Hawkish Fed Comments Pressure Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.11%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.61%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.83%.

Stock indexes Wednesday closed sharply lower.  Stocks were under pressure Wednesday the entire day as a chorus of hawkish Fed comments reinforced the outlook that the Fed will need to keep raising interest rates and keep rates higher for longer to curb inflation.  Weakness in technology stocks also weighed on the overall market as Alphabet sank more than -7% on concern its new artificial intelligence chatbot Bard may yield incorrect responses.

Minneapolis Fed President Kashkari said there's little evidence that the rate hikes done so far have had much effect on the labor market, so the FOMC "needs to do more" to get the labor market into balance.  Also, Fed Governor Waller said we need more inflation moderation before changing the outlook, and the Fed may need to keep interest rates higher for longer than some expect.  On the less hawkish side, New York Fed President Williams said a peak interest rate of 5.00-5.25% is still a reasonable view, and 25 bp rate increases seem like the right size.

Mixed earnings reports Wednesday also weighed on stocks. Lumen Technologies plunged more than -20% after forecasting full-year adjusted Ebitda below consensus.  Also, Jack Henry & Associates closed down more than -9% after reporting weaker-than-expected Q2 revenue. Illumina fell -7%, and Trimble fell more than -5% after forecasting full-year adjusted EPS below expectations. 

Inflation concerns also undercut stock index futures Wednesday after Manheim reported that U.S. Jan average used-vehicle prices rose +2.5% m/m. Used car prices are one of the larger components of the Consumer Price Index, making up 4.5% of its core. 

On the bullish side, Fortinet closed up more than +10% Wednesday to lead a rally in cybersecurity stocks after forecasting full-year revenue above estimates. Also, CME Group closed up more than +5% after reporting better-than-expected Q4 adjusted EPS, and Fox Corp closed up more than +4% after reporting stronger-than-expected Q2 revenue. 

Overseas markets Wednesday settled mostly lower.  The Euro Stoxx 50 index closed unchanged.  China’s Shanghai Composite stock index closed down -0.49%, and Japan’s Nikkei Stock index closed down -0.29%.

Today’s stock movers…

Lumen Technologies (LUMN) closed down more than -20% to lead losers in the S&P 500 after forecasting full-year adjusted Ebitda of $4.6 billion to $4.8 billion, below the consensus of $5.15 billion. 

Jack Henry & Associates (JKHY) closed down more than -9% after reporting Q2 revenue of $505.3 million, weaker than the consensus of $515.6 million, and cut its full-year revenue forecast to $2.05 billion-$2.06 billion from a previous view of $2.09 billion-$2.10 billion, below the consensus of $2.09 billion. 

Alphabet (GOOGL) closed down more than -7% after reports that the company’s newly launched artificial intelligence chatbot Bard delivered erroneous responses. 

Illumina (ILMN) closed down more than -7% to lead losers in the Nasdaq 100 after forecasting full-year adjusted EPS of $1.25-$1.50, well below the consensus of $1.70. 

Emerson Electric (EMR) closed down more than -5% after reporting Q1 net sales of $3.37 billion, below the consensus of $3.42 billion. 

Trimble (TRMB) closed down more than -5% after forecasting 2023 adjusted EPS of $2.66-$2.86, weaker than the consensus of $2.89. 

Chipotle Mexican Grill (CMG) fell more than -3% after reporting Q4 comparable same-store sales rose +5.60%, well below the consensus of +7.04%. 

Fortinet (FTNT) closed up more than +10% to lead gainers in the S&P 500 and Nasdaq 100 after forecasting full-year revenue of $5.37 billion-$5.43 billion, above the consensus of $5.36 billion.  Palo Alto Networks (PANW) also closed up more than +4% on the news.

CME Group (CME) closed up more than +5% after reporting Q4 adjusted EPS of $1.92, stronger than the consensus of $1.87.

Fox Corp (FOXA) closed up more than +4% after reporting Q2 revenue of $4.61 billion, stronger than the consensus of $4.57 billion.

CVS Health (CVS) closed up more than +3% after forecasting full-year revenue of $332.7 billion-$338.5 billion, well above the consensus of $324.87 billion. 

Eaton Corp Plc (ETN) closed up more than +2% after reporting Q4 net sales of %5.40 billion, better than the consensus of $5.32 billion.

Omnicom Group (OMC) closed up more than +2% after Morgan Stanley upgraded the stock to equal weight from underweight. 

Across the markets…

March 10-year T-notes (ZNH23) on Wednesday closed up +5.5 ticks, and the 10-year T-note yield fell by -2.5 bp to 3.649%.  Mar T-notes Wednesday posted moderate gains as weakness in stocks sparked some safe-haven buying of T-notes.  T-notes raced to their highs Wednesday afternoon on strong demand for the Treasury’s $35 billion auction of 10-year T-notes, with a bid-to-cover ratio of 2.66, well above the 10-auction average of 2.40.

T-notes Wednesday briefly gave up their gains on hawkish comments from Fed Governor Waller, New York Fed President Williams, and Minneapolis Fed President Kashkari.  Also, Wednesday’s jump in the 10-year German bund yield to a 5-week high of 2.399% weighed on T-notes.  Finally, an increase in inflation expectations was bearish for T-notes after the 10-year breakeven inflation rate Wednesday climbed to a 2-month high of 2.373%. 

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