Stocks Waver after a Mixed U.S. CPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.12%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.38%.

Stocks on Wednesday settled mixed.  The broader market posted modest gains Wednesday after a mixed U.S. consumer price report.  U.S. consumer prices in August increased to +3.7% y/y from +3.2% y/y in July, stronger than expectations of +3.6% y/y.  However, stocks found support after Aug core CPI eased to +4.3% y/y from +4.7% y/y in July, right on expectations and the smallest increase in almost two years.

Gains in U.S. stock index futures were limited by negative carryover from a slide in European stocks as the 10-year German bund yield jumped to a 3-week high after Reuters reported that the ECB's new economic estimates due to be released Thursday will show a Eurozone inflation forecast for 2024 above 3%, bolstering the case for the ECB to raise interest rates at Thursday’s policy meeting.

The markets are discounting the odds at 2% for a +25 bp rate hike at the September 20 FOMC meeting and 40% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields on Wednesday were mixed.  The 10-year T-note yield fell from a 3-week high of 4.342% and finished down -4.1 bp at 4.239%.  The 10-year German bund yield rose to a 3-week high of 2.690% and finished up +0.8 bp at 2.651%.  The 10-year UK gilt yield fell to a 1-1/2 week low of 4.342% and finished down -6.9 bp at 4.347%. 

Overseas stock markets Wednesday settled lower.  The Euro Stoxx 50 closed -0.44%.  China’s Shanghai Composite Index closed -0.45%. Japan’s Nikkei Stock Index closed -0.21%.

Reuters reported that the ECB's new economic estimates, due to be released Thursday, will show a Eurozone inflation forecast for 2024 above 3%.

Eurozone Jul industrial production fell -1.1% m/m, weaker than expectations of -0.9% m/m and the biggest decline in 4 months.

Japan Aug PPI eased to +3.2% y/y from +3.4% y/y in July, better than expectations of +3.3% y/y.

The Japan Q3 BSI large manufacturing business conditions rose +5.8 to 5.4, the highest since Q4 of 2021.

Today’s stock movers…

JB Hunt Transport Services (JBHT) closed up more than +4% to lead gainers in the S&P 500 after the company said it expects a gradual increase of freight as retailers have mostly whittled down excess inventories. 

Moderna (MRNA) closed up more than +3% to lead gainers in the Nasdaq 100 after it said a reformulated version of its messenger-RNA-based flu shot met its primary goals in a final-stage trial, paving the way for it to seek FDA approval for the vaccine. 

Morgan Stanley (MS) closed up more than +2%, adding to Tuesday’s +2% gain after investment manager Simkowitz said, “We are more confident now than any time this year about an improved outlook for 2024.” 

Westrock (WRK) closed up more than +2%, adding to Tuesday’s +2% gain after Smurfit Kappa Group Plc agreed to acquire the company in a $11.2 billion deal. 

Ford Motor (F) closed up more than +1% after UBS double-upgraded the stock to buy from sell with a price target of $15. 

Commercial real estate brokerage stocks tumbled Wednesday after the CFO of CBRE Group said the market has become more challenging as interest rates rose recently, and it expects Q3 EPS to fall in the “high-teens range,” weaker than the consensus for flat earnings.  As a result, CBRE Group (CBRE) closed down more than -6% to lead losers in the S&P 500.  Also, Jones Lang LaSalle (JLL) closed down more than -7%, Newmark Group (NMRK) closed down more than -6%, and  Cushman & Wakefield (CWK) closed down more than -5%.   

3M Co (MMM) closed down more than -5% to lead losers in the Dow Jones Industrials after the company pushed out the spinoff of its healthcare division to the first half of 2024 from an earlier target of late 2023 and cautioned on the outlook for next year. 

Netflix (NFLX) closed down more than -5% to lead losers in the Nasdaq 100 after the CFO said at the Bank of America Media, Communications & Entertainment Conference that it needs to get back to revenue growth in 2024 and it doesn’t see a way to profit in live sports. 

Airline stocks were under pressure after American Airlines Group cut its guidance for Q3 adjusted EPS to 20-30 cents from a previous estimate of 85-95 cents, well below the consensus of 65 cents.  As a result, American Airlines Group (AAL) closed down more than -5%.  Also, United Airlines Holdings (UAL) closed down more than -3%.  In addition, Delta Air Lines (DAL) and Alaska Air Group (ALK) closed down more than -2%, and Southwest Airlines (LUV) closed down more than -1%.

Regional bank stocks retreated Wednesday on comments from Zions Bancorp CEO Simmons, who said they are seeing a slowdown in loan demand. As a result, U.S. Bancorp (USB) closed down more than -5%, and Truist Financial (TFC) closed down more than -4%.  Also, Citizens Financial Group (CFG) closed down more than -3%, and Comerica (CMA), M&T Bank (MTB), Huntington Bancshares (HBAN), Zions Bancorp (ZION), and KeyCorp (KEY) closed down more than -2%. 

Applied Optoelectronics (AAOI) closed down more than -19% after it terminated its agreement to sell manufacturing facilities in China to Yuhan Optoelectronic Technology.

Apple (AAPL) closed down more than -1% after China flagged “security incidents” with Apple’s iPhones, the government’s first comments after news reports that it was restricting the use of Apple products in sensitive departments and state-owned companies. 

Across the markets…

December 10-year T-notes (ZNZ23) on Wednesday closed up +4.5 ticks, and the 10-year T-note yield fell -4.1 bp to 4.239%.  Dec T-note prices Wednesday recovered from a 3-week low and moved higher, and the 10-year T-note yield fell back from a 3-week high of 4.342%.  T-notes found support Wednesday after U.S. Aug core CPI eased to +4.3% y/y from +4.7% y/y in July, right on expectations and the slowest pace of increase in almost two years.  T-notes also moved higher on strong demand for the Treasury’s $20 billion auction of re-opened 30-year T-bonds with a bid-to-cover ratio of 2.46, better than the 10-auction average of 2.39.

T-notes Wednesday initially fell on negative carryover from a slump in 10-year German bunds to a 3-week low.  Also, the stronger-than-expected U.S. Aug CPI was bearish for T-notes.  In addition, inflation expectations rose early Wednesday and weighed on T-notes after the 10-year breakeven inflation rate posted a 4-week high of 2.371% before falling back.

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