Hawkish Fed Comments Weigh on Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -0.23%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.31%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.05%.

Stocks on Friday settled mixed, with the S&P 500 sliding to a 3-1/4 month low and the Dow Jones Industrials falling to a 2-1/4 month low. The broader market Friday was under pressure from hawkish comments from several Fed members who signaled interest rates may have to be higher for longer.  Friday's decline in bond yields prompted some short covering in technology stocks and kept the Nasdaq 100 in positive territory.

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

Fed comments Friday 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."  In addition, San Francisco Fed President Daly said she is not ready to declare victory in the fight against inflation, and it is unlikely inflation will reach the Fed's 2% goal in 2024. 

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 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, it will mull ending yield curve control and an interest rate shift.

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 48% 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 Friday were mixed.  The 10-year T-note yield fell back from a 16-year high of 4.506% and finished down -5.6 bp at 4.438%.  The 10-year German bund yield rose +0.3 bp to 2.739%.  The 10-year UK gilt yield fell -5.6 bp to 4.249%. 

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed down -0.13%.  China’s Shanghai Composite Index closed +1.55%. Japan’s Nikkei 225 today closed -0.52%.

Today’s stock movers…

Cruise line operators retreated Friday on concerns that higher interest rates will eat into profitability as they rely on borrowing to finance their operations and fleet expansion. As a result, Norwegian Cruise Line Holdings (NCLH) closed down more than -7% to lead losers in the S&P 500.  Also, Royal Caribbean Cruises Ltd (RCL) closed down more than -3%, and Carnival (CCL) closed down more than -2%. 

Tyson Foods (TSN) closed down more than -3% after HSBC initiated coverage on the stock with a recommendation of reduce and a price target of $49. 

Scholastic (SCHL) closed down more than -13% after reporting a Q1 adjusted loss per share of -$2.20 versus a loss of -$1.33 y/y.

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

Walgreens Boots Alliance (WBA) closed down more than -1% after Deutsche Bank cut its price target on the stock to $27 from $34.

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

General Mills (GIS) closed 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.

Chip stocks moved higher Friday as a decline in T-note yields sparked a slight recovery in the stocks after this week’s sharp losses.  ON Semiconductor (ON) closed up more than +3% to lead gainers in the S&P 500.  Also, Broadcom (AVGO) closed up more than +2%, and Nvidia (NVDA), ASML Holding NV (ASML), Applied Materials (AMAT), Lam Research (LRCX), KLA Corp (KLAC), NXP Semiconductors NV (NXPI), Microchip Technology (MCHP), and Micron Technology (MU) closed up more than +1%. 

U.S.-listed Chinese stocks rallied Friday on reports that the U.S. and China are forming working groups to discuss economic and financial issues.  As a result, PDD Holdings (PDD) closed up more than +4% to lead gainers in the Nasdaq 100.  Also, NetEase (NTES) closed up more than +5%, and Alibaba Group Holding (BABA) closed up more than +4%.  In addition, Baidu (BIDU) closed up more than +3%, and JD.com (JD) closed up more than +2%.

FactSet Research Systems (FDS) closed up more than +2% as analysts raised their price targets on the stock by an average of +3.2% since the company reported earnings on Thursday.

Ford Motor (F) closed up more than +1% after Reuters reported the UAW had made progress with the company on a new labor contract.

Seagen (SGEN) closed up more than +3% after a study showed its Padcev drug improved survival in bladder cancer patients when combined with Merk’s Keytruda. 

Western Digital (WDC) closed up more than +1% after Bloomberg News reported the company is looking to merge with Japan-based Kioxia.

Activision Blizzard (ATVI) closed 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. 

Across the markets…

December 10-year T-notes (ZNZ23) Friday closed up +8.5 ticks.  The 10-year T-note yield fell -5.6 bp to 4.438%.  T-notes on Friday rose moderately on some short-covering following this week’s sharp sell-off to a 16-year low.  Gains were limited by the stronger-than-expected Sep S&P manufacturing PMI report. 

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.” Also, Fed Governor Bowman said, "I continue to expect that further rate hikes will likely be needed to return inflation to 2%.”  In addition, San Francisco Fed President Daly said it is unlikely inflation will reach the Fed's 2% goal in 2024.

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