Stocks Fall as Powell Signals Interest Rates May be Higher for Longer

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 -0.19%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.65%.

Stocks this morning are moderately lower.  Stocks retreated on comments from Fed Chair Powell that signaled interest rates may be higher for longer when he said the Fed is prepared to raise rates further if appropriate and intends to hold policy at a restrictive level until inflation is moving toward the Fed’s 2% objective.  Losses in stocks were muted as Powel also signaled the Fed may pause its rate hike cycle when he said the Fed "will proceed carefully" on whether to hike again.

Today’s U.S. economic news was bearish for stocks.  The University of Michigan U.S. Aug consumer sentiment index was revised down by -1.7 to 69.5, weaker than expectations of no change at 71.2. Also, inflation expectations rose after the Aug 1-year inflation expectations rose to 3.5%, stronger than expectations of no change at 3.3%, and the 5-10-year inflation expectations rose to +3.0%, stronger than expectations of no change at 2.9%.

Fed Chair Powell said, "Although inflation has moved down from its peak, it remains too high, and we are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our 2% objective."  He added that the Fed "will proceed carefully" on whether to hike again as there may still be significant further drag from past rate hikes.

The markets are discounting the odds at 21% for a +25 bp rate hike at the September 20 FOMC meeting and 65% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields are higher.  The 10-year T-note yield is up +1.8 bp at 4.255%.  The 10-year German bund yield is up +5.0 bp at 2.563%.  The 10-year UK gilt yield is up +3.1 bp at 4.457%.  

Overseas stock markets are lower.  The Euro Stoxx 50 is down -0.09%.  China’s Shanghai Composite Index closed down -0.59%.  Japan’s Nikkei Stock Index closed down -2.05%.

Today’s stock movers…

Homebuilders are retreating on higher T-note yields, pushing mortgage rates higher and undercut housing affordability.  As a result, DR Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) are down more than -3%.  Also, Lennar (LEN) is down more than -2%. 

Boeing (BA) is down more than -1% today, adding to Thursday’s -4% fall to lead losers in the Dow Jones Industrials after it reported an issue affecting its 737 Max jet, raising concerns about its delivery target.   

Domo Inc (DOMO) is down more than -40% after cutting its 2024 EPS forecast to a loss of -39 cents to -47 cents from a prior forecast of -27 cents to -29 cents, weaker than the consensus of -36 cents.

Nordstrom (JWN) is down more than -7% after the company said in a conference call that credit card delinquencies in the first half of the year were “gradually” rising and were now above pre-pandemic levels, which could result in higher credit losses in the second half of the year and into 2024.

Marvell Technology (MRVL) is down more than -8% to lead losers in the Nasdaq 100 after forecasting Q3 adjusted gross margin of 60.3% to 61.3%, below the consensus of 61.7%. 

Hawaiian Electric (HE) is down more than -18% after it said it drew down $370 million on revolving credit lines and suspended its dividend, and S&P Global Ratings cut its rating to B- from BB-.

Ulta Beauty (ULTA) is down more than -2% after reporting Q2 net sales of $2.50 billion, below the consensus of $2.51` billion.

Fidelity National Information (FIS) is down more than -1% after Evercore ISI downgraded the stock to inline from outperform.

Hasbro (HAS) is up more than +4% to lead gainers in the S&P 500 after Stifel raised its price target on the stock to $94 from $79. 

Workday (WDAY) is up more than +3% to lead gainers in the Nasdaq 100 after reporting Q2 adjusted EPS of $1.43, better than the consensus of $1.26. 

Tesla (TSLA) is up more than +2% after Phillip Securities initiated coverage of the stock with a recommendation of accumulate and a price target of $265.

Netflix (NFLX) is up more than +2% after Loop Capital Markets upgraded the stock to buy from hold with a price target of $500.

Affirm Holdings (AFRM) is up more than +25% after reporting Q4 revenue of $445.8 million, well above the consensus of $406.5 million. 

Walt Disney (DIS) is up nearly +1% after the Information reported that Amzon.com is in talks with Disney about working on a streaming version of ESPN. 

Intuit (INTU) is up more than +1% after forecasting 2023 revenue of $15.89 billion-$16.11 billion, the midpoint above the consensus of $15.96 billion.

Across the markets…

September 10-year T-notes (ZNU23) today are down -11 ticks, and the 10-year T-note yield is up +1.8 bp at 4.255%.  Sep T-notes today whipsawed lower on comments from Fed Chair Powell and U.S. economic news.  T-notes initially moved higher after Fed Chair Powell said the Fed "will proceed carefully" on whether to raise interest rates again, signaling the Fed may pause its rate hike cycle.  Also, the downward revision in the University of Michigan U.S. Aug consumer sentiment index supported T-notes.  However, T-notes gave up their advance and turned lower after the University of Michigan U.S. Aug inflation expectations unexpectedly rose. 

The dollar index (DXY00) today is up by +0.27%.  The dollar today climbed to a 2-1/2 month high, and I slightly higher. The dollar found support after the University of Michigan U.S. Aug inflation expectations unexpectedly rose, which is hawkish for Fed policy.  Gains in the dollar were limited on dovish comments from Fed Cahir Powell, who signaled a pause in Fed rate hikes when he said the Fed "will proceed carefully" on whether to hike again.  Also, an unexpected downward revision to the University of Michigan U.S. Aug consumer sentiment index was bearish for the dollar.

EUR/USD (^EURUSD) today is down by -0.17% and posted a 2-1/2 month low. The euro is under pressure today from a stronger dollar and on Eurozone economic concerns after the German Aug IFO business climate fell more than expected to a 10-month low.  Losses in EUR/USD were limited by hawkish comments from ECB Governing Council member Nagel, who said "it's much too early to think about a pause" in ECB interest rate increases.

The German Aug IFO business climate fell -1.7 to a 10-month low of 85.7, weaker than expectations of 86.8.

ECB Governing Council member Nagel said with inflation still around 5%, "it's much too early to think about a pause" in interest rate increases.

USD/JPY (^USDJPY) is up by +0.40%.  The yen today fell to a 1-week low against the dollar.  Higher T-note yields today are weighing on the yen. Also, today’s news that showed a sharper-than-expected decline in the Tokyo Aug CPI is dovish for BOJ policy and negative for the yen.

Japan Jul PPI services prices rose +1.7% y/y, stronger than expectations of +1.3% y/y.

Japan Aug Tokyo CPI eased to 2.9% y/y from 3.2% y/y in July, weaker than expectations of +3.0% y/y and the slowest pace of increase in 11 months.  However, Aig Tokyo CPI ex-fresh food and energy remained unchanged from Jul at a 41-year high of +4.0% y/y.

October gold (GCV3) today is down -10.4 (-0.54%), and Sep silver (SIU23) is down -0.120 (-0.50%).  Precious metals prices this morning are moderately lower.  A rally in the dollar index to a 2-1/2 month high is bearish for metals. Also, higher T-note yields today are weighing on precious metals.  Losses in metals are limited by comments from Fed Chair Powell, who said the Fed "will proceed carefully" on whether to hike again, possibly signaling a pause in Fed interest rate hikes. 

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