Stocks Lower on Debt Ceiling and Higher Bond Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.23%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.30%.

U.S. stocks this morning are mildly lower as U.S. debt ceiling talks continue.  President Biden and House Speaker McCarthy called their discussions on Monday productive, but an agreement to raise the debt ceiling remains elusive.  Today’s U.S. economic news was mixed for stocks.

Hawkish comments today from Minneapolis Fed President Kashkari pushed bond yields higher and weighed on stocks when he said, "If inflation became more entrenched than we realized, then we're going to have to keep interest rates high for longer."

U.S. stock indexes are also under pressure this morning on negative carryover from a decline in European stocks after the news that manufacturing activity in the Eurozone in May unexpectedly contracted by the most in 3 years.

Global bond yields are higher.  The 10-year T-note yield climbed to a 2-1/4 month high of 3.757% and is up +2.1 bp at 3.736%.  The 10-year German bund yield is up +1.0 bp at 2.469%, and the UK 10-year gilt rose to a 7-1/4 month high of 4.187% and is up +10.4 bp at 4.168%.

On the bearish side for stocks, Zoom Video Communications is down more than -6% after reporting fewer than expected Q1 enterprise customers and weaker than expected Q1 cash and cash equivalents.  Also, homebuilding stocks are under pressure today after the 10-year T-note yield rose to a 2-1/4 month high.  In addition, AutoZone is down more than -3% after reporting Q3 net sales that were below consensus. 

On the bullish side, PacWest Bancorp is up more than +18%, adding to Monday’s +19% surge, after agreeing to sell a $2.6 billion portfolio of 74 real estate construction loans as part of its plan to shore up its liquidity. Also, American International Group is up more than +3% after agreeing to sell its reinsurance business to Renaissance Holdings Ltd for roughly $3 billion.  In addition, Broadcom is up more than +2% after Apple signed a multibillion-dollar deal with the company to develop 5G radio frequency components. 

Overseas stock markets are lower.  The Euro Stoxx 50 is down -0.85%.  China’s Shanghai Composite closed down -1.52%, and Japan’s Nikkei Stock Index closed down -0.42%. 

Today’s stock movers…

Zoom Video Communications (ZM) is down more than -6% to lead losers in the Nasdaq 100 after reporting 215,900 Q1 enterprise customers, below the consensus of 217,853, and reporting Q1 cash and cash equivalents of $1.03 billion, well below the consensus of $1.42 billion.

Homebuilding stocks are under pressure today after the 10-year T-note yield rose to a 2-1/4 month high.  As a result, PulteGroup (PHM) is down more than -2%, and Lennar (LEN), Toll Brothers (TOL), and DR Horton (DHI) are down more than -1%. 

AutoZone (AZO) is down more than -3% after reporting Q3 net sales of $4.09 billion, weaker than the consensus of $4.12 billion.

Steel Dynamics (STLD) is down more than -2% after JPMorgan Chase initiated coverage of the stock with a recommendation of underweight and a price target of $82. 

Nucor (NUE) is down more than -2% after JPMorgan Chase initiated coverage of the stock with a recommendation of underweight and a price target of $130. 

PacWest (PACW) is up more than +18% to lead regional bank stocks higher after agreeing to sell a $2.6 billion portfolio of 74 real estate construction loans as part of its plan to shore up its liquidity.  Also, Zions Bancorp (ZION) is up more than +6% to lead gainers in the S&P 500, and Comerica (CMA) is up more than +5%.  In addition, KeyCorp (KEY) is up more than +2%, and M&T Bank (MTB), Lincoln National (LNC), Citizens Financial Group (CFG), and Bancorp (USB) are up more than +1%.

American International Group (AIG) is up more than +3% after agreeing to sell its reinsurance business to Renaissance Holdings Ltd for roughly $3 billion. 

Broadcom (AVGO) is up more than +2% after Apple signed a multibillion-dollar deal with the company to develop 5G radio frequency components. 

Chevron (CVX) is up more than +2% to lead gainers in the Dow Jones Industrials after HSBC upgraded the stock to buy from hold with a price target of $189. 

Yelp (YELP) is up more than +10% after activist investor TCS Capital Management said it believes “several buyers” would pay a premium for the company after it urged the board of directors to explore a sale.

Across the markets…

June 10-year T-notes (ZNM23) today are down -3 ticks, and the 10-year T-note yield is up +2.1 bp at 3.736%.  Jun T-notes this morning dropped to a 2-1/4 month low, and the 10-year T-note yield rose to a 2-1/4 month high of 3.757%.  Hawkish comments today from Minneapolis Fed President Kashkari weighed on T-notes when he said rates would have to be kept higher for longer if inflation persists. 

Also, rising inflation expectations are weighing on T-note prices after the 10-year breakeven inflation expectations rate today rose to a 3-week high of 2.277%.  Supply pressures are also undercutting T-note prices as the Treasury later today will auction $42 billion of 2-year T-notes as part of this week’s $120 billion auction package of T-notes.  

The dollar index (DXY00) today is up +0.19% and posted a 2-month high.  Hawkish comments this morning from Minneapolis Fed President Kashkari pushed the 10-year T-note yield up to a 2-1/4 month high and strengthened the dollar’s interest rate differentials.  However, gains in the dollar were contained by the ongoing U.S. debt ceiling impasse. 

EUR/USD (^EURUSD) today is down by -0.20%.  The euro today is under pressure from dollar strength and economic concerns in the Eurozone after the Eurozone May S&P manufacturing PMI unexpectedly contracted at the steepest pace in 3 years. 

Today’s Eurozone economic news was dovish for ECB policy and bearish for the euro.  The Eurozone May S&P manufacturing PMI unexpectedly fell -1.2 to a 3-year low of 44.6, weaker than expectations of an increase to 46.0.  Also, the May S&P composite PMI fell -0.8 to 53.3, weaker than expectations of 53.5.

USD/JPY (^USDJPY) today is down by -0.09%.  The yen today recovered from a 5-1/2 month low and is slightly higher. The yen found support on today’s positive Japanese economic news.  Gains in the yen were limited by higher T-note yields. 

Strong Japanese economic news was bullish for the yen after the Japan May Jibun Bank manufacturing PMI rose +1.3 to 50.8, the strongest pace of expansion in 8 months.  Also, the May Jibun Bank services PMI rose +0.9 to 56.3, the strongest pace of expansion since the data series began in 2019.

June gold (GCM3) this morning is down -4.7 (-0.24%), and July silver (SIN23) is down -0.171 (-0.72%).  Precious metals prices this morning are moderately lower, with silver falling to a 1-3/4 month low.  Today’s rally in the dollar index to a 2-week high is bearish for metals.  Also, higher global bond yields are weighing on precious metals.  In addition, hawkish comments from Minneapolis Fed President Kashkari today undercut metals when he said interest rates would need to be higher for longer if inflation persists. 

Silver prices were also under pressure today from industrial metals demand concerns after the U.S. May S&P manufacturing PMI fell more than expected, and the Eurozone May S&P manufacturing PMI unexpectedly contracted at the steepest pace in 3 years .  However, losses in metals prices were limited as the ongoing U.S. debt-ceiling impasse has sparked safe-haven demand for precious metals. 

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