Stocks Fall as Fed Officials Reinforce Hawkish Views

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday fell -1.11%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.85%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -0.89%.  The indexes all posted 5-week lows.

Stocks Friday extended Thursday’s rout on concern that the resolve of the Fed and ECB to keep raising interest rates to fight inflation will tip the global economy into recession.  Hawkish comments Friday from New York Fed President Williams, San Francisco Fed President Daly, and Cleveland Fed President Mester weighed on stocks as they signaled that they favored higher interest rates for longer.

Stocks remained lower Friday after economic news from S&P Global showed U.S. manufacturing activity contracted more than expected. In addition, Friday's quarterly triple-witching expiration of equity derivatives also increased stock volatility and amplified losses. 

Higher global interest rates are bearish for stocks. Hawkish ECB and Fed comments Friday pushed the 10-year German bund yield to a 1-1/4 month high of 2.212%.  That weighed on other global government bond markets as the 10-year UK gilt yield climbed to a 1-month high of 3.389%, and the 10-year T-note yield rose +3.8 bp at 3.484%.

On the positive side, Adobe rose nearly +3% today after reporting stronger-than-expected adjusted Q4 EPS.  Also, Meta Platforms climbed more than +2% after JPMorgan Chase upgraded the stock to overweight from neutral.   

New York Fed President Williams said that while inflation has shown some signs of slowing, a tight labor market and other factors are likely to keep price pressures elevated and warrant high-interest rates for some time.

San Francisco Fed President Daly said, "we are far away from our price stability goal," and she pushed back against markets' "optimistic" inflation views when she said that holding interest rates at their peak level for 11 months is a "reasonable starting point."

Cleveland Fed President Mester said we haven't seen improvement in service price inflation, and the Fed needs to keep the funds rate above 5% in 2023 to curb prices.

The U.S. Dec S&P Global manufacturing PMI unexpectedly fell -1.5 to 46.2, weaker than expectations of an increase to 47.8 and the steepest pace of contraction in 2 years.

Today’s stock movers…

Chip stocks retreated Friday for a second day after HSBC warned of demand uncertainty in the sector on Thursday.  Nvidia (NVDA), Marvell Technology (MRVL), and ASML Holding NV (ASML) closed down more than -2%.  Also, Qualcomm (QCOM) and Advanced Micro Devices (AMD) closed down more than -1%.

Ford Motor (F) closed down more than -7% to lead losers in the S&P 500 on concern inflation is pushing supplier costs higher than expected after it announced it had raised the price of its base F-150 Lightning electric pickup truck to $56,000, up by $16,000 or 40% since it was first launched.

Accenture (ACN) closed down more than -5% after reporting Q1 bookings of $16.22 billion, below the consensus of $17.27 billion. 

Prologis (PLD) closed down more than -5% after JPMorgan Chase downgraded the stock to neutral from overweight.   

Lincoln National (LNC) closed down more than -5% after Jeffries downgraded the stock to underperform from hold. 

Tesla (TSLA) closed down more than -4% at a 2-year low on concern that mounting pressure on the finances of Twitter will force CEO Musk to sell more shares of Tesla. 

Extra Space Storage (EXR) closed down more than -4% after JPMorgan Chase downgraded the stock to neutral from overweight.

Equity Residential (EQR) closed down more than -3% after BMO Capital Markets downgraded the stock to underperform from market perform. 

Darden Restaurants (DRI) closed down more than -2% after reporting Q2 restaurant margins, including marketing, of 16.6%, weaker than the consensus of 17.3%. 

Adobe (ADBE) closed up more than +1% to lead gainers in the Nasdaq 100 after reporting Q4 adjusted EPS of $3.60, better than the consensus of $3.50. 

Meta Platforms (META) closed up more than +2% after JPMorgan Chase upgraded the stock to overweight from neutral.

Synopsys (SNPS) closed up more than +1% after Bank of America Global Research upgraded the stock to buy from neutral.

Centene (CNC) closed up more than +1% after it forecasted 2023 adjusted EPS of $6.25-$6.40, the midpoint above the consensus of $6.31. 

Across the markets…

March 10-year T-notes (ZNH23) on Friday closed down -3.5 ticks, and the 10-year T-note yield rose +3.8 bp to 3.484%. March T-notes Friday were under pressure on hawkish comments from several Fed Presidents who all favored keeping interest rates higher for longer.  T-notes recovered from their worst levels after economic news from S&P Global showed U.S. manufacturing activity contracted more than expected.

Also weighing on T-note prices Friday was a jump in European government bond yields.  Hawkish ECB comments Friday comments from ECB Governing Council members Muller and Rehn, who both advocated for higher ECB interest rates, pushed yields higher.  As a result, the 10-year German bund yield rose to a 1-1/4 month high of 2.212%, and the 10-year UK gilt yield rose to a 1-month high of 3.389%.

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