Stocks Give Up Early Gains as the 10-Year T-note Yield Jumps Above 4%

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.64%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.67%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.22%.

Stocks on Thursday gave up early gains and settled moderately lower.  Long liquidation emerged in stocks after 10-year T-notes yields jumped above 4.00% on a report that said the BOJ plans to discuss tweaking its yield curve control policy at Friday’s policy meeting.  The Nikkei reported that the BOJ will consider letting long-term interest rates rise above the 0.5% upper limit of its 10-year JGB yield target by “a certain degree.”

Stocks Thursday initially moved higher, with the S&P 500 posting a nearly 16-month high, the Dow Jones Industrials posting a 17-1/2 month high, and the Nasdaq 100 posting a 1-week high on strength in technology stocks.  Meta Platforms rose more than +4% after reporting better-than-expected Q2 revenue.  Also, chip stocks rallied after Samsung Electronics said artificial intelligence will boost memory demand before the year’s end.

Stocks also found support Thursday on signs that the U.S. economy may achieve a soft landing after U.S. Q2 GDP expanded more than expected, boosted by stronger-than-expected consumer spending. Also, the Q2 core PCE price index advanced at a slower-than-expected pace.

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.

As expected, the ECB raised its main refinancing rate today by 25 bp to 4.25% and said, "The Governing Council's future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target."

U.S. weekly initial unemployment claims unexpectedly fell -7,000 to a 5-month low of 221,000, showing a stronger labor market than expectations of an increase to 235,000.

U.S. Q2 GDP rose +2.4% (q/q annualized), stronger than expectations of +1.8%, as Q2 personal consumption rose +1.6%, stronger than expectations of +1.2%.  The Q2 core PCE price index eased to +3.8% q/q from +4.9% q/q in Q1, better than expectations of +4.0% q/q and the slowest pace of increase since Q1 2021.

U.S. Jun capital goods new orders nondefense ex-aircraft and parts unexpectedly rose +0.2% m/m, stronger than expectations of a decline of -0.1% m/m.

U.S. Jun pending home sales unexpectedly rose +0.3% m/m, stronger than expectations of a -0.5% m/m decline.

The markets are discounting the odds at 20% for a +25 bp rate hike at the September 20 FOMC meeting. 

Global bond yields on Thursday were mixed.  The 10-year T-note yield jumped to a 2-1/2 week high of 4.022% and finished up +13.7 bp to 4.004%.  The 10-year German bund yield fell -1.1 bp to 2.474%.  The 10-year UK Gilt yield rose to a 1-week high of 4.324% and finished up +2.9 bp at 4.310%. 

Overseas stock markets Thursday settled mixed.  The Euro Stoxx 50 closed up +2.32%.  China’s Shanghai Composite Index today closed down -0.20%. Japan’s Nikkei Stock Index closed up +0.68%.

Today’s stock movers…

Ebay (EBAY) closed down more than -10% to lead losers in the S&P 500 and Nasdaq 100 after forecasting Q3 adjusted EPS from continuing operations of 96 cents-$1.01, weaker than the consensus of $1.02.   

Chipotle Mexican Grill (CMG) closed down more than -9% after reporting Q2 comparable same-store sales rose +7.4%, weaker than the consensus of +7.67%.

Edwards Lifesciences (EW) closed down more than -9% after forecasting Q3 adjusted EPS of 55 cents-61 cents, below the consensus of 63 cents.

Airline stocks retreated Thursday after Southwest Airlines raised its full-year non-fuel expenses to fly each seat a mile, an industry gauge of efficiency, to a decline of -1% to -2% from a previous estimate of as much as a -4% drop.  As a result, Southwest Airlines (LUV) closed down more than -8%.  Also, United Airlines Holdings (UAL) closed down by more than -2%, and American Airlines Group (AAL), Alaska Air Group (ALK), and Delta Air Lines (DAL) closed down by more than -1%.

Willis Towers Watson Plc (WTW) closed down more than -8% after reporting Q2 adjusted EPS of $2.05, weaker than the consensus of $2.32, and cut its 2024 adjusted EPS forecast to $15.40-$17.00 from a previous estimate of $17.50-$20.50. 

S&P Global (SPGI) closed down more than -7% after reporting Q2 adjusted EPS of $3.12, weaker than the consensus of $3.14.

Honeywell International (HON) closed down more than -5% to lead losers in the Dow Jones Industrials after reporting Q2 sales of $9.15 billion, weaker than the consensus of $9.16 billion, and forecasting Q3 sales of $9.1 billion-$9.3 billion, the midpoint below the consensus $9.27 billion.

Align Technology (ALGN) closed up more than +13% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q2 net revenue f $1.00 billion, stronger than the consensus of $990.4 million. 

Textron (TXT) closed up more than +12% after reporting Q2 revenue of $3.42 billion, stronger than the consensus of $3.40 billion.

Lam Research (LRCX) closed up more than +9% after reporting Q4 adjusted EPS of $5,98, well above the consensus of $5.01.

Meta Platforms (META) closed up more than +4% after reporting Q2 revenue of $32.00 billion, better than the consensus of $31.06 billion, and cut its full-year capex estimate to $27 billion-$30 billion from a prior estimate of $30 billion-$33 billion, below the consensus of $31.71 billion.

Semiconductor stocks rallied Thursday after Samsung Electronics, South Korea’s largest company, reported better-than-expected Q2 net income and said artificial intelligence will boost memory demand before the year’s end.  As a result, Applied Materials (AMAT), Micron Technology (MU), and KLA Corp (KLAC) closed up more than +5%.  Also, ASML Holding NV (ASML) closed up more than +3%, and Analog Devices (ADI), Microchip Technology (MCHP), and ON Semiconductor (ON) closed up more than +2%. 

Cruise lines rallied Thursday after Royal Caribbean Cruises boosted its full-year adjusted EPS estimate to $6.00-$6.20 from a previous estimate of $4.40-$4.80, well above the consensus of $4.73.  As a result, Royal Caribbean Cruises (RCL) closed up more than +8%, Carnival (CCL) closed up more than +3%, and Norwegian Cruise Line Holdings (NCLH) closed up more than +2%.

Comcast Corp (CMCSA) closed up more than +5% after reporting Q2 revenue of $30.51 billion, stronger than the consensus of $30.09 billion.

Carrier Global (CARR) closed up more than +4% after reporting Q2 sales of $6.0 billion, better than the consensus of $5.81 billion.

Across the markets…

September 10-year T-notes (ZNU23) Thursday closed down -1-4/32 points and the 10-year T-note yield rose +13.7 bp to 4.004%.  Sep T-notes Thursday tumbled to a 2-1/2 week low, and the 10-year T-note yield jumped to a 2-1/2 week high of 4.022%.  T-notes sold off Thursday from stronger-than-expected U.S. economic reports on Q2 GDP, weekly jobless claims, Jun pending home sales, and Jun capital goods new orders, which are hawkish for Fed policy.

Selling in T-notes intensified Thursday afternoon on a report from the Nikkei that said the BOJ was considering tweaking its yield curve control and allowing long-term interest rates to climb above its 0.5% yield cap by “a certain degree.”  Also, slack demand for the Treasury’s $35 billion auction of 7-year T-notes undercut T-notes as the auction had a 2.48 bid-to-cover ratio, weaker than the 10-auction average of 2.50. 

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