 66 (PSX), APA Corp (APA), and ConocoPhillips (COP) closed down more than -2%.

Lululemon Athletica (LULU) closed down more than -12% to lead losers in the Nasdaq 100 after reporting Q3 gross margins, a gauge of profitability, was 55.9%, below the consensus of 56.7%.

AmerisourceBergen (ABC) closed down more than -3% today after Walgreens Boots Alliance said it sold $1 billion of AmerisourceBergen shares and cut its stake in the company to 17% from 20%. 

Cooper Cos (COO) closed down more than -3% after reporting Q4 adjusted EPS of $2.75, weaker than the consensus of $3.11.

Pioneer Natural Resources (PXD) closed down more than -2% after KeyBanc Capital Markets on Thursday cut its price target on the stock to $260 from $290. 

DocuSign (DOCU) closed up more than +12% Friday to lead gainers in the Nasdaq 100 after reporting Q3 billings of $659.4 million, well above the consensus of $593.5 million and raising its 2023 billings forecast to $2.63 billion-$2.64 billion from a previous estimate of $2.55 billion-$2.57 billion, stronger than the consensus of $2.56 billion.

Netflix (NFLX) closed up more than +3% after Wells Fargo Securities upgraded the stock to overweight from equal weight. 

Warner Bros Discovery (WBD) closed up more than +3% after announcing a reorganization, with new personal appointed to run the Home & Food Content for HGTV, Discovery, Animal Plant, the Science Channel, and the Food Network as part of the company’s restructuring. 

Broadcom (AVGO) closed up more than +2% after reporting Q4 adjusted net revenue of $8.93 billion, above the consensus of $8.90 billion, and forecasting Q1 revenue of $8.9 billion, stronger than the consensus of $8.8 billion.

Across the markets…

March 10-year T-notes (ZNH23) on Friday closed down -11.5 ticks, and the 10-year T-note yield rose +8.5 bp to 3.567%. T-notes Friday were under pressure after the U.S. Nov producer price report showed prices rose more than expected, bolstering concerns the Fed may keep monetary policy tighter for longer. On the brighter side, while the +7.4% y/y PPI was above expectations, it at least fell back from October’s +8.1% y/y gain and was the smallest pace of increase in 18 months.

T-notes maintained moderate losses Friday after the University of Michigan U.S. Dec consumer sentiment index rose more than expected.  Higher European government bond yields also undercut T-note prices. The 10-year German bund yield Friday to a 1-week high of 1.943%, and the 10-year UK gilt yield rose to a 1-week high of 3.186%.

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