Stocks Retreat on U.S. Labor Market Strength and a Hawkish Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed down -1.16%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.02%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.59%.

Stocks on Thursday closed sharply  lower, with the Dow Jones Industrial falling to a 2-week low and the Nasdaq 100 posting a 1-week low.  Stock indexes gave up overnight gains and moved lower after strong U.S. labor market indicators and hawkish Fed comments bolstered expectations for the Fed to remain aggressive in tightening monetary policy.

Thursday’s reports showed the Dec ADP employment rose +235,000, showing a stronger labor market than expectations of +150,000.  Also, weekly initial unemployment claims unexpectedly fell to a 3-1/4 month low.  The 10-year T-note yield rose +3.7 bp to 3.720%.

Stock losses accelerated as bond yields moved higher on hawkish comments from Kansas City Fed President George and Atlanta Fed President Bostic, who both said inflation was still too high and signaled higher interest rates.

Stock indexes briefly recovered some of their losses Thursday on dovish comments from St. Louis Fed President Bullard that he thinks the Fed has almost raised interest rates high enough to bring down inflation. Bullard said, "the policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer."

Stock indexes initially moved higher in overnight trade on positive carry-over from a rally in China’s Shanghai Composite to a 2-1/2 week high as China took additional steps to reopen its economy.  China announced Thursday that the border between mainland China and Hong Kong would gradually reopen beginning Sunday. 

U.S. Dec ADP employment rose +235,000, showing a stronger labor market than expectations of +150,000.  Also, Nov ADP was revised upward to +182,000 from the initially reported +127,000.

U.S. weekly initial unemployment claims unexpectedly fell -19,000 to a 3-1/4 month low of 204,000, showing a stronger labor market than expectations of unchanged at 225,000.

The U.S. Nov trade deficit shrank to a 2-year low of -$61.5 billion from -$77.8 billion in Oct, a smaller deficit than expectations of -$63.0 billion and a positive factor for Q4 GDP.

Atlanta Fed President Bostic said inflation is still way too high in the U.S. and the Fed has "much work to do on inflation" despite signs that prices are moderating.

Kansas City Fed President George said she "raised her forecast to over 5%" on her projection for the fed funds rate and said she sees it "staying there for some time until we get signals that inflation is really convincingly starting to fall back toward our 2% goal."

Overseas markets Thursday were mixed.  The Euro Stoxx 50 index closed down -0.36%.  The Shanghai Composite index closed up +1.01%, and Japan’s Nikkei Stock index closed up by +0.40%.

Today’s stock movers…

Constellation Brands (STZ) closed down more than -9% to lead losers in the S&P 500 after it reported Q3 comparable EPS of $2.83, weaker than the consensus of $2.88, and cut its full-year comparable EPS estimate to $11.00-$11.20 from a prior estimate of $11.20-$11.60. 

ServiceNow (NOW) closed down more than -6% after Piper Sandler cut its price target on the stock to $500 from $550. 

Walgreens Boots Alliance (WBA) closed down more than -6% to lead losers in the Dow Jones Industrials as the company acknowledged that the settlement of cases related to the nationwide opioid crisis would cost it $6.5 billion.

Crowdstrike Holdings (CRWD) closed down more than -9% to lead losers in the Nasdaq 100 after Stifel cut its price target on the stock to $110 from $120.

Software stocks tumbled Thursday and weighed on technology stocks and the overall market.  Datadog (DDOG) closed down more than -7%, and Atlassian Corp (TEAM) closed down more than -5%.  Also, Ansys (ANSS) and Intuit (INTU) closed down more than -4%.  In addition,  Adobe (ADBE) and Autodesk (ADSK) closed down more than -3%, and Microsoft (MSFT) closed down more than -2%.

Lamb Weston Holdings (LW) closed up more than +9% to lead gainers in the S&P 500 after reporting Q2 net sales of $1.28 billion, stronger than the consensus of $1.15 billion and raised its full-year adjusted EPS estimate to $3.75-$4.00 from a previous estimate of $2.45-$2.85. 

Western Digital Corp (WDC) closed up more than +6% after Bloomberg reported the company had restarted merger talks with Japan’s Kioxia. 

Energy producers and energy service providers gained Thursday after WTI crude oil rose more than +1%.  Valero Energy (VLO) closed up more than +5%, and Marathon Petroleum (MPC) closed up more than +4%.  Also, Baker Hughes (BKR), Hess Corp (HES), and ConocoPhillips (COP) closed up more than +3%.  In addition, Diamondback Energy (FANG), Exxon Mobil (XOM), Phillips 66 (PSX), Devon Energy (DVN), and Marathon Oil (MRO) closed up more than +2%.  Finally, Chevron (CVX) closed up +1.8% to lead gainers in the Dow Jones Industrials.

T-Mobile U.S. Inc (TMUS) closed up more than +3% after reporting Q4 postpaid net customers of 1.82 million, above the consensus of 1.80 million.

Conagra Brands (CAG) closed up more than +3% after reporting Q2 adjusted EPS of 81 cents, stronger than the consensus of 66 cents, and forecast full-year adjusted EPS of $2.60-$270, above the consensus of $2.47.

Delta Air Lines (DAL) closed up more than +2% after Argus Research upgraded the stock to buy from hold.

Across the markets…

March 10-year T-notes (ZNH23) on Thursday closed down -5.5 ticks, and the 10-year T-note yield rose by +3.7 bp to 3.720%.  Mar T-notes Thursday retreated after U.S labor market news came in stronger than expected, bolstering the chances that the Fed will keep interest rates higher for longer. T-note losses accelerated Thursday on hawkish Fed comments.  Kansas City Fed President George said she "raised her forecast to over 5%" for the fed funds rate.  Also, Atlanta Fed President Bostic said the Fed has "much work to do on inflation" despite signs that prices are moderating. 

T-notes recovered from their worst levels Thursday on dovish comments from St. Louis Fed President Bullard, who said he thinks the Fed has almost raised interest rates high enough to bring down inflation.  Also, weakness in stocks sparked some safe-haven buying of T-notes. 

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