Lower Bond Yields Spark Mild Recovery in Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.43%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.13%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.88%.

Stocks this morning are moderately higher, recovering from some of the significant sell-off seen earlier this week.  Today's decline in bond yields prompted some short covering in stocks as the 10-year T-note yield fell back from a 16-year high of 4.506% posted in overnight trade. 

The U.S. Sep S&P manufacturing PMI rose +1.0 to 48.9, stronger than expectations of 48.2.

Fed comments today were on the hawkish side and negative for stocks.  Fed Governor Bowman said, "I continue to expect that further rate hikes will likely be needed to return inflation to 2% in a timely way."  Also, Boston Fed President Collins said, "I expect rates may have to stay higher, and for longer, than previous projections had suggested, and further tightening is certainly not off the table."

Bank of America said investors are fleeing stocks on the prospects of higher interest rates for longer as EPFR Global data show global equity funds had outflows of $16.9 billion in the week through September 20, the fastest pace in 9 months.

The markets are discounting a 23% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 50% 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 mixed.  The 10-year T-note yield fell back from a 16-year high of 4.506% and is down -5.6 bp at 4.438%.  The 10-year German bund yield is up +0.2 bp at 2.738%.  The 10-year UK gilt yield is down -4.9 bp at 4.255%. 

Overseas stock markets are mixed today.  The Euro Stoxx 50 is down -0.06%.  China’s Shanghai Composite Index closed +1.55%.  Japan’s Nikkei 225 today closed -0.52%.

Today’s stock movers…

Western Digital (WDC) is up more than +4% to lead gainers in the S&P 500 after Bloomberg News reported the company is looking to merge with Japan-based Kioxia.

Meta Platforms (META) is up more than +2% after Citigroup rated the stock a buy and opened a 90-day upside catalyst watch for the stock ahead of the Meta Connect 2023 event next week, where the company will announce details around its generative AI plans. 

Chip stocks are moving higher as they recover slightly from this week’s sharp losses.  ON Semiconductor (ON) is up more than +2%.  Also, Nvidia (NVDA), ASML Holding NV (ASML), Applied Materials (AMAT), Broadcom (AVGO), Lam Research (LRCX), KLA Corp (KLAC), NXP Semiconductors NV (NXPI), Marvel Technology (MRVL), and Micron Technology (MU) are up more than +1%. 

Apple (AAPL) is up more than +1% to lead gainers in the Dow Jones Industrials after its latest iPhones and watches went on sale.

Ford Motor (F) is up more than +3% after Reuters reported the UAW has made real progress with the company over a new labor contract.

Seagen (SGEN) is up more than +3% to lead gainers in the Nasdaq 100 after a study showed its Padcev drug improved survival in bladder cancer patients when combined with Merk’s Keytruda. 

Constellation Brands (STZ) is up more than +1% after Goldman Sachs raised its price target on the stock to $305 from $275. 

Activision Blizzard (ATVI) is up more than +1% on signs that Microsoft’s $69 billion acquisition of the company is set to move forward after the UK competition authorities said they would accept Microsoft’s latest concessions. 

Charter Communications (CHTR) is up more than +1% after Wells Fargo Securities upgraded the stock to overweight from equal weight with a price target of $550.

Wayfair (W) is up more than +1% after Bernstein upgraded the stock to market perform from underperform. 

Tyson Foods (TSN) is down more than -2% after HSBC initiated coverage on the stock with a recommendation of reduce and a price target of $49. 

Deere & Co (DE) is down more than -1% after Canaccord Genuity downgraded the stock to hold from buy. 

General Mills (GIS) is down more than -1% as analysts have cut their price targets on the stock by an average of 12% since the company reported quarterly earnings results on Wednesday.

Dollar General (DG) is down more than -1% after HSBC initiated coverage of the stock with a recommendation of reduce and a price target of $102.

Scholastic (SCHL) is down more than -11% after reporting a Q1 adjusted loss per share of -$2.20 versus a loss of -$1.33 y/y.

Vertex Pharmaceuticals (VRTX) is down more than -1% on signs of insider selling after an SEC filing showed company CMO Bozic sold $1.98 million of shares on Tuesday.

Across the markets…

December 10-year T-notes (ZNZ23) today are up +11 ticks, and the 10-year T-note yield is down -5.6 bp at 4.438%.  T-notes are moderately higher today on some short-covering following this week’s sharp sell-off to a 16-year low.  Gains are limited by the stronger-than-expected S&P manufacturing PMI report.  Also, hawkish Fed comments weighed on T-notes when Boston Fed President Collins said, "I expect rates may have to stay higher, and for longer, than previous projections had suggested,” and after Fed Governor Bowman said, "I continue to expect that further rate hikes will likely be needed to return inflation to 2%.”

The dollar index (DXY00) today is up by +0.06% and posted a new 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 stronger-than-expected U.S. S&P manufacturing PMI report was supportive of the dollar.  Gains in stocks today are limiting the upside in the dollar on reduced liquidity demand. 

EUR/USD (^EURUSD) today is down -0.03% and posted a new 6-month low. The euro moved lower today after the Eurozone Sep S&P manufacturing PMI unexpectedly declined and after ECB Chief Economist Lane said the Eurozone economy this year will be "fairly muted."  The euro recovered from its worst levels on hawkish comments from ECB Governing Council member De Cos, who said, "It is certainly too early to talk about rate cuts at the moment." 

The Eurozone Sep S&P manufacturing PMI unexpectedly fell -0.1 to 43.4, weaker than expectations of an increase to 44.0.  However, the Sep S&P composite PMI rose +0.4 to 47.1, stronger than expectations of a decline to 46.5.

ECB Governing Council member De Cos said, "The growth outlook for the Eurozone has been revised downwards, and the risks are on the downside."  However, "it is certainly too early to talk about rate cuts at the moment."

ECB Chief Economist Lane said the Eurozone economy this year will be "fairly muted."

USD/JPY (^USDJPY) is up +0.26%.  The yen today is moderately lower and just above Thursday’s 10-1/2 month low against the dollar.  The yen weakened after the BOJ maintained record-low interest rates after today’s policy meeting, and BOJ Governor Ueda said the distance from being able to adjust the negative rate hasn't changed much.  Another bearish factor for the yen was today’s news that the Japan Sep Jibun Bank manufacturing PMI contracted at the steepest pace in 7 months.  Losses in the yen are contained after the 10-year JGB bond yield rose to a 10-year high of 0.756% and as T-note yields declined.

The BOJ, as expected, voted 9-0 to keep the policy balance rate unchanged at -0.1% and to maintain the 10-year JGB yield target at about 0%.

BOJ Governor Ueda said the distance from being able to adjust the negative rate hasn't changed much, and if the BOJ's inflation goal is in sight, we will mull ending yield curve control and an interest rate shift.

Japan Aug national CPI eased to +3.2% y/y from +3.3% y/y in July, stronger than expectations of +3.0% y/y. Aug national CPI ex-fresh food and energy was unchanged from July at +4.3% y/y, right on expectations.

The Japan Sep Jibun Bank manufacturing PMI fell -1.0 to 48.6, the steepest pace of contraction in 7 months.

October gold (GCV3) today is up +7.6 (+0.40%), and Dec silver (SIZ23) is up +0.288 (+1.22%). Precious metals prices today are moderately higher, with silver posting a 2-week high.  Lower T-note yields today are supportive for precious metals.  Silver also garnered support from today’s stronger-than-expected U.S. S&P manufacturing PMI report, which was a positive factor for industrial metals demand. 

Gains in metals are limited with today’s rally in the dollar index to a 6-1/2 month high.  Also, hawkish central bank comments are bearish for precious metals after Boston Fed President Collins said, "I expect rates may have to stay higher, and for longer, than previous projections had suggested,” and after ECB Governing Council member De Cos said, "it is certainly too early to talk about rate cuts at the moment."  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 Thursday.

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