Stocks Slip Ahead of an Expected 25 bp Fed Rate Hike

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.30%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.04%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.91%.

Stocks this morning are mostly lower ahead of an expected 25 bp rate hike by the FOMC later this afternoon.  Weakness in technology stocks is weighing on the overall market on disappointing earnings results from Microsoft and Texas Instruments.  Losses were limited after Alphabet jumped more than +6% after reporting better-than-expected Q2 revenue.  Also, a +5% jump in Boeing is keeping the Dow Jones Industrials in positive territory.

Q2 corporate earnings season is off to a strong start, as nearly 80% of U.S. companies that have reported results have beaten profit estimates.

U.S. Jun new home sales fell -2.5% m/m to 697,000, weaker than expectations of 725,000.

The markets are expecting the Fed today and the ECB tomorrow to both raise their respective interest rates by 25 bp and will look for guidance from the central banks to see if more rate hikes are likely.

The markets are discounting the odds at 97% for a +25 bp rate hike at the Tue/Wed FOMC meeting.  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 mixed.  The 10-year T-note yield is down -1.0 bp to 3.875%.  The 10-year German bund yield is up +6.3 bp at 2.489%.  The 10-year UK Gilt yield is up +2.2 at 4.290%.  

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.20%.  China’s Shanghai Composite Index today closed down -0.26%.  Japan’s Nikkei Stock Index closed down -0.04%.

Today’s stock movers…

CoStar Group (CSGP) is down more than -8% to lead lowers in the S&P 500 and Nasdaq 100 after reporting Q2 revenue of $605.9 million, weaker than the consensus if $607.4 million, and cut its full-year revenue forecast to $2.45 billion-$2.46 billion from a prior view of $2.47 billion-$2.48 billion, weaker than the consensus of $2.48 billion. 

Allegion Plc (ALLE) is down more than -7% after reporting Q2 net revenue of $912.5 million, below the consensus of $932.6 million. 

Robert Half (RHI) is down more than -6% after reporting Q2 EPS of $1.00, weaker than the consensus of $1.12, and forecast Q3 revenue of $1.48 billion to $1.58 billion, below the consensus of $1.59 billion. 

Microsoft (MSFT) is down more than -4% to lead losers in the Dow Jones Industrials after reporting Q3 cloud revenue of $30.3 billion, below the consensus of $30.5 billion.

Chip stocks are under pressure today after Texas Instruments forecasted Q3 revenue of $4.36 billion to $4.74 billion, the midpoint below the consensus of $4.59 billion.  As a result, Texas Instruments (TXN) is down more than -5%.  Also, Advanced Micro Devices (AMD), Analog Devices (ADI), and Broadcom (AVGO) are down more than -2%.  In addition, Microchip Technology (MCHP), Globalfoundries (GFS), KLA Corp (KLAC), and NXP Semiconductors NV (NXPI) are down more than -1%.

Waste Management (WM) is down more than -3% after reporting Q2 adjusted operating Ebitda of $1.47 billion, weaker than the consensus of $1.50 billion, and cutting its full-year adjusted operating Ebitda estimate to $5.78 billion-$5.88 billion from a previous estimate of $5.83 billion-$5.98 billion, below the consensus of $5.90 billion. 

Raytheon Technologies (RTX) is down more than -2% after Morgan Stanley downgraded the stock to equal weight from overweight.

Thermo Fisher Scientific (TMO) is down more than -1% after reporting Q2 adjusted EPS of $5.15, weaker than the consensus of $5.43, and cut its full-year adjusted EPS forecast to $22.28-$22.72 from a previous estimate of $22.70, below the consensus of $23.58.

Union Pacific (UNP) is up more than +10% to lead gainers in the S&P 500 after announcing former executive Vena will replace CEO Fritz, who is stepping down.

Chubb Ltd (CB) is up more than +6% after reporting Q2 core operating EPS of $4.92, well above the consensus of $4.41. 

Advanced Data Processing (ADP) is up more than +5% after reporting Q4 adjusted EPS of $1.89, better than the consensus of $1.83.

Old Dominion Freight Line (ODFL) is up more than +5% after reporting Q2 operating income of $391.6 million, above the consensus of $388.5 million.

Boeing (BA) is up more than +5% to lead gainers in the Dow Jones Industrials after reporting Q2 adjusted free cash flow of $2.58 billion, well above the consensus of -$73.6 million.

Alphabet (GOOGL) is up more than +5% to lead gainers in the Nasdaq 100 after reporting Q2 revenue ex-TAC of $62.07 billion, better than the consensus of $60.27 billion.   

Regional bank stocks are climbing after Bank of California agreed to buy PacWest Bancorp.  As a result, PacWest Bancorp (PACW) is up more than +21%.  Also, KeyCorp (KEY) is up more than +6%, and Comerica (CMA) and Zions Bancorp (ZION) are up more than +5%.  In addition, Citizens Financial Group (CFG), Truist Financial (TFC), and Lincoln National (LNC) are up more than +2%.

Wells Fargo (WFC) is up more than +2% after announcing plans to repurchase as much as $30 billion of its stock and boosting its dividend. 

Across the markets…

September 10-year T-notes (ZNU23) today are up +6 ticks, and the 10-year T-note yield is down -1.0 bp at 3.875%.  Sep T-notes today are moderately higher on some short covering ahead of the results of the FOMC meeting later this afternoon.  Today’s weaker-than-expected U.S. Jun new home sales report also gave T-notes a boost. 

The dollar index (DXY00) today is down by -0.11%.  Lower T-note yields today are weighing on the dollar.  Also, speculation the Fed will signal a pause today in its rate hike campaign after it raises the fed funds target range by 25 bp is bearish for the dollar.  The dollar maintained moderate losses following this morning’s weaker-than-expected U.S. Jun new home sales report.

EUR/USD (^EURUSD) today is up by +0.07%.  Dollar weakness today is supportive of the euro.  Also, the smallest pace of increase in Eurozone Jun M3 money supply in 13 years is bullish for the euro.  In addition, higher German bund yields today strengthen the euro’s interest rate differentials and are positive for EUR/USD.

Eurozone Jun M3 money supply rose +0.6% y/y, less than expectations of +0.9% y/y and the smallest pace of increase in nearly 13 years.

USD/JPY (^USDJPY) is down by -0.31%.  A decline in T-note yields today is supportive of the yen.  Also, short covering is pushing the yen higher ahead of Friday’s BOJ meeting in case the BOJ surprises the markets and decides to tweak its yield-curve-control program.

Today’s Japanese economic news was dovish for BOJ policy and bearish for the yen.  The May leading index CI was revised lower to 109.2 from the initially reported 109.5.  Also, Jun PPI services prices eased to +1.2% y/y from +1.7% y/y in May, better than expectations of +1.5% y/y and the slowest pace of increase in 15 months.

August gold (GCQ3) today is up +3.4 (+0.17%), and Sep silver (SIU23) is down -0.064 (-0.26%).  Precious metals prices this morning are mixed.  A weaker dollar today is bullish for metals prices.  Also, lower T-note yields today are supportive of precious metals.  In addition, precious metals have support on speculation the Fed may signal a pause in its rate hike campaign following today’s FOMC meeting.  On the negative side is the outlook for the Fed and ECB to raise interest rates this week. Also, fund liquidation of long gold holdings is weighing on gold prices after long gold holdings in ETFs fell to a 3-year low Tuesday. 

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