Stocks Retreat as Weak Economic Reports Spark Recession Fears

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.56%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.81%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.27%.

Stocks on Wednesday gave up an early advance and closed moderately lower, with the Dow Jones Industrials falling to a 1-1/2 week low.  Stocks gave up early gains after Wednesday’s weak U.S. retail sales and manufacturing production reports increased market concerns about a recession.

Negative corporate news Wednesday also weighed on stocks. Packaged food stocks tumbled Wednesday on the weak U.S. Dec retail sales report.  Also, PNC Financial Services Group and Charles Schwab retreated after reporting weaker-than-expected Q4 EPS.  In addition, IBM fell after being downgraded.

There was some positive corporate news Wednesday for stocks. Moderna rose more than +3% after reporting a Phase 3 study of its RSV vaccine met primary efficacy endpoints. Also, trucking companies rallied after Citigroup said that JB Hunt’s Q4 earnings results were overall better than feared due to the strength in its intermodal business. 

A plunge in global bond yields Wednesday is supportive of stocks. The 10-year T-note yield sank to a 4-month low of 3.368%, and the 10-year German bund yield tumbled to a 1-month low of 1.968%.  Also, the 10-year Japan JGB bond yield fell to a 3-week low of 0.361%.

Hawkish Fed comments Wednesday weighed on stocks after St. Louis Fed President Bullard said U.S. interest rates are "almost" into a zone that we could call restrictive, and "monetary policy has to stay on the tighter side during 2023" as the disinflationary process unfolds.  Also, Cleveland Fed President Mester said the Fed's interest rate increases are calming inflation as intended, but more hikes are needed to squash soaring prices.

The Fed Beige Book was neutral for stocks as it said that in the month through Jan 9, "economic activity was relatively unchanged since the prior report and selling prices increased at a modest or moderate pace in most Fed districts, though many said that the pace of increases had slowed from that of recent reporting periods."

U.S. Dec retail sales fell -1.1% m/m, weaker than expectations of -0.9% m/m and the biggest decline in a year.   Also, Dec retail sales ex-autos fell -1.1% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 22 months.

U.S. Dec PPI final demand rose +6.2% y/y, weaker than expectations of +6.8% y/y and the smallest gain in 1-3/4 years.  Also, Dec PPI ex-food and energy rose +5.5% y/y, weaker than expectations of +5.6% y/y and the smallest gain in 19 months.

U.S. Dec manufacturing production fell -1.3% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 1-3/4 years.

The U.S. Jan NAHB housing market index rose +4 to 35, stronger than expectations of no change at 31.

Overseas markets Wednesday closed mostly higher.  The Euro Stoxx 50 index was unchanged.  The Shanghai Composite Stock index closed unchanged, and Japan’s Nikkei Stock index closed up by +2.50%.

Today’s stock movers…

Packaged food-producing stocks retreated Wednesday on recession concerns.  Kraft Heinz (KHC) closed down more than -6% to lead losers in the S&P 500 and Nasdaq 100. Also, McCormick & Co (MKC), Hormel Foods (HRL), Hershey (HSY), Conagra Brands (CAG), and General Mills (GIS) closed down more than -4%.  In addition, Campbell Soup (CPB), Mondelez International (MDLZ), JM Smucker (SJM), and Constellation Brands (STZ) closed down more than -3%.

PNC Financial Services Group (PNC) closed down more than -6% after reporting Q4 adjusted EPS of $3.49, well below the consensus of $3.96.

Warner Bros Discovery (WBD) closed down more than -4% after data from FilmLA showed TV production in Los Angeles in Q4 fell -24% y/y and shoots for TV commercials dropped -34% y/y as companies pulled back on ad spending.

International Business Machines (IBM) closed down more than -3% after Morgan Stanley downgraded the stock to equal weight from overweight.

Charles Schwab (SCHW) closed down more than -2% after reporting Q4 adjusted EPS of $1.07, below the consensus of $1.09.

Trucking companies moved higher Wednesday after Citigroup said JB Hunt’s Q4 results were overall better than feared due to the strength in its intermodal business.  JB Hunt Transport Services (JBHT) closed up more than +4% to lead gainers in the S&P 500.  Also, CH Robinson Worldwide (CHRW) closed up +059%, and Old Dominion Freight Line (ODFL) closed up +0.34%. 

Moderna (MRNA) closed up more than +3% to lead gainers in the Nasdaq 100 after reporting a Phase 3 study of its RSV vaccine met primary efficacy endpoints. 

Seagate Technology Holdings (STX) closed up more than +3% after Morgan Stanley upgraded the stock to overweight from equal weight. 

Prologis (PLD) closed up more than +1% after reporting Q4 FFO/share of $1.24, stronger than the consensus of $1.22.

Across the markets…

March 10-year T-notes (ZNH23) on Wednesday closed up +1-7.5/32 points, and the 10-year T-note yield fell by -17.8 bp to 3.370%.  Mar T-notes Wednesday surged to a 4-month high, and the 10-year T-note yield tumbled to a 4-month low of 3.368%.  T-notes rallied sharply after Wednesday’s weaker-than-expected U.S. retail sales, manufacturing production, and PPI reports bolstered speculation that the Fed will slow its aggressive rate-hike campaign.

T-notes extended their gains Wednesday afternoon on strong demand for the Treasury’s $12 billion auction of 20-year T-bonds.  The auction had a record-high bid-to-cover ratio of 2.83, well above the 10-auction average of 2.60.  T-notes also found support on reduced inflation expectations after the 10-year breakeven inflation rate dropped to a 1-3/4 month low of 2.089%.

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