Stocks Falter and Bond Yields Jump on the Outlook for a More Aggressive Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.28%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.32%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.31%.

Stocks this morning are moderately lower, with the Dow Jones Industrials falling to a 1-week low.  Stocks and bonds are falling today after stronger-than-expected U.S. economic reports on Jun ADP employment and Jun ISM services bolstered the outlook for the Fed to be more aggressive in raising interest rates.

Stock index futures were under pressure in the overnight session, and bond yields rose on comments late Wednesday from New York Fed President Williams, who said the incoming data the Fed has seen so far support the "hypothesis" that the Fed has more work to do on monetary policy.

Stock index futures extended their losses, and bond yields rose even further this morning on a blowout Jun ADP employment report that showed employers added the most jobs in 16 months and after the Jun ISM services index rose more than expected to a 4-month high.

The U.S. Jun ADP employment change surged by +497,000, well above expectations of +225,000 and the most in 16 months, signaling strength in the U.S. labor market.

U.S. weekly initial unemployment claims rose +12,000 to 248,000, slightly more than expectations of +245,000.  Weekly continuing claims fell -13,000 to a 4-month low of 1.720 million, showing a stronger labor market than expectations of 1.737 million.

The U.S. May trade deficit shrank to -$69.0 billion from -$74.4 billion in Apr, right on expectations.

U.S. May JOLTS job openings fell -496,000 to 9.824 million, showing a weaker labor market than expectations of 9.900 million.

The U.S. Jun ISM services index rose +3.6 to a 4-month high of 53.9, stronger than expectations of 51.2.

The markets are discounting the odds at 91% for a +25 bp rate hike at the next FOMC meeting on July 25-26, up from 85% on Wednesday.  The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields are sharply higher.  The 10-year T-note yield jumped to a 4-month high of 4.079% and is up +12.2 bp to 4.053%.  The 10-year German bund yield rose to a 3-3/4 month high of 2.641% and is up +14.5 bp at 2.623%.  The 10-year UK Gilt yield soared to a 14-year high of 4.699% and is up +17.2 bp at 4.666%.  

Overseas stock markets are lower.  The Euro Stoxx 50 is down -2.71%.  China’s Shanghai Composite Index today closed -0.54%.  Japan’s Nikkei Stock Index today closed -1.70%.

Today’s stock movers…

Regional bank stocks are under pressure today and are weighing on the overall market.  US Bancorp (USB), Comerica (CMA), and KeyCorp (KEY) are down more than -4%.  Also, Citizens Financial Group (CFG), Truist Financial (TFC), Zions Bancorp (ZION), and Fifth Third Bancorp (FITB) are down more than -3%. 

American Express (AXP) is down more than -3% to lead losers in the Dow Jones Industrials after Baird downgraded the stock to neutral from outperform.   

MarketAxess Holdings (MKTX) is down more than -3% after Piper Sandler lowered its price target on the stock to $260 from $375.

Boston Properties (BXP) is down more than -3% after Truist Securities cut its price target on the stock to $75 from $86.

Homebuilders are falling today after the 10-year T-note yield jumped to a 4-month high, raising mortgage rates and dampening home-buying prospects.  As a result, DR Horton (DHI), Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM) are down -2% or more.

Keurig Dr Pepper (KDP) is up more than +1% to lead gainers in the Nasdaq 100 after Morgan Stanley upgraded the stock to overweight from equal weight, noting the stock’s “compelling” valuation.

Microsoft (MSFT) is up +0.5% to lead gainers in the Dow Jones Industrials after Morgan Stanley raised its price target on the stock to $415 from $355 and said artificial intelligence-driven gains could propel the stock to a more than $3 trillion valuation. 

BorgWarner (BWA) is up more than +1% to lead gainers in the S&P 500 after Bank of America Global Research upgraded the stock to buy from neutral. 

Aptiv Plc (APTV) is up more than +1% after Bank of America Global Research upgraded the stock to buy from neutral. 

Meta Platforms (META) is up +0.6% after launching its Threads app, a rival to Twitter.

Across the markets…

September 10-year T-notes (ZNU23) today are down -31 ticks, and the 10-year T-note yield is up +12.2 bp at 4.053%.  Sep T-notes today sank to a 4-month low, and the 10-year T-note yield rose to a 4-month high of 4.079%.  T-notes were weighed down in the overnight session on negative carryover from the hawkish minutes of the Jun 13-14 FOMC meeting and from comments late Wednesday from Ney York Fed President Williams, who said the Fed has more work to do on monetary policy.  T-note losses accelerated this morning after the Jun ADP employment change showed employers added the most jobs in 16 months, a hawkish factor for Fed policy. 

The dollar index (DXY00) today is up by +0.16%.  The dollar today recovered from early losses and rallied to a 3-week high after the stronger-than-expected U.S Jun ADP employment and Jun ISM services reports pushed bond yields higher and may prompt the Fed to keep raising interest rates.  Also, today’s slump in global equity markets has sparked liquidity demand for the dollar.

EUR/USD (^EURUSD) is up by +0.13%.  The euro today recovered from a 3-week low and is moderately higher.  Short covering emerged in EUR/USD after today’s report showed German May factory orders rose more than expected by the most in almost three years.  The euro today initially moved lower as U.S. bond yields rose on the hawkish minutes of the Jun 13-14 FOMC meeting.

Eurozone May retail sales were unchanged m/m, weaker than expectations of +0.2% m/m.

The German Jun S&P construction PMI fell -2.5 to 41.4, the steepest pace of contraction in 2-1/3 years.

German May factory orders rose +6.4% m/m, stronger than expectations of +1.0% m/m and the largest increase in almost three years.

USD/JPY (^USDJPY) is down -0.27%.  The yen today climbed to a 1-week high against the dollar and is finding support on the slump in global equity markets, which has sparked some safe-haven demand for the yen.  Also, rising JGB bond yields have strengthened the yen’s interest rate differentials after the 10-year JGB bond yield today rose to a 2-1/2 week high. Higher T-note yields today are limiting the upside in the yen. 

August gold (GCQ3) today is down -16.6 (-0.87%), and Sep silver (SIU23) is down -0.502 (-2.53%).  Precious metals prices this morning are moderately lower on negative carryover from Wednesday’s hawkish minutes of the Jun 13-14 FOMC meeting.  Also, hawkish comments from New York Fed President Williams undercut metals when he said the Fed has more work to do on monetary policy.  Metals prices fell further after bond yields rose even higher after the U.S Jun ADP employment and Jun ISM services reports rose more than expected, a hawkish factor for Fed policy.  In addition, the prospects of additional Fed rate hikes have sparked fund liquidation of gold as holdings in gold ETFs fell to a 3-1/2 month low Wednesday.  Losses in metals accelerated this morning after the dollar index rebounded from early losses and rallied to a 3-week high. 

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