Stocks Settle Mixed as Euphoria Over Debt-Ceiling Agreement Fades

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday was unchanged, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.40%.

Stock indexes Tuesday settled mixed, with the Nasdaq 100 posting a 13-1/2 month high.  The broader market found support Tuesday after a tentative agreement was reached over the long holiday weekend to raise the U.S. debt ceiling.  However, the euphoria over the agreement faded since the agreement will reduce spending and fiscal stimulus for the U.S. economy, and also boosted the chances of a Fed rate hike in June.

White House negotiators and Republican leaders led by House Speaker McCarthy agreed to a tentative deal to suspend the debt ceiling until January 2025 and cap federal spending for the next two years.  The House is expected to vote on the bill Wednesday before it goes to the Senate for a vote.

Tuesday’s U.S. economic news was mixed for stocks. However, a decline in bond yields Tuesday gave technology stocks a boost.  Weakness in energy stocks limited gains in the overall market.  The market is pricing in a 63% chance for a +25 bp rate hike at the June 13-14 FOMC meeting.

The U.S. Mar S&P CoreLogic composite-20 home price index fell -1.15% y/y, the biggest decline in nearly 11 years but a smaller decline than expectations of -1.60% y/y 

The Conference Board’s U.S. May consumer confidence index fell -1.4 to 102.3, stronger than expectations of 99.0.

The U.S. May Dallas Fed manufacturing outlook level of general business activity unexpectedly fell -5.7 to a 3-year low of -29.1, weaker than expectations of an increase to -18.0.

Tuesday’s comments from Richmond Fed President Barkin were hawkish for Fed policy and bearish for stocks when he said, "However I look at it, the inflation rate is too high," and we need to bring it down by reducing demand.

Global bond yields Tuesday moved lower and were supportive of stocks.  The 10-year T-note yield fell -10.8 bp at 3.690%.  The 10-year German bund yield fell to a 1-1/2 week low of 2.338% and finished down -9.2 bp at 2.342%, and the UK 10-year gilt yield fell -8.7 bp at 4.247%.

On the bullish side for stocks, Paramount Global closed up more than +6% after Wolfe Research upgraded the stock.  Also, Qualcomm closed up more than +5% after senior vice president Katouzian said the company is benefitting from a spike in demand for its “AI-capable” products.  In addition, Tesla is up more than +3% after CEO Musk said the company opposes “decoupling” and is willing to expand business in China.

On the bearish side, energy stocks and energy service providers sold off Tuesday after the price of WTI crude fell more than -4% to a 2-week low. Also, fertilizer stocks were under pressure after Morgan Stanley cut its price targets across the sector.  In addition, U.S.-listed Chinese stocks moved lower on concern’s that China’s economic recovery is faltering.

Overseas stock markets Tuesday settled mixed.  The Euro Stoxx 50 closed down -0.66%.  China’s Shanghai Composite closed up +0.09%, and Japan’s Nikkei Stock Index closed up +0.30%. 

Today’s stock movers…

Paramount Global (PARA) closed up more than +6% to lead gainers in the S&P 500 after Wolfe Research upgraded the stock to peer perform from underperform. 

Qualcomm (QCOM) closed up more than +5% after senior vice president Katouzian said the company is benefitting from a spike in demand for its “AI-capable” products, and the company has shipped 2 billion AI-capable products year to date. 

Ford Motor (F) closed up more than +4% after Jeffries upgraded the stock to buy from hold with a price target of $16.   

Tesla (TSLA) closed up more than +4% after CEO Musk said the company opposes “decoupling” and is willing to expand business in China.

Nvidia (NVDA) closed up more than +2% after it unveiled a new batch of products and services tied to artificial intelligence (AI).  Other mega-cap stocks involved with AI also rose, with Intel (INTC) closing up more than +3% to lead gainers in the Dow Jones Industrials.

Universal Health Services (UHS) closed up more than +2% after SVB upgraded the stock to outperform from market perform with a price target of $170. 

Energy stocks and energy service providers sold off sharply after the price of WTI crude sank more than -4% to a 2-week low.  APA Corp (APA) closed down more than -3%.  Also, Devon Energy (DVN) and Coterra Energy (CTRA) closed down more than -2%.  In addition, Hess Corp (HES), Valero Energy (VLO), Marathon Oil (MRO), Haliburton (HAL), Diamondback Energy (FANG), Schlumberger (SLB), Phillips 66 (PSX), and Marathon Petroleum (MPC) closed down -1% or more.   

Target (TGT) closed down more than -3% to lead losers in the S&P 500 as the stock has closed lower for eight consecutive sessions after it forecasted weaker-than-expected Q2 earnings on May 17.

Fertilizer stocks were under pressure Tuesday after Morgan Stanley cut its price targets across the sector.  As a result, Mosaic (MOS) and CF Industries (CF) closed down more than -1%.   

U.S.-listed Chinese stocks moved lower on concern’s that China’s economic recovery is faltering. PDD Holdings (PDD) closed down more than -5% to lead losers in the Nasdaq 100. Also, JD.com (JD) closed down by more than -3%, and Baba Group Holding (BABA) and Baidu (BIDU) closed down by more than -2%. 

Across the markets…

June 10-year T-notes (ZNM23) on Tuesday closed up +24.5 ticks, and the 10-year T-note yield fell by -10.8 bp to 3.690%.  June T-notes Tuesday pushed higher on positive carryover from a rally in 10-year German bunds to a 1-1/2 week high.  T-notes also garnered support after U.S. negotiators reached a tentative agreement to raise the debt ceiling, which also puts a cap on federal spending that could slow economic growth.  In addition, a decline in inflation expectations was supportive for T-notes as the 10-year breakeven inflation rate fell to a 1-week low Tuesday of 2.218%.   

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