Stocks Lower as Fed Chair Powell Reiterates Hawkish Bias

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.43%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.18%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.08%.

U.S. stocks are lower today after Fed Chair Powell, in his semi-annual testimony before the House Financial Services Committee, reiterated the Fed’s hawkish bias.  Mr. Powell will appear Thursday before the Senate Banking Committee and repeat his prepared testimony, although he will answer different questions from panel members. There are no U.S. economic reports on today’s docket.

Mr. Powell’s comments today were broadly in line with his comments last week after the FOMC meeting but nevertheless disappointed the markets.  Mr. Powell today said the Fed believes that higher interest rates will be needed to curb inflation.  He said the Fed remains “strongly committed to bringing inflation back down to our 2% goal.”  However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed for the next meeting.

The FOMC last week left its funds rate target unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes.  However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%.  The markets are discounting the odds at 76% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, up from 74% odds late Tuesday.

Stocks are being undercut this morning by a +4.5 bp rise in the 10-year T-note yield to 3.765%.  T-note prices were undercut by the hawkish bias in Mr. Powell’s testimony today and an upside UK inflation surprise. 

The UK May CPI rose +0.7% m/m and +8.7% y/y, stronger than expectations of +0.5% m/m and +8.4% y/y.  The UK May core CPI rose +7.1% y/y, stronger than expectations of +6.8% y/y and April’s report of +6.8% y/y.  The 10-year UK gilt yield today is sharply higher by +9.7 bp at 4.434%.

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.40%.  China’s Shanghai Composite closed down -1.31%, while Japan’s Nikkei Stock Index closed up +0.56%. 

Chinese stocks today were undercut by continued disappointment that China’s State Council on Tuesday didn’t mention specific economic support measures and that the Chinese central bank cut lending rates less than expected.  The PBOC today on Tuesday cut the one-year and five-year loan prime rates by -10 bp, smaller than expectations for a -15 bp cut.

Today’s stock movers…

Chip stocks are notable losers in the Nasdaq 100 today, with AMD (AMD) down -3.4%, Intel (INTC) down -2.9%, NVIDIA (NVDA) down -2.7%, and Qualcomm (QCOM) down -2.2%.  Notable Nasdaq 100 winners today include a +2.9% rally in Dollar Tree (DLTR), a +2.1% rally in O’Reilly Automotive (ORLY), and a +1.7% rally in Baker Hughes (BKR).

Tesla (TSLA) is down -2.0% after its recent string of gains.    A Barclays analyst today said that Tesla has rallied “too far, too fast.”  Tesla has rallied by +35% in June through Tuesday.

FedEx (FDX) is down -1.5% after company management issued 2024 earnings guidance of $16.50-$18.50 per share, with a mid-point of $17.50 that was below the market consensus of $18.31. Also, FedEx reported sales of $21.9 billion in the quarter ending May 31, which was the third consecutive decline as package volumes declined from pandemic levels.  On the positive side, fiscal Q4 earnings of $4.94 per share were above the market consensus of $4.88, although sharply below the year-earlier level of $6.87.

Adobe (ADBE) is down -0.6% even though BMO Capital Markets upgraded the stock to outperform from market perform on expectations for a revenue boost from AI and Adobe Express.

Li Auto (LI) is up +4.0% after Chinese electric vehicle makers saw support from the Chinese government’s extension of tax breaks through 2027 for clean-energy vehicles.

Peloton Interactive (PTON) is down -10% after Wolf Research downgraded its rating to underperform from peer-perform.

Infosys (INFY) is down -2.3% on a downgrade by Susquehanna Financial to negative from neutral.

Across the markets…

September 10-year T-notes (ZNU23) today are down -13 ticks, and the 10-year T-note yield is up +4.5 bp at 3.765%.  T-notes prices retreated today on Fed Chair Powell’s hawkish bias and on the unfavorable UK inflation report, which illustrated the continued problems that the U.S. and Europe are having with inflation. T-note prices are also being undercut by a small +0.3 bp rise today in the 10-year inflation expectations rate to 2.230%.

The dollar index (DXY00) today is down -0.21%, despite today’s higher T-note yields.  The FX market remains focused on monetary policy differentials, with the ECB and Bank of England continuing to raise interest rates while the Fed is on pause.  The dollar is also lower despite increased safe-haven demand tied to today’s sell-off in stocks.  EUR/USD (^EURUSD) today is up +0.38%, and USD/JPY (^USDJPY) is up +0..44%.

August gold (GCQ3) today is down -4.1 (-0.21%), and July silver (SIN23) is down -0.484 (-2.08%).  Precious metals prices today are lower on the Fed’s hawkish bias and have failed to gain much support from the weaker dollar.  Silver is lower on concern about the lackluster global economic outlook.

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