Stocks Close Moderately Lower as a Debt-Ceiling Deal Remains Elusive

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.73%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.77%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.50%.

Stock indexes Wednesday closed moderately lower, with the S&P 500 falling to a 1-1/2 week low and the Dow Jones Industrials dropping to a 1-3/4 month low.  Stocks remain under pressure as talks to lift the U.S. debt ceiling are at an impasse.  Negotiations between President Biden’s team and representatives of House Speaker McCarthy showed little progress Wednesday.

U.S. stocks were also weighed down by negative carryover from a slide in the Euro Stoxx 50 to a 1-3/4 month low on inflation concerns after UK Apr consumer prices rose more than expected. 

Fed Governor Waller said he "does not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective."  However, he added that "the choice to hike or skip at the June FOMC meeting hinges on how the data come in over the next three weeks." 

The May 2-3 FOMC meeting minutes showed policymakers divided on whether further interest rate increases are needed.  "Almost all participants stated that, with inflation still well above the committee's longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook."

Global bond yields Wednesday were higher.  The 10-year T-note yield rose +3.1 bp to 3.723%.  The 10-year German bund yield climbed to a 3-week high of 2.504% and finished up +0.3 bp at 2.472%.  The UK 10-year gilt jumped to a 7-1/4 month high of 4.368% and finished up +5.5 bp at 4.214%.

On the bearish side for stocks, chip stocks declined, led by a -7% fall in Analog Devices after it forecasted Q3 adjusted EPS below consensus. Also, Inuit closed down more than -7% after reporting Q3 net revenue below consensus.  Agilent fell more than -10% after cutting its full-year revenue forecast. 

On the bullish side, Palo Alto Networks closed up more than +7% after reporting Q3 billings above consensus and raising its full-year revenue forecast.  Also, Kohl’s closed up more than +7% after reporting Q1 net sales above consensus.  O’Reilly Automotive is up more than +1% after it boosted it stock buyback authorization by $2 billion to $23.75 billion.

Overseas stock markets Wednesday settled lower.  The Euro Stoxx 50 closed down -1.81%. China’s Shanghai Composite closed down -1.28%, and Japan’s Nikkei Stock Index closed down -0.89%. 

Today’s stock movers…

Chip stocks retreated Wednesday, as Analog Devices (ADI) closed down more than -7% to lead losers in the S&P 500 and Nasdaq 100 after it forecast Q3 adjusted EPS of $2.42-$2.62, weaker than the consensus of $2.64.  Other chip stocks fell on the news, with Microchip Technology (MCHP) closing down more than -5% and NXP Semiconductors NV (NXPI) closing down more than -4%.  Also, Globalfoundries (GFS) and ON Semiconductor (ON) closed down more than -3%.  In addition, Applied Materials (AMAT) and ASML Holding NV (ASML) closed down more than -2%. 

Inuit (INTU) closed down more than -7% after reporting Q3 net revenue of $6.02 billion, weaker than the consensus of $6.09 billion. 

Agilent (A) closed down more than -5% after cutting its full-year revenue forecast to $6.93 billion-$7.03 billion from a previous forecast of $7.03 billion-$7.10 billion, weaker than the consensus of $7.09 billion. 

VF Corp (VFC) closed down more than -3% after reporting Q4 revenue of $2.70 billion, weaker than the consensus of $2.73 billion.

Real estate trust stocks moved lower Wednesday on higher global bond yields.  Boston Properties (BXP) and Digital Realty Trust (DLR) closed down more than -4%.  Also, Alexandria Real Estate Equities (ARE) and Equinix (EQIX) closed down more than -3%.  Healthpeak Properties (PEAK), Federal Realty Investment Trust (FRT), Equity Residential (EQR), Regency Centers (REG), Camden Property Trust (CPT), and Welltower (WELL) closed down more than -2%.

Children’s Place (PLCE) closed down more than -21% after reporting a Q1 adjusted loss of -$2.00 per share, a larger loss than expectations of -$1.82, and forecast full-year adjusted EPS of $1.00 to $1.50, well below the consensus of $2.24.

Palo Alto Networks (PANW) closed up more than +7% to lead gainers in the Nasdaq 100 after reporting Q3 billings of $2.26 billion, above the consensus of $2.23 billion, and raised its full-year revenue forecast to $6.88 billion-$6.91 billion from a previous forecast of $6.85 billion-$691 billion, stronger than the consensus of $6.89 billion. 

Kohl’s (KSS) closed up more than +7% after reporting Q1 net sales of $3.36 billion, stronger than the consensus of $3.34 billion.

Netflix (NFLX) closed up more than +2% after Oppenheimer raised its price target on the stock to $450 from $415.

Corning Incorporated (GLW) closed up more than +2% after it announced a 20% increase in display glass substrate prices.

Energy stocks and energy service providers moved higher Wednesday, with WTI crude oil climbing to a 3-week high.  Valero Energy (VLO) closed up more than +2%.  Also, Marathon Oil (MRO), Exxon Mobil (XOM), Devon Energy (DVN), Diamondback Energy (FANG), Phillips 66 (PSX), and Baker Hughes (BKR) closed up more than +1%.

O’Reilly Automotive (ORLY) closed up more than +1% after it boosted its stock buyback authorization by $2 billion to $23.75 billion. 

Across the markets…

June 10-year T-notes (ZNM23) on Wednesday closed down -6 ticks, and the 10-year T-note yield rose by +3.1 bp to 3.723%.  June T-notes Wednesday posted moderate losses but remained above Tuesday’s 2-1/4 month low.  Negative carryover from a slump in 10-year UK gilts Wednesday to a 7-1/4 month low weighed on T-note prices after UK Apr CPI rose more than expected. Also, hawkish comments from Fed Governor Waller undercut T-notes when he said he "does not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective."

T-notes recovered from their worst levels Wednesday on strong demand for the Treasury’s $43 billion 5-year T-note auction with a bid-to-cover ratio of 2.58, above the 10-auction average of 2.45.  Also, the slump in stocks Wednesday sparked some safe-haven demand for T-notes. 

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