Stocks Turn Lower as Long-Term Inflation Expectations Unexpectedly Climb

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.19%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.33%.

U.S. stocks this morning gave up an early advance and are moderately lower.  Stocks gave up early gains this morning on inflation fears after a gauge of long-term inflation expectations from the monthly University of Michigan survey unexpectedly rose to a 12-year high.  Also, the University of Michigan U.S. May consumer sentiment index fell more than expected to a 6-month low. 

Stocks this morning initially opened higher on signs of progress on a deal to raise the debt ceiling after President Biden and House Speaker McCarthy postponed a meeting on the debt ceiling that was planned for today. According to staff involved with the discussions, the delay reflects some headway in the debt ceiling talks.

Market sentiment also improved today as officials from China and the U.S. are taking steps to repair ties between the countries after U.S. Security Adviser Sullivan met with top Chinese diplomat Wang Yi to ease tensions.

The banking turmoil has prompted investors to withdraw from financial stocks and move into technology stocks.  Bank of America said EPFR Global data show investors poured $3.8 billion into technology stocks in the week through May 10, the largest inflow since December 2021.  Conversely, investors pulled $2.1 billion from financial stocks, the largest redemption in a year. 

Fed Governor Bowman said inflation rates remain much too high, and she expects interest rates will need to stay restrictive for some time. 

The U.S. Apr import price index ex-petroleum fell -0.1% m/m, the third consecutive month prices have fallen but a smaller decline than expectations of -0.3% m/m.

The University of Michigan U.S. May consumer sentiment index fell -5.8 to a 6-month low of 57.7, weaker than expectations of 63.0.

Longer-term inflation expectations unexpectedly rose after the University of Michigan U.S. May 5-10 year inflation expectations rose +0.2 to a 12-year high of +3.2% versus expectations of a decline to +2.9%.

Global bond yields are higher.  The 10-year T-note yield is up +4.8 bp at 3.433%.  The 10-year German bund yield is up +4.7 bp at 2.272%, and the UK 10-year gilt yield is up +7.7 bp at 3.784%.

On the bearish side for stocks, Gen Digital is down more than -7% after reporting Q4 cash flow that was below consensus.  Also, SiriusPoint Ltd (SPNT) is down more than -10% after Dan Loeb said he is no longer exploring an acquisition of the company.  In addition, cruise line operators are falling after the decline in the University of Michigan U.S. May consumer sentiment index to a 6-month raised concerns about discretionary consumer spending.

On the bullish side, News Corp is up more than +7% after reporting stronger-than-expected Q3 revenue.  Also, Tesla is up more than +2% after raising prices on its Model X and Model S cars in the U.S., the third price increase in less than a month.  In addition, Charles Schwab is up more than +3% after reporting April new brokerage accounts and April net new client assets increased.

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.08%.  China’s Shanghai Composite closed down -1.12%, and Japan’s Nikkei Stock Index closed up +0.90%. 

Today’s stock movers…

Gen Digital (GEN) is down more than -7% to lead losers in the S&P 500 after reporting Q4 cash flow from operations of $3324 million, well below the consensus of $448.8 million. 

Catalent (CTLT) is down more than -4% after Jeffries cut its price target on the stock to $45 from $83.

SiriusPoint Ltd (SPNT) is down more than -10% after Dan Loeb said he is no longer exploring an acquisition of the company. 

The decline in the University of Michigan U.S. May consumer sentiment index to a 6-month low has raised concerns about discretionary consumer spending that is weighing on cruise line operators.  As a result, Carnival (CCL) is down more than -2%, and Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises Ltd (RCL) are down more than -1%.

Regional bank stocks are under pressure as sentiment remains negative toward the sector. Lincoln National (LNC) is down more than -2%, and Comerica (CMA), Fifth Third Bancorp (FITB), and Zions Bancorp (ZION) are down more than -1%. 

Twilio (TWLO) is down more than -3% after Mizuho Securities downgraded the stock to neutral from buy. 

News Corp (NWSA) is up more than +7% after reporting Q3 revenue of $2.45 billion, above the consensus of $2.38 billion.

Tesla (TSLA) is up more than +2% in pre-market trading after raising prices on its Model X and Model S cars in the U.S., the third price increase in less than a month. 

Charles Schwab (SCHW) is up more than +3% after reporting April new brokerage accounts were 331,000, with April net new client assets of $13.6 billion. 

Eli Lilly (LLY) is up more than +1% after Moody’s Investors Service upgraded the company’s senior unsecured long-term rating to A1 from A2 with a stable outlook.

Blue Bird (BLBD) is up more than +39% after reporting Q2 adjusted Ebitda of $19.8 million, well above the consensus of $10.1 million, and raising its full-year adjusted Ebitda estimate to $55 million-$65 million from a prior estimate of $40 million-$46 million, stronger than the consensus of $40.6 million.

Across the markets…

June 10-year T-notes (ZNM23) today are down -8 ticks, and the 10-year T-note yield is up +4.8 bp at 3.433%.  Jun T-notes this morning are moderately lower after long-term U.S. inflation expectations rose in the monthly University of Michigan survey.  Also, hawkish comments today from Fed Governor Bowman weighed on T-notes when she said interest rates would need to stay restrictive for some time.  Losses were limited after the University of Michigan’s U.S. May consumer sentiment index fell more than expected to a 6-month low.

The dollar index (DXY00) today is up +0.18% and extended Thursday’s advance to a 1-1/2 week high.  Higher T-note yields today are supporting moderate gains in the dollar.  Also, comments from Fed Governor Bowman were hawkish for Fed policy and bullish for the dollar when she said she expects interest rates to remain restrictive for some time.  A larger-than-expected decline in the University of Michigan U.S. May consumer sentiment limited gains in the dollar.

EUR/USD (^EURUSD) today is down by -0.29% and extended Thursday’s decline to a 1-month low.  Strength in the dollar today is weighing on the euro.  Also, concerns that the Eurozone economy will deteriorate as the ECB continues to raise interest rates are weighing on the euro after ECB Governing Council member and Bundesbank President Nagel said inflation is much too strong and more ECB rate hikes currently look necessary. 

USD/JPY (^USDJPY) today is up by +0.39%.  The yen today is under pressure from higher T-note yields. Also, today’s rally in the Nikkei Stock Index to a 17-month high has reduced the safe-haven demand for the yen. In addition, the fall in the 10-year JGB bond yield fell to a 5-week low today at 0.365% has weakened the yen’s interest rate differentials.

Today’s Japanese economic news was bullish for the yen after the Japan Apr eco watchers survey outlook rose +1.6 to a 1-1/2 year high of 55.7, stronger than expectations of 55.1.

June gold (GCM3) this morning is down -3.6 (-0.18%), and July silver (SIN23) is down -0.144 (-0.59%).  Precious metals prices this morning are moderately lower, with gold sliding to a 1-1/2 week low and silver falling to a 6-week low.  A rally in the dollar index to a 1-1/2 week high today is bearish for metals.  Also, higher global bond yields are negative for metals prices.  Economic concerns that may lead to reduced demand for industrial metals are also weighing on silver prices after the University of Michigan U.S. May consumer sentiment index fell to a 6-month low.

However, on the positive side, concern about the health of the U.S. banking system and the U.S. debt limit impasse has boosted safe-haven demand for precious metals.  That has led to strong fund buying of gold as gold holdings in exchange-traded funds (ETFs) rose to a 6-1/4 month high on Thursday.

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