Stocks Erase an Early Rally as Higher Bond Yields Undercut Chip Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.28%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.85%.

Stocks this morning are mixed.  Stocks gave up a morning rally and turned lower as higher bond yields weighed on chip stocks and sparked long liquidation on the broader market ahead of Friday’s speech by Fed Chair Powell.  Bond yields rose after U.S. weekly jobless claims unexpectedly declined, and former St. Louis Fed President Bullard said a reaccelerating U.S. economy could prompt higher interest rates.

Stock indexes initially opened higher this morning as Nvidia climbed to a record high and sparked a rally in technology stocks after reporting stronger-than-expected Q2 revenue and forecasting Q3 sales well above expectations.

The markets await comments Friday morning from Fed Chair Powell at the Fed’s annual symposium of global central bankers at Jackson Hole, Wyoming.  With inflation falling from 40-year highs but still well above the Fed’s 2% target, Powell’s speech will be scoured to determine when the Fed may end its rate hike campaign.  ECB President Lagarde will also speak at the event.

Former St. Louis Fed President Bullard said a pickup in economic activity this summer could delay plans for the Fed to end its interest-rate hiking campaign, saying, "This reacceleration could put upward pressure on inflation, stem the disinflation that we're seeing and instead delay plans for the Fed to change policy."

U.S. weekly initial unemployment claims unexpectedly fell -10,000 to 230,000, showing a stronger labor market than expectations of an increase to 240,000.

U.S. July capital goods new orders nondefense ex-aircraft and parts unexpectedly rose +0.1% m/m, right on expectations.

The U.S. July Chicago Fed national activity index rose +0.45 to 0.12, stronger than expectations of -0.22.

The markets are discounting the odds at 12% for a +25 bp rate hike at the September 20 FOMC meeting and 45% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields are mixed.  The 10-year T-note yield is up +1.0 bp at 4.202%.  The 10-year German bund yield rebounded from a 2-week low of 2.447% and is up +0.4 bp at 2.521%.  The 10-year UK gilt yield fell to a 2-week low of 4.390% and is down -4.0 bp at 4.428%.  

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.68%.  China’s Shanghai Composite Index closed up +0.12%.  Japan’s Nikkei Stock Index closed up +0.87%.

Today’s stock movers…

Dollar Tree (DLTR) is down more than -10% to lead losers in the S&P 500 and Nasdaq 100 after forecasting Q3 EPS of 94 cents to $1.04, weaker than the consensus of $1.29.

Boeing (BA) is down more than -2% to lead losers in the Dow Jones Industrials after it reported an issue affecting its 737 Max jet, raising concerns about its delivery target.  

Higher bond yields today are weighing on chip stocks. As a result, Advanced Micro Devices (AMD) is down more than -5%, and Marvell Technology (MRVL) is down more than -3%.  Also, ASML Holding NV (ASML) and Globalfoundries (GFS) are down more than -2%.  In addition, Intel (INTC), Lam Research (LRCX), Applied Materials (AMAT), and Analog Devices (ADI) are down more than -1%. 

Petco (WOOF) is down more than -21% after forecasting 2024 net revenue of $6.15 billion-$6.28 billion, below the consensus of $6.29 billion.

Medtronic Plc (MDT) is down more than -2% after saying the FDA’s independent experts panel voted against recommending the company’s blood pressure treatment device, saying the risks do not outweigh the benefits.

U.S. Steel (X) is down more than -1% after Esmark said it’s no longer pursuing a takeover of the company.

Autodesk (ADSK) is up more than +3% to lead gainers in the S&P 500 after reporting Q2 net revenue of $1.35 billion, above the consensus of $1.32 billion, and raising its 2024 revenue forecast to $5.41 billion-$5.46 billion from a previous forecast of $5.36 billion-$5.46 billion, stronger than the consensus of $5.41 billion.

Nvidia (NVDA) is up more than +2% at a new record high after reporting Q2 revenue of $13.51 billion, well above the consensus of $11.04 billion, and forecasting Q3 sales of about $16 billion, stronger than the consensus of $12.5 billion.  It also approved an additional $25 billion in stock buybacks. 

Regional bank stocks are climbing today as they recover some of this week’s losses.  Zions Bancorp (ZION) is up more than +3%.  Also, Comerica (CMA) and KeyCorp (KEY) are up more than +2%.  In addition, Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), Lincoln National (LNC), Northern Trust (NTRS), Bank of New York Mellon (BK), M&T Bancorp (MTB), Regions Financial (RF), Truist Financial (TFC), and US Bancorp (USB) are up more than +1%.

Guess?  Inc (GES) is up more than +24% after reporting Q2 gross margin of 44.2%, better than the consensus of 41.1%, and raising its 2024 adjusted operating margin forecast to 9.0%-9.4% from a prior view of 8.2%-8.8%.

Splunk (SPLK) is up more than +13% after reporting Q2 revenue of $910.6 million, above the consensus of $886.9 million, and raising its 2024 revenue forecast to $3.93 billion-$3.95 billion from a previous forecast of $3.85 billion-$3.90 billion, stronger than the consensus of $3.90 billion.

Prudential Financial (PRU) is up more than +2% after Raymond James upgraded the stock to a “strong buy” with a price target of $125.

Discover Financial Services (DFS) is up more than +1% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $104.

Across the markets…

September 10-year T-notes (ZNU23) today are down -5 ticks, and the 10-year T-note yield is up +1.0 bp at 4.202%.  Sep T-notes today are under pressure from a rally in stocks, which reduces the safe-haven demand for T-notes.  Prices fell to their lows after U.S. weekly jobless claims unexpectedly declined, which signals a stronger labor market that is hawkish for Fed policy.  An increase in inflation expectations is also bearish for T-notes after the 10-year breakeven inflation rate rose to a 1-week high of 2.368%.  T-notes recovered most of their losses on the increase in safe-haven demand after stocks gave up most of their morning gains.

The dollar index (DXY00) today is up by +0.43% and just below Wednesday’s 2-1/2 month high.  Higher T-note yields today are positive for the dollar.  Also, signs of U.S. labor market strength are hawkish for Fed policy and bullish for the dollar after weekly initial unemployment claims unexpectedly declined.  On the negative side is today’s rally in equity markets, which curbs liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.31%.  The euro is under pressure today from the stronger dollar.  Also, weaker-than-expected Eurozone economic news weighed on EUR/USD after French July business and manufacturing confidence fell more than expected.

The France Jul business confidence index fell -1 to a 2-1/4 year low of 99, weaker than expectations of no change at 100.  Also, the France Jul manufacturing sentiment index fell -5 to a 2-1/2 year low of 96, weaker than expectations of 99.

USD/JPY (^USDJPY) is up by +0.71%.  The yen is falling today on dollar strength and higher T-note yields. Also, today’s rally in the Nikkei Stock Index to a 1-week high has reduced safe-haven demand for the yen.

October gold (GCV3) today is down -7.1 (-0.37%), and Sep silver (SIU23) is down -0.182 (-0.75%).  Precious metals prices this morning are moderately lower.  A stronger dollar and higher T-note yields today are bearish for gold. Also, ongoing fund liquidation in gold is bearish for gold prices after long gold holdings in ETFs fell to a 3-1/3 year low Wednesday.  In addition, a rally in stocks today has curbed safe-haven demand for precious metals. Losses in metals are limited on short-covering and position squaring ahead of Fed Chair Powell’s speech Friday at the Fed’s annual symposium in Jackson Hole, Wyoming. 

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