Stocks Fall Ahead of FOMC Meeting Results on Wednesday

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.22%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.31%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.22%.

Stocks fell on Tuesday’s weak U.S. housing starts report and the +6.0 bp rise in the 10-year T-note yield to a 15-year high.  There was also downward pressure from the possibilities of an expanding UAW strike and a U.S. government shutdown on September 30, as well as the restart of student loan payments on October 1.  Oil prices rallied to a 10-1/2 month high Tuesday, which was negative for the inflation outlook and hawkish for Fed policy, although oil prices fell back later in the day.

Stocks also traded on a cautious note ahead of the 2-day FOMC meeting that ends Wednesday.  The markets are fully expecting the FOMC to leave its funds rate target unchanged at 5.25/5.50%.  However, the markets are expecting the FOMC to maintain its hawkish bias and keep in play the possibility of one more rate hike later this year.

Specifically, the markets are discounting a 29% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 15% chance for that 25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in 2024 in response to an expected slowdown in the U.S. economy.

The OECD Tuesday cut its global GDP forecast for 2024 to +2.7% from +3.0%, with the comment that “While high inflation continues to unwind, the world economy remains in a difficult place.  We’re confronting the double challenges of inflation and low growth.”

U.S. Aug housing starts fell -11.3% to 1.283 million, much weaker than expectations for a decline of about -1%.  However, Aug building permits rose +6.9% m/m to 1.542 million, stronger than expectations for a small decline.

The Eurozone final-Aug CPI was revised slightly lower to +0.5% m/m and +5.2% y/y from the preliminary report of +0.6% m/m and +5.3% y/y.  The final-core CPI was left unrevised at +5.3% y/y.

Overseas stock markets fell Tuesday.  The Euro Stoxx 50 fell -0.07%, China’s Shanghai Composite Index fell -0.03%, and Japan’s Nikkei 225 fell -0.87%.

Today’s stock movers…

The UAW Tuesday said that more autoworkers will go on strike at noon on Friday if there isn’t substantial progress on contract talks.  GM (GM) rose +1.86%, Ford (F) rose +1.78%, and Stellantis NV (STLA) rose +2.11%.

Oil stocks saw support as WTI crude oil prices rallied to a new 10-1/2 month high but then fell back along with oil prices later in the day.  Exxon (XOM) fell -0.26%, Chevron (CVX) fell -0.01%, and Conoco Phillips (COP) fell -1.06%.

Disney (DIS) fell -3.62% on the company’s announcement that it will nearly double its spending on theme parks to $60 billion over the next 10 years.

Deere (DE) fell -2.96% on a downgrade by Evercore ISI to inline from outperform.

Block (SQ) fell -2.83% after news that CEO Alyssa Henry is leaving and that Jack Dorsey will take over.

Starbucks (SBUX) fell -1.52% on a downgrade by TD Cowen to market-perform from outperform due to a “worrisome” outlook for Chinese same-store sales tied to macroeconomic and competitive pressures.

Dell Technologies (DELL) rose +1.08% on an upgrade by Daiwa Securities to outperform from neutral on an improved demand outlook.

CVS Corp (CVS) rose +1.82% on an upgrade by Evercore ISI due to improving operational issues and an attractive valuation.

Rackspace Technology (RXT) soared by +36% on an upgrade by Raymond James to outperform from market-perform on an improved outlook for its turnaround plan.

Rocket Lab USA (RKLB) fell -7.54% after the company was forced to end its latest rocket launch mission and postponed an upcoming mission.

Royal Caribbean Cruises (RCL) rose +2.50%, and Carnival (CCL) rose by +0.33%, after upgrades by Truist Securities to Buy and Hold, respectively, due to strong trends and more attractive valuations.

Grocery-delivery business Maplebear Inc, doing business as Instacart (CART), rallied by +12% on its first day of trading to $45.31 from Monday’s IPO price of $30 per share.  CART raised $660 million of cash at the IPO and had an IPO valuation of $9.9 billion.

Across the markets…

December 10-year T-notes (ZNZ23) Tuesday fell -12.5 ticks.  The 10-year T-note yield rose +6.0 bp to 4.363% and posted a 15-year high.  T-notes were under pressure Tuesday as a new 10-1/2 month high in oil prices put upward pressure on inflation expectations even though oil prices fell back later in the day.  Also, the Fed may be forced to hold interest rates higher-for-longer if gasoline prices continue to rise and push the inflation statistics higher.  The 10-year breakeven inflation expectations rate Tuesday rose +1.1 bp to 2.373%.  

T-note prices found underlying support Tuesday from the weak U.S. housing starts report, which suggested that high mortgage rates and high home prices are curbing homebuilder plans to build new houses.

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