Stocks Retreat on Weak Chinese News and Increased Fed Rate-Hike Prospects

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.81%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.85%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.60%.

U.S. stocks this morning are moderately lower on global economic concerns after Chinese reports showed manufacturing and service sector activity slowed more than expected.  Losses accelerated this morning after U.S. Apr JOLTS job openings unexpectedly rose, which increases the chances of a Fed rate hike in June. The market is pricing in a 63% chance for a +25 bp rate hike at the June 13-14 FOMC meeting.

The debt ceiling agreement struck by White House negotiators and Republican leaders last Saturday goes to a vote in the House later today after advancing by the House Rules Committee Tuesday night on a 7-6 vote. If the measure passes the House, it will go to the Senate for approval.  Congress is under heavy pressure to approve the measure before June 5, when Treasury Secretary Yellen warned the U.S. risks default.

The U.S. May MNI Chicago PMI fell -8.2 to 40.4, weaker than expectations of 47.3 and the weakest level in 6 months.

U.S. Apr JOLTS job openings unexpectedly rose +358,000 to 10.103 million, showing a stronger labor market than expectations of a decline to 9.400 million.

Cleveland Fed President Mester said the Fed needs to go further with its interest rate hikes, and she "doesn't see a compelling reason to pause."

The China May manufacturing PMI unexpectedly fell -0.4 to 48.8, weaker than expectations of 49.5 and the weakest report in 5 months. Also, the May non-manufacturing PMI fell -1.9 to 54.5, weaker than expectations of 55.2.

Global bond yields are lower and are supportive of stocks. The 10-year T-note yield fell to a 1-1/2 week low of 3.637% and is down -3.8 bp at 3.648%.  The 10-year German bund yield fell to a 2-1/2 week low of 2.241% and is down -6.6 bp at 2.276%, and the UK 10-year gilt yield slid to a 1-week low of 4.152% and is down -6.4 bp at 4.183%.

On the bearish side for stocks, Advanced Auto Parts plummeted more than -32% after reporting Q1 comparable store sales unexpectedly fell and lowered guidance on full-year net sales.  Also, Comerica is down more than -7% after the American Banker said internal documents it obtained from the firm showed officials privately acknowledged compliance failures related to the operation of the Treasury Department’s Direct Express program.  In addition, Hewlett Packard Enterprise is down more than -6% after reporting Q2 net revenue below consensus and lowering guidance on its full-year revenue estimate.

On the bullish side, Twilio is up more than +6% after The Information reported that activist investor Legion Partners met with the company’s board of directors and managers to suggest changes to the board.  Also, Box Inc is up more than +2% after reporting better-than-expected Q1 adjusted EPS and raising guidance on its full-year adjusted EPS estimate.  In addition, American Airlines Group is up more than +1% after raising guidance on Q2 adjusted EPS.

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.75%.  China’s Shanghai Composite closed down -0.61%, and Japan’s Nikkei Stock Index closed down -1.41%. 

Today’s stock movers…

Advanced Auto Parts (AAP) is down more than -32% to lead losers in the S&P 500 after reporting Q1 comparable store sales unexpectedly fell -0.4% versus expectations of a +0.73% increase and reducing guidance on full-year net sales to $11.2 billion-$11.3 billion from a previous forecast of $11.4 billion-$11.6 billion, weaker than the consensus of $11.4 billion.  Other auto part suppliers are also falling on the news, with Genuine Parts (GPC) down more than -7% and AutoZone (AZO) and O’Reilly Automotive (ORLY) down more than -5%.

Comerica (CMA) is down more than -7% after the American Banker said internal documents it obtained from the firm showed officials privately acknowledged compliance failures related to the operation of the Treasury Department’s Direct Express program.

Hewlett Packard Enterprise (HPE) is down more than -6% after reporting Q2 net revenue of $6.97 billion, weaker than the consensus of $7.29 billion, and reducing guidance on its full-year revenue adjusted for currency estimate to +4% to +6% from a previous estimate of +5% to +7%.

Energy stocks and energy service providers are under pressure, with the price of WTI crude falling to a 3-1/2 week low.  APA Corp (APA) is down more than -3%.  Also, Schlumberger (SLB), Valero Energy (VLO), Hess Corp (HES), and Marathon Oil (MRO) are down -2% or more.  In addition, Exxon Mobil (XOM), Baker Hughes (BKR), ConocoPhillips (COP), Devon Energy (DVN), and Diamondback Energy (FANG) are down more than -1%. 

HP Inc (HPQ) tumbled more than -4% in pre-market trading after reporting Q2 revenue of $12.91 billion, below the consensus of $13.03 billion. 

Arista Networks (ANET) is down more than -4% on signs of insider selling after an SEC filing showed COO Sadana sold $2.88 million worth of shares on May 25.

Sealed Air Corp (SEE) is down more than -4% after Mizuho Securities cut its price target on the stock to $49 from $56.

Twilio (TWLO) is up more than +6% after The Information reported that activist investor Legion Partners met with the company’s board of directors and managers to suggest changes to the board. 

Box Inc (BOX) is up more than +2% after reporting Q1 adjusted EPS of 32 cents, better than the consensus of 27 cents, and raised guidance on full-year adjusted EPS to $1.44-$1.50 from a prior view of $1.42-$1.48, above the consensus of $1.42.

Equity Residential (EQR) is up more than +1% after raising guidance on full-year normalized FFO per share to $3.73-$3.83 from a previous forecast of $3.70-$3.80, above the consensus of $3.75.

Microsoft (MSFT) is up more than +1% after Credit Suisse raised its price target on the stock to $420 from $350.

Verizon Communications (VZ) is up more than +1% to lead gainers in the Dow Jones Industrials after it entered into a 10-year digital modernization contract with the United States Postal Service (USPS).

American Airlines Group (AAL) is up more than +1% after raising guidance on Q2 adjusted EPS to $1.45-$1.65 from a previous estimate of $1.20-$1.40.

Xylem (XYL) is up than +3% after Baird upgraded the stock to outperform from neutral with a price target of $135.

Across the markets…

June 10-year T-notes (ZNM23) today are up +10 ticks, and the 10-year T-note yield is down -3.8 bp at 3.648%.  Jun T-notes this morning are posting modest gains on positive carryover from a rally in 10-year German bunds to a 2-1/2 week high.  T-notes jumped to their highs on this morning ‘s weaker-than-expected May MNI Chicago PMI report.  However, prices came off their best levels after Apr JOLTS job openings unexpectedly rose. 

The dollar index (DXY00) today is up by +0.40% and posted a 2-1/2 month high. Hawkish comments today from Cleveland Fed President Mester supported the dollar when she said she "doesn't see a compelling reason to pause" Fed rate hikes.  The dollar also rose after weaker-than-expected Chinese economic news today pushed the yuan down to a 6-month low against the dollar.  Finally, the weakness in stocks today has boosted the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.67% and fell to a 2-1/4 month low.   Dollar strength today is weighing on the euro along with weaker-than-expected French and German May CPI reports, which are dovish for ECB policy.  Also, a decline in the 10-year German bund yield to a 2-1/2 week low today has weakened the euro’s interest rate differentials.

German May CPI (EU harmonized) eased to +6.3% y/y from +7.6% y/y in Apr, better than expectations of +6.7% y/y and the weakest level in 15 months.

The German Apr import price index fell -7.0% y/y, the most in 3 years, and a larger decline than expectations of -5.8% y/y.

France May CPI (EU harmonized) eased to +6.0% y/y from +6.9% y/y in Apr, better than expectations of +6.4% y/y and the smallest increase in a year.

France Apr consumer spending unexpectedly fell -1.0% m/m, the third straight decline and weaker than expectations of a +0.3% m/m increase.

USD/JPY (^USDJPY) today is up by +0.11%.  The yen is being undercut by weaker-than-expected Japanese industrial production and retail sales reports.  However, losses in the yen are limited by lower T-note yields and weakness in global stocks, which boosts the safe-haven demand for the yen. Also, a jump in the Japan May consumer confidence index today to a 16-month high is supportive of the yen.

Japan Apr industrial production unexpectedly fell -0.4% m/m, weaker than expectations of a +1.4% m/m increase.

Japan Apr retail sales unexpectedly fell -1.2% m/m, the biggest decline in 16 months and weaker than expectations of a +0.5% m/m increase.

The Japan May consumer confidence index rose +0.6 to a 16-month high of 36.0, right on expectations.

June gold (GCM3) this morning is up +9.8 (+0.50%), and July silver (SIN23) is up +0.161 (+0.69%).  Precious metals prices this morning are moderately higher.  A slump in stocks today has boosted the safe-haven demand for precious metals.  Also, lower global bond yields today are bullish for metals.  However, gains in metals are limited after the dollar rallied to a 2-1/2 month high today.  Also, silver prices are under pressure on demand concerns for industrial metals after the China May manufacturing PMI unexpectedly contracted by the most in 5 months and after the U.S. May MNI Chicago PMI contracted by the steepest pace in 6 months.

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