Economic Concerns and Debt Ceiling Risk Weigh on Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.74%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.68%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.80%.

U.S. stock index futures this morning are moderately lower, with the S&P 500 falling to a 1-week low and the Dow Jones Industrials falling to a 1-1/2 week low.  Stocks are under pressure on recession concerns sparked by yesterday’s weak Dec U.S. retail sales report of -1.1% and Dec manufacturing production report of -1.3% m/m.

This morning’s U.S. economic reports were mixed but tilted slightly toward the stronger side, pushing bond yields higher and undercutting stocks.  The 10-year T-note yield is up +3.1 bp at 3.401%.

The U.S. Dec housing starts report of -1.4% to 1.382 million units was stronger than expectations for a decline to 1.358 million units, but the Dec building permits report of -1.6% to 1.330 million was weaker than expectations for a rise to 1.365 million.

The Jan Philadelphia Fed business outlook index rose to -8.9 from Dec’s revised -13.7, which was stronger than expectations of a rise to -11.0.

Today’s unemployment claims report was slightly stronger than expected.  Weekly U.S. initial unemployment claims fell -15,000 to 190,000, which showed a stronger labor market than expectations for a rise to 214,000.  In addition, continuing claims rose by +13,000 to 1.647 million, which showed a stronger labor market than expectations for a rise to 1.655 million.

Comments today from Boston Fed President Collins were dovish for Fed policy and supportive of stocks when she said, "now that interest rates are in restrictive territory, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace."

The market is discounting a 100% chance that the FOMC at its meeting in less than two weeks on Jan 31-Feb 1, will raise its federal funds rate target by another +25 bp to 4.50/4.75% from the current range of 4.25%/4.50%.  The effective federal funds rate is currently at 4.33%, and FOMC members are predicting a funds rate of 5.1% by the end of this year, up +77 bp from the current level.

The markets are also concerned about an impending debt ceiling crisis as Congress is expected to have difficulty passing a debt ceiling hike or suspension by the Treasury’s X-date in June, when the Treasury will run out of borrowing authority and cash to pay all its bills, possibly resulting in a U.S. sovereign default on Treasury security interest and principal.  The Treasury hit the debt ceiling today and is beginning to use extraordinary measures, which will last only through early June, according to Treasury Secretary Yellen.

Overseas markets today are mixed.  The Euro Stoxx 50 index is down -1.67%.  The Shanghai Composite Stock index closed up +0.49%, and Japan’s Nikkei Stock index closed down by -1.44%.

Today’s stock movers…

Northern Trust (NTRS) is down more than -10% to lead losers in the S&P 500 after reporting Q4 EPS of 71 cents, well below the consensus of $1.80. 

Credit card stocks are under pressure today after Discover Financial Services said it expects charge-offs in the range of 3.5-3.9% this year, higher than market expectations of 2.8%.  Discover Financial Services (DFS) is down more than -2%.  The report heightened worries about a recession and consumer spending in 2023.  Capital One Financial (COF) is down more than -5%, and Synchrony Financial (SYF) is down more than -4%.  Also, American Express (AXP) is down more than -3% to lead losers in the Dow Jones Industrials.

Cruise line operators are falling today after Norwegian Cruise Line Holdings said it expects adjusted Ebitda for the six months ending Dec 31 to be “nearly break-even,” a downgrade from a prior forecast of “slightly positive.” As a result, Norwegian Cruise Line Holdings (NCLH) and Carnival (CCL) are down more than -3%.  Also, Royal Caribbean Cruises (RCL) is down more than -2%.

Allstate (ALL) is down by more than -5% after reporting an adjusted net loss for Q4 that was larger than market expectations.

VF Corp (VFC) is down more than -3% after Williams Trading LLC downgraded the stock to sell from hold.

Alcoa (AA) is down by more than -3% after the company reported disappointing Q4 earnings sparked by lower aluminum prices and higher materials and production costs, a common theme for other miners and commodity-producing companies.

Comerica (CMA) is up more than +5% to lead gainers in the S&P 500 after reporting Q4 EPS of $2.58, better than the consensus of $2.54.

Meta Platforms (META) is up more than +1% after JPMorgan Chase said the stock is a top pick and is better positioned than other online ad names ahead of its upcoming Q4 results.

Truist Financial (TFC) is up more than +2% after reporting Q4 adjusted EPS of $1.30, better than the consensus of $1.29.

Kinder Morgan (KMI) is up more than +1% after reporting Q4 distributable cash flow (DCF) of 54 cents, above the consensus of 53 cents.

Phillip Morris International (PM) is up more than +2% after Jeffries upgrade the stock to buy from neutral.

Across the markets…

March 10-year T-notes (ZNH23) today are down -8 ticks, and the 10-year T-note yield is up +3.1 bp at 3.401%.  Mar T-note prices this morning fell back from a 4-month high, and the 10-year T-note yield moved higher from a 4-month low of 3.319%.  T-note prices are lower on stronger-than-expected U.S. economic reports, including housing starts, initial unemployment claims, and the Jan Philadelphia Fed business outlook. T-notes also have carry-over pressure from an increase in 10-year German bund yields on hawkish ECB comments. 

The dollar index (DXY00) today is down by -0.22% and moderately above Wednesday’s 7-1/2 month low.  Dovish comments today from Boston Fed President Collins are weighing on the dollar after she said she favors the Fed slowing its pace of interest rate hikes. Also, hawkish ECB comments today strengthened EUR/USD and weighed on the dollar.  The dollar recovered from its worst levels today after stronger-than-expected U.S. economic news boosted bond yields.

EUR/USD (^EURUSD) today is up by +0.03% and moderately below Wednesday’s 8-3/4 month high.  Hawkish comments today from ECB President Lagarde and ECB Governing Council member Knot gave the euro a boost when they said inflation is still too high and interest rates will still have to rise.  Also, a hawkish account of the Dec ECB meeting was supportive of EUR/USD as “a large number" of officials preferred a 75 bp rate hike rather than a 50 bp rate hike.

ECB President Lagarde said, "inflation by all accounts, whichever way you look at it, is way too high. We shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner."

ECB Governing Council member Knot said there'll be more than one half-point increase in interest rates, with the inflation situation still "not satisfactory."

The account of the Dec ECB meeting was hawkish, with "a large number" of officials preferring a +75 bp rate hike rather than a +50 bp rate hike, as "the latest data suggested that inflation was becoming much more broad-based and persistent."

USD/JPY (^USDJPY) today is down by -0.42%.  The yen is moving higher today on speculation the BOJ will make a shift in its monetary policy after BOJ Governor Kuroda said he “cannot rule out” a future change in the BOJ’s yield-curve-control.  Higher T-note yields today are limiting the upside in the yen. 

Today’s Japanese trade news was mixed for the yen.   Japan Dec exports rose +11.5% y/y, stronger than expectations of +10.6% y/y.  However, Dec imports rose +20.6% y/y, weaker than expectations of +22.6% y/y.

February gold (GCG3) this morning is up +11.2 (+0.59%), and March silver (SIH23) is up +0.018 (+0.08%).  Precious metals prices this morning are slightly higher.  A weaker dollar today is supportive of metals.  Also, a slump in stocks today has boosted the safe-haven demand for precious metals.  Gains in metals are limited due to higher global bond yields. 

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