Stocks Slump as Powell Warns of Higher Interest Rates

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -1.53%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.72%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.22%.

Stock indexes Tuesday sold off sharply after Fed Chair Powell signaled the Fed is ready to raise interest rates higher than previously anticipated should inflation persist.  Powell said the peak in interest rates could be higher than anticipated as recent U.S. economic news has come in stronger than expected.  As a result, expectations have increased for the Fed to raise interest rates by 50 bp instead of 25 bp at the March 21-22 FOMC meeting if upcoming reports on jobs and inflation are stronger than expected. 

Fed Chair Powell said the FOMC is prepared to increase the pace of rate hikes if needed and that "the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated."  He added that there's good reason for the FOMC to keep rates higher for longer, as "the historical record cautions strongly against prematurely loosening policy."  In addition, Powell said there's good reason for the FOMC to keep rates higher for longer as "the historical record cautions strongly against prematurely loosening policy."

Another negative factor for stocks is the inversion of the yield curve.  The yield curve Tuesday inverted by the most since 1981 after the 2-year T-note yield exceeded the 10-year yield by more than 100 bp. The inverted yield curve is often seen as a harbinger of recession within the next 12 to 18 months.

Tuesday’s U.S. economic news was bearish for stocks after Jan consumer credit rose +$14.799 billion, weaker than expectations of +$25.350 billion.

Negative corporate news Tuesday also weighed on stocks. DXC Technology closed down more than -7% after it said it terminated discussions with a financial sponsor regarding a potential acquisition of the company.  Also, Rivian Automotive closed down more than -14% after announcing plans to raise $1.3 billion by selling green convertible bonds.  In addition, Nutanix closed down more than -7% after saying it would delay its 10-Q filing amid an investigation into its use of third-party evaluation software.

On the positive side, Dick’s Sporting Goods closed up more than +11% after reporting better-than-expected Q4 net sales. Also, Dish Network closed up more than +4% on signs of insider buying after an SEC filing showed board member Defranco bought $15.7 million worth of stock on March 2.  In addition, airline stocks rallied Tuesday after United Airlines Holdings and Delta Air Lines were upgraded.

Overseas stock markets Tuesday settled mixed.  The Euro Stoxx 50 closed down -0.81%.  China’s Shanghai Composite stock index closed down -1.11%, and Japan’s Nikkei Stock Index closed up +0.25%. 

Today’s stock movers…

DXC Technology (DXC) closed down more than -7% to lead losers in the S&P 500 after it said it terminated discussions with a financial sponsor regarding a potential acquisition of the company.

Rivian Automotive (RIVN) closed down more than -14% to lead losers in the Nasdaq 100 after announcing plans to raise $1.3 billion by selling green convertible bonds. 

Bank stocks retreated Tuesday and weighed on the overall market.  Fifth Third Bancorp (FITB), M&T Bank (MTB), Signature Bank of New York (SBNY), and Citizens Financial Group (CFG) closed down more than -5%.  Also, Zions Bancorp (ZION), Truist Financial (TFC), Wells Fargo (WFC), and PNC Financial Services Group (PNC) closed down more than -4%.  In addition, Bank of America (BAC), Comerica (CMA), State Street Corp (STT), Regions Financial Corp (RF), and US Bancorp (USB) closed down more than -3%.  

Nutanix (NTNX) closed down more than -7% after it said it would delay its 10-Q filing amid an investigation into its use of third-party evaluation software.

KeyCorp (KEY) closed down more than -3% after cutting guidance on 2023 net interest income to up 1% to 4% from prior guidance of up 6% to 9%.

Trimble (TRMB) closed down more than -3% after Northcoast Research downgraded the stock to sell from neutral. 

Dish Network (DISH) closed up more than +4% to lead gainers in the S&P 500 on signs of insider buying after an SEC filing showed board member Defranco bought $15.7 million worth of stock on March 2.

United Airlines Holdings (UAL) closed up more than +3% after Exane BNP Paribas upgraded the stock to outperform from underperform. 

Dick’s Sporting Goods (DKS) closed up more than +11% after reporting Q4 net sales of $3.60 billion, stronger than the consensus of $3.46 billion. 

ON Semiconductor (ON) closed up more than +1% after the company announced a long-term supply agreement with BMW AG, which Rosenblatt Securities said was positive. 

Delta Air Lines (DAL) closed up more than +1% after Evercore ISI upgraded the stock to outperform from inline, citing “upbeat demand.”  Other airline stocks also moved higher, with American Air Lines Group (AAL) and Alaskan Air Group (ALK) closing up more than +1%.

Across the markets…

June 10-year T-notes (ZNM23) on Tuesday closed down -1 tick, and the 10-year T-note yield rose by +1.2 bp to 3.967%.  T-notes Tuesday erased an early rally and closed slightly lower after Fed Chair Powell said, “the ultimate level of interest rates is likely to be higher than previously anticipated," and there's good reason for the FOMC to keep rates higher for longer as "the historical record cautions strongly against prematurely loosening policy."  

Losses in T-notes Tuesday were limited on carryover support from a decline in European government bond yields.  The 10-year German bund yield fell -5.7 bp to 2.692% after the ECB's monthly survey showed a decline in inflation expectations.  Also, strong demand for the Treasury’s $40 billion 3-year T-note auction supported T-notes as the auction had a bid-to-cover ratio of 2.73, well above the 10-auction average of 2.53.   

• Unusual Options Volume for Ferrari (RACE) Underscores a Contrarian Opportunity
• Meta Platform’s Cost Cuts Boost its Appeal
• Stocks Fall on Hawkish Powell
• Here’s 1 Stat AMC Bulls Can’t Ignore