Stocks Plunge as Fed and ECB Signal Higher Interest Rates

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -2.20%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -2.06%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -2.74%.  

Stocks today are sharply lower, with the S&P 500 and Nasdaq 100 falling to 5-week lows and the Dow Jones Industrials dropping to a 4-week low.

Stock indexes this morning are sharply lower on negative carry-over from Wednesday when the Fed signaled interest rates would go higher for longer.  Losses in stock indexes accelerated after the ECB raised its inflation estimates, and ECB President Lagarde said, “interest rates still have to rise significantly at a steady pace.”   This morning’s economic news was mixed for stocks as U.S. Nov retail sales and Nov manufacturing production fell more than expected, while weekly jobless claims unexpectedly declined.

Chip stocks are selling off today to lead technology stocks lower, with Nvidia dropping more than -4% after HSBC warned of demand uncertainty in the sector.  Also, Western Digital sank more than -7% after Goldman Sachs downgraded the stock to sell.

A decline in T-note yields is supportive for stocks, with the 10-year T-note yield down -1.1 bp at 3.466%.  T-note prices shook off a sharp drop in German bund prices after the ECB raised its inflation forecasts and instead moved higher on this morning’s weaker-than-expected U.S. economic news.

U.S. Nov retail sales fell -0.6% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 11 months.  Also, Nov retail sales ex-autos unexpectedly fell -0.2% m/m, weaker than expectations of +0.2% m/m and the biggest decline in 11 months

The U.S. Dec Philadelphia Fed business outlook survey rose +5.6 to -13.8, weaker than expectations for a rise to -10.0.

The U.S. Dec Empire manufacturing survey general business conditions index fell -15.7 to a 4-month low of -11.2, weaker than expectations of -1.0.

U.S. Nov manufacturing production fell -0.6% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 5 months.

U.S. weekly initial unemployment claims unexpectedly fell -20,000 to an 11-week low of 211,000, showing a stronger labor market than expectations of an increase to 232,000. 

The Bank of England, as expected, raised its official bank lending rate by +50 bp to a 14-year high of 3.50%.

Today’s stock movers…

Chip stocks are under pressure today to lead technology stocks lower, with Nvidia (NVDA) down more than -4% after HSBC initiated coverage on the stock with a reduce rating, citing the near-term chip inventory correction and demand uncertainty.  Also, Qualcomm (QCOM), Applied Materials (AMAT), Marvell Technology (MRVL), ASML Holding NV (ASML), Microchip Technology (MCHP), Lam Research (LRCX), Advanced Micro Devices (AMD), Micron Technology (MU), and NXP Semiconductors (NXPI) are down more than -3%.

Western Digital (WDC) is down more than -7% after Goldman Sachs downgraded the stock to sell from neutral.   

Discover Financial Services (DFS) is down more than -5% after reporting charge-offs for November rose to 2.46% compared to 1.53% last year and that November delinquencies rose to 2.36% from 1.6% last year.

Netflix (NFLX) is down more than -7% to lead losers in the Nasdaq 100 after a report from Digiday said Netflix is refunding advertisers as it missed ad-supported viewership guarantees made to them. 

Pool Corp (POOL) is down more than -5% after Bank of America initiated coverage on the stock with a recommendation of underperform. 

Nucor (NUE) is down more than -6% after forecasting Q4 EPS of $4.25-$4.35, below the consensus of $4.38.

Marriott International (MAR) is downmore than -2% after Barclays downgraded the stock to equal weight from overweight.

Charles River Laboratories (CRL) is up more than +5% to lead gainers in the S&P 500 after the Khmer Times reported that non-human primate shipments to the U.S. aren’t suspended and that Cambodia will keep exporting them for medical research. 

Nordson (NDSN) is up more than +2% after reporting Q4 sales of $683.6 million, better than the consensus of $652.3 million.

Verizon Communications (VZ) is up more than +1% to lead gainers in the Dow Jones Industrials after Morgan Stanley upgraded the stock to overweight from equal weight. 

Across the markets…

March 10-year T-notes (ZNH23) today are up +2 ticks, and the 10-year T-note yield is down -1.1 bp at 3.466%.  March T-notes this morning are slightly higher on mostly weaker-than-expected U.S. economic news on Nov retail sales, Nov manufacturing production, and the Dec Philadelphia Fed and Dec Empire manufacturing surveys.  Gains in T-notes are limited after the 10-year German bund yield jumped to a 1-month high of 2.124%. 

The dollar index (DXY00) this morning is up by +0.10%.  The dollar this morning is slightly higher on positive carryover from Wednesday when the Fed signaled higher interest rates for longer.  Gains in the dollar are limited on mostly weaker-than-expected U.S. economic news on Nov retail sales and Nov manufacturing production, which is dovish for Fed policy.  Also, EUR/USD jumped to a 6-month high, which weighed on the dollar.  

EUR/USD (^EURUSD) today is up by +0.17% and climbed to a new 6-month high.  The euro is climbing today on hawkish comments from ECB President Lagarde and a jump in German bund yields.  ECB President Lagarde said today that we should expect the ECB to raise interest rates at a 50 bp pace for a period of time.  Also, the 10-year German bund yield jumped to a 1-month high today, strengthening the euros’ interest rate differentials.  Gains in EUR/USD were limited after the ECB cut its 2023 Eurozone GDP forecast.

The ECB, as expected, raised its main refinancing rate 50 bp to 2.50% and said, "interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target."

The ECB lowered its 2023 Eurozone GDP forecast to 0.5% from a previous estimate of 0.9% and raised its 2023 Eurozone inflation forecast to 6.3% from a previous estimate of 5.5%.

ECB President Lagarde said, "it is pretty much obvious that on the basis of the data that we have at the moment, significant rise at a steady pace means we should expect to raise interest rates at a 50 bp pace for a period of time."

Eurozone Nov new car registrations rose +16.3% y/y to 830,000, the biggest increase in 1-1/2 years.

The German Nov wholesale price index eased to 14.9% y/y from 17.4% y/y in Oct, the slowest pace of increase in 14 months.

USD/JPY (^USDJPY) this morning is up by +0.93%.  The yen today is moderately lower on central bank divergence. The Fed on Wednesday signaled higher interest rates for longer and the ECB today said it intends to continue to raise interest rates at a steady pace.  Meanwhile, the BOJ is maintaining QE and record low-interest rates.  Lower T-note yields today are limiting the downside in the yen. 

Today’s Japanese trade news was bullish for the yen.  Japan Nov exports rose +20.0% y/y, stronger than expectations +19.7% y/y.  Also, Nov imports rose +30.3% y/y, stronger than expectations of +26.9% y/y.

February gold (GCG3) this morning is down -24.3 (-1.34%), and March silver (SIH23) is down -0.556 (-2.30%).  Precious metals prices this morning are moderately lower, with gold falling to a 1-week low. Metals prices are under pressure today from a stronger dollar and as global central banks signal higher interest rates.  Fed Chair Powell on Wednesday signaled the Fed would continue to raise rates next year, and ECB President Lagarde said today that the ECB would raise interest rates at a steady pace for the foreseeable future. 

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