What you need to know…
The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.94%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.22%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.46%.
Stocks on Wednesday gave up early gains and posted moderate losses, with the S&P 500 falling to a 3-1/2 week low and the Nasdaq 100 dropping to a 3-week low. Stocks retreated Wednesday afternoon after the Federal Reserve paused its rate hike cycle but signaled higher interest rates for longer. Policymakers signaled one more +25 bp rate hike this year, and the FOMC’s dot plot projected that the federal funds rate target in 2024 and 2025 would be 50 bp higher than projected in June. The hawkish Fed pause pushed the 10-year T-note yield to a 16-year high and sent stocks tumbling.
Stocks Wednesday initially moved higher and found support from gains in European stocks on signs of slowing price pressures in Europe and the UK after German producer prices in August posted a record decline and UK consumer prices last month unexpectedly eased.
Fed Chair Powell said, "The FOMC is prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we're confident that inflation is moving down sustainably toward our objectives."
The FOMC, as expected, unanimously voted to hold the fed funds target range unchanged at 5.25% to 5.50%, with 12 of the 19 policymakers expecting one more 25 bp rate hike this year.
The FOMC's dot plot of interest rate projections shows policymakers still foresee one more rate hike this year, but the median fed funds target for 2024 was raised by +50 bp to 5.125% from 4.625% in June, and for 2025 the median fed funds target was raised by +50 bp to 3.875% from 3.375% in June, signaling the Fed expects interest rates to stay higher for longer.
The FOMC's median projection for U.S. economic growth in 2023 was raised to +2.1% from +1.0% in June. Also, the 2023 unemployment rate estimate was lowered to 3.8% from a June forecast of 4.1%. In addition, the 2023 core PCE price deflator was lowered to +3.7% from a June forecast of +3.9%.
The markets are now discounting a 31% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 54% 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 starting in late 2024 in response to an expected slowdown in the U.S. economy.
U.S. and European bond yields Wednesday were mixed. The 10-year T-note yield rose to a 16-year high of 4.397% and finished up +1.4 bp at 4.373%. The 10-year German bund yield fell -3.6 bp at 2.702%. The 10-year UK gilt yield fell to a 2-3/4 month low of 4.212% and finished down -12.5 bp to 4.215%.
The Mortgage Bankers Association reported that the MBA mortgage applications index rose +5.4% w/w for the week ended September 15, the largest increase in 3 months. The home purchase sub-index rose +2.3% w/w and the refinancing sub-index rose +13.2% w/w.
Bank of America raised its year-end price target for the S&P 500 to 4,600 from a previous target of 4,300, saying that indicators on the macrocycle, including valuations and positioning, are flashing bullish signals.
UK July CPI eased to +6.7% y/y, weaker than expectations of an increase to +7.0% y/y and the smallest increase in 1-1/2 years. Also, UK July core CPI eased to +6.2% y/y from +6.9% y/y in July, weaker than expectations of +6.8% y/y.
Overseas stock markets Wednesday settled mixed. The Euro Stoxx 50 closed up +0.78%. China’s Shanghai Composite Index closed -0.52%. Japan’s Nikkei 225 today closed -0.66%.
Today’s stock movers…
Zebra Technologies (ZBRA) closed down more than -6% to lead losers in the S&P 500 after Morgan Stanley downgraded the stock to underweight from equal weight.
Intel (INTC) closed down more than -4% to lead losers in the Dow Jones Industrials and Nasdaq 100 on disappointment the company did not announce any fresh news regarding its 18A semiconductor manufacturing process at its Innovation conference.
Alphabet (GOOGL) closed down more than -3% after the company said it had only regained only 40% of the mobile traffic it used to have on its mapping service after Apple replaced Google Maps on its iPhones in favor of its own app.
A jump in the 10-year T-note yield Wednesday to a 16-year high undercut high-valuation chip stocks. As a result, Nvidia (NVDA), Marvell Technology (MRVL), Broadcom (AVGO), and NXP Semiconductors NV (NXPI) closed down more than -2%. Also, Qualcomm (QCOM), Analog Devices (ADI), Micron Technology (MU), ON Semiconductor (ON), KLA Corp (KLAC), and Microchip Technology (MCHP) closed down more than -1%.
NCino (NCNO) closed down more than -3% after Morgan Stanley downgraded the stock to underweight from equal weight with a price target of $24.
Skyworks Solutions (SWKS) closed down more than -1% after BNP Paribas Exane downgraded the stock to neutral from outperform.
Textron (TXT) closed up more than +4% to lead gainers in the S&P 500 after announcing a fleet agreement for the option for NetJets to purchase up to 1,500 additional Cessna Citations business jets over the next 15 years.
Autozone (AZO) closed up more than +4% after reporting Q4 net sales of $5.70 billion, above the consensus of $5.62 billion.
Western Digital (WDC) closed up more than +3% after BNP Paribas Exane upgraded the stock to outperform from neutral with a price target of $58.
International Business Machines (IBM) closed up more than +2% after RBC Capital Markets initiated coverage of the stock with a recommendation of outperform and a price target of $188.
Pinterest (PINS) closed up more than +3% after several analysts said they were impressed by the company’s investor day Tuesday and that the company was upbeat and its long-term targets look achievable.
Boston Scientific (BSX) closed up more than +2% after Barclays said the company at its investor day conference that It expects organic growth of 8%-10% in its long-range plans.
Lululemon Athletica (LULU) closed up more than +1% after Needham & Co. initiated coverage of the stock with a recommendation of buy with a price target of $470.
Across the markets…
December 10-year T-notes (ZNZ23) Wednesday closed up +3 ticks. The 10-year T-note yield rose +1.4 bp to 4.373%. T-notes Wednesday morning moved slightly higher, but Wednesday afternoon, Dec T-notes gave up their gains and dropped to an 11-month nearest-futures low, and the 10-year T-note yield rose to a 16-year high of 4.397%. T-notes sank on the hawkish FOMC dot-plot that signaled one more 25 bp interest rate hike this year and projected interest rates for 2024 and 2025 that were 50 bp higher than they projected in June.
T-note prices Wednesday initially moved higher and had carryover support from strength in European bond markets. The 10-year UK gilt yield fell to a 2-3/4 month low Wednesday after UK consumer prices unexpectedly eased last month, and 10-year German bund prices rallied after German producer prices in August posted a record decline.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
