Stocks Slump and Bond Yields Climb on Fed Jitters

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.01%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.17%.

Stocks this morning are moderately lower, with the S&P 500 falling to a 1-month low and the Dow Jones Industrials and the Nasdaq 100 falling to 3-1/2 week lows.  Stocks today extended Wednesday’s losses as the hawkish tone from Wednesday’s FOMC meeting is undercutting global risk sentiment.  The Fed on Wednesday signaled one more +25 bp rate hike this year and saw less easing next year, with the median forecast for the federal funds rate at 5.1% by the end of 2024, up from 4.6% when projections were made in June.

Stock index futures added to their losses this morning after weekly U.S. jobless claims unexpectedly fell to a 7-1/2 month low, showing a stronger labor market that was hawkish for Fed policy. 

Technology stocks are also under pressure this morning after the 10-year T-note yield soared to a 16-year high.  An increase in M&A activity is a positive factor for stocks after Cisco Systems agreed to a deal to acquire Splunk for about $28 billion.

U.S. weekly initial unemployment claims unexpectedly fell -20,000 to a 7-1/2 month low of 201,000, showing a stronger labor market than expectations of an increase to 225,000.  Also, weekly continuing claims unexpectedly fell -21,000 to an 8-month low of 1.662 million, showing a stronger labor market than expectations of an increase to 1.692 million.

The U.S. Sep Philadelphia business outlook survey fell -25.5 to -13.5, weaker than expectations of -1.0.

U.S. Aug existing home sales unexpectedly fell -0.7% m/m to a 7-month low of 4.04 million, weaker than expectations of a +0.7% m/m increase to 4.10 million. 

U.S. Aug leading indicators fell -0.4% m/m, a smaller decline than expectations of -0.5% m/m.

The markets are 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 51% 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 Q3 of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields today are higher.  The 10-year T-note yield jumped to a 16-year high of 4.488% and is up +6.5 bp at 4.472%.  The 10-year German bund yield climbed to a 12-year high of 2.779% and is up +3.7 bp at 2.738%.  The 10-year UK gilt yield is up +7.9 bp at 4.294%. 

Overseas stock markets are lower today.  The Euro Stoxx 50 is down -1.43%.  China’s Shanghai Composite Index closed -0.77%.  Japan’s Nikkei 225 today closed -1.37%.

Today’s stock movers…

Mega-cap technology stocks are under pressure today, with the 10-year T-note yield climbing to a 16-year high.  As a result, Amazon.com (AMZN) is down more than -3%. Also, Alphabet (GOOGL), Adobe (ADBE), Tesla (TSLA), and Meta Platforms (META) are down more than -2%.

Homebuilders are under pressure after the 10-year T-note yield climbed to a 16-year high, boosting mortgage rates, and after U.S. Aug existing home sales unexpectedly fell to a 7-month low.  As a result, DR Horton (DHI) and PulteGroup (PHM) are down more than -4%.  Also, Lennar (LEN) and Toll Brothers (TOL) are down more than -3%. 

Raymond James Financial (RJF) is down more than -3% after reporting August financial assets under management of $202.6 billion, falling from July’s $204.6 billion. 

Charles River Laboratories International (CRL) is down more than -6% to lead losers in the S&P 500 after giving updated 2026 financial targets, including a lower-than-anticipated range for organic revenue growth. 

Broadcom (AVGO) is down more than -3% following a report from The Information that said Google executives “extensively” discussed dropping the company as an AI chips supplier as early as 2027.

Cisco Systems (CSCO) is down more than -3% to lead losers in the Dow Jones Industrials and Nasdaq 100 after agreeing to buy Splunk in a deal valued at $28 billion.

FactSet Research Systems (FDS) is up more than +5% to lead gainers in the S&P 500 after reporting Q4 adjusted operating income of $180/1 million, better than the consensus of $166.5 million, and Q4 adjusted operating margin of 33.6% was above the consensus of 32.1%.

FedEx (FDX) is up more than +4% after raising the lower limit of its 2024 adjusted EPS forecast to $17.00-$18.50 from a previous estate of $16.50-$18.50, the midpoint above the consensus of $17.55. 

International Paper (IP) is up more than +2% after Truist Securities upgraded the stock to buy from hold with a price target of $43.

Film and entertainment stocks are moving higher on reports that the Hollywood studios and writers are nearing an agreement that would end the 5-month-long strike.  As a result, Warner Bros Discovery (WBD) is up more than +1% to lead gainers in the Nasdaq 100.  Also, Fox Corp (FOXA), Paramount Global (PARA), and Netflix (NFLX) are up more than +1%.

Splunk (SPLK) is up more than +20% after Cisco Systems agreed to buy the company for about $157 a share in cash in a deal valued at about $28 billion.

Microsoft (MSFT) is up more than +1% after announcing an AI copilot will start to roll out later this month in its Windows program and will work across all apps and devices.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -26 ticks, and the 10-year T-note yield is up +6.5 bp at 4.472%.  Dec T-notes sank to a 16-year nearest-futures low today, and the 10-year T-note yield soared to a 16-year high of 4.488%. T-notes extended Wednesday’s losses 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.  Also, today’s unexpected decline in weekly jobless claims to a 7-1/2 month low signals strength in the U.S. labor market that may prompt the Fed to keep raising interest rates. 

The dollar index (DXY00) today is up by +0.20% and posted a 6-1/2 month high. The dollar has carryover support from Wednesday when the Fed signaled one more +25 bp rate hike this year and projected the fed funds rate next year +50 bp higher than they projected back in June. Also, today’s slump in stocks is boosting liquidity demand for the dollar.  In addition, soaring T-note yields today are strengthening the dollar’s interest rate differentials. 

EUR/USD (^EURUSD) today is down -0.06% and fell to a 6-month low. Strength in the dollar today is weighing on the euro.  Losses in the euro are limited after the 10-year German bund yield rose to a 12-year high today when ECB Governing Council members Nagel and Makhlouf said the ECB may still need to raise interest rates further.  Also, today’s stronger-than-expected French business and manufacturing confidence indicators were supportive of the euro.   

ECB Governing Council member and Bundesbank President Nagel said it is too soon to say that interest rates have reached a plateau as the inflation rate is still "too high," and forecasts still only show a slow decline toward the ECB's target level of 2%.

ECB Governing Council member Makhlouf said there might still be an ECB rate hike in October, and March is too early to plan for an ECB interest rate cut.

The French Sep business confidence indicator was unchanged at 100, stronger than expectations of a decline to 98.  Also, the French Sep manufacturing sentiment index unexpectedly rose +2 to 99, stronger than expectations of a decline to 95.

USD/JPY (^USDJPY) is down -0.32%.  The yen today recovered from a 10-1/2 month low against the dollar and moved higher as a jump in Japanese government bond yields strengthened the yen’s interest rate differentials after the 10-year JGB government bond yield rose to a 10-year high of 0.751%.  Also, a slump in stocks today has boosted some safe-haven demand for the yen.  In addition, the yen is experiencing some short covering ahead of Friday’s BOJ meeting results.   Expectations are for the BOJ to maintain QE and record low interest rates.

October gold (GCV3) today is down -30.4 (-1.56%), and Dec silver (SIZ23) is down -0.581 (-2.44%).  Precious metals prices today are sharply lower.  A rally in the dollar index today to a 6-1/2 month high is bearish for metals. Also, soaring global bond yields today are negative for precious metals.  In addition, Wednesday’s hawkish FOMC meeting is undercutting metals after the FOMC signaled one more +25 bp rate hike this year and higher interest rates next year than the June forecasts.  Finally, gold is being weighed down by long liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Wednesday.

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