Stocks Close Moderately Lower on Economic Growth Concerns

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.76%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.76%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.00%.

Stocks on Thursday posted moderate losses, with the S&P 500 falling to a 1-week low and the Dow Jones Industrials falling to a 2-week low. Stocks were under pressure on recession concerns sparked by Wednesday’s weak Dec U.S. retail sales report of -1.1% and Dec manufacturing production report of -1.3% m/m.

Thursday’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 rose +2.5 bp at 3.395%.

Dec housing starts fell -1.4% m/m to a 5-month low of 1.382 million, a smaller decline than expectations of 1.358 million.  However, Dec housing permits, a proxy for future construction, fell -1.6% m/m to a 2-1/2 year low of 1.330 million, weaker than expectations of 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.

Thursday’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.

Fed comments Thursday were mixed for stocks.  On the hawkish side, Fed Vice Chair Brainard said, "even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis." On the dovish side, Boston Fed President Collins 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 Thursday settled mixed.  The Euro Stoxx 50 index closed down -1.92%.  The Shanghai Composite Stock index closed up +0.49%, and Japan’s Nikkei Stock index closed down by -1.44%.

Today’s stock movers…

Cruise line operators fell Thursday 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) closed down more than -4%.  Also, Carnival (CCL) and Royal Caribbean Cruises (RCL) closed down more than -2%.

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

Credit card stocks were under pressure Thursday 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) closed down -0.4%.  The report heightened worries about a recession and consumer spending in 2023.  Capital One Financial (COF) closed down more than -3%, and American Express (AXP) closed down more than -2%.  Also, Synchrony Financial (SYF) closed down more than -1%. 

Northern Trust (NTRS) closed down more than -8% after reporting Q4 EPS of 71 cents, well below the consensus of $1.80. 

Alcoa (AA) closed down by more than -7% 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.

Charles Schwab (SCHW) closed down more than -6% after Bank of America downgraded the stock to underperform from buy.

VF Corp (VFC) closed down more than -5% after Williams Trading LLC downgraded the stock to sell from hold.

KeyCorp (KEY) closed down more than -4% after reporting Q4 revenue of $1.90 billion, weaker than the consensus of $1.93 billion.

Comerica (CMA) closed 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.

Truist Financial (TFC) closed up more than +4% after reporting Q4 adjusted EPS of $1.30, better than the consensus of $1.29.

ServiceNow (NOW) closed up more than +2% after Bank of America predicted the company’s Q4 earnings results next week will be “healthy,” and Citigroup said it’s more positive on the company after checking feedback from ServiceNow’s customers. 

Meta Platforms (META) closed up more than +2% to lead gainers in the Nasdaq 100 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.

Phillip Morris International (PM) closed up nearly +2% after Jeffries upgraded the stock to buy from neutral.

Across the markets…

March 10-year T-notes (ZNH23) on Thursday closed down -8.5 ticks, and the 10-year T-note yield rose by +2.5 bp to 3.395%.  Mar T-notes Thursday 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 moved 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 had carry-over pressure Thursday from an increase in 10-year German bund yields on hawkish ECB comments. 

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