Stocks Recover Early Losses on Soft Landing Optimism for the U.S. Economy

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed up +0.40%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.13%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.46%.

Stocks on Monday recovered from early losses and closed moderately higher as short-covering emerged on comments from Chicago Fed President Goolsbee, who said it's possible for the U.S. to avoid a recession and have a soft landing.

Stocks on Monday initially opened lower, with the S&P 500 falling to a 3-1/2 month low, the Dow Jones Industrials posting a 2-1/2 month low, and the Nasdaq 100 dropping to a 5-week low.  Stocks were under early pressure Monday on speculation global central banks will keep interest rates higher for longer to combat inflation.  The 10-year German bund yield jumped to a 12-year high Monday of 2.812%, and the 10-year T-note yield climbed to a new 16-year high of 4.546%. The stock market is also concerned about a possible U.S. government shutdown this Sunday when the fiscal year begins on Oct 1.

Another negative for stocks is the concern that China’s property debt crisis is worsening after China Evergrande Group canceled a creditor meeting on Sunday and said it must revisit its restructuring plan.  The ongoing debt crisis in China threatens to derail the country’s growth prospects and drag down the global economy.

Monday’s U.S. economic news was weaker than expected and bearish for stocks.  The Aug Chicago Fed national activity index fell -0.23 -0.16, weaker than expectations of 0.10.  Also, the Aug Dallas Fed manufacturing outlook level of general business activity unexpectedly fell -0.9 to -18.1, weaker than expectations of an increase to -14.0.

Morgan Stanley warned Monday that risks are rising for U.S. consumer stocks on "slowing consumer spending, resumption of student loan payments, rising delinquencies in certain household cohorts, higher gasoline prices, and weakening data in the housing sector."  Also, 44% of stocks in the consumer discretionary sector are trading below their 200-day moving averages, pointing to additional weakness.

The markets are discounting a 19% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 46% 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 the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields Monday moved higher.  The 10-year T-note yield rose to a new 16-year high of 4.546% and finished up +10.4 bp at 4.538%.  The 10-year German bund yield climbed to a 12-year high of 2.812% and finished up +5.8 bp at 2.798%.  The 10-year UK gilt yield rose +7.4 bp to 4.323%. 

Overseas stock markets Monday settled mixed.  The Euro Stoxx 50 closed -0.95%.  China’s Shanghai Composite Index closed -0.54%.  Japan’s Nikkei 225 today closed +0.85%.

Today’s stock movers…

Sealed Air Corp (SEE) closed up more than +3% to lead gainers in the S&P 500 after Citigroup upgraded the stock to buy from neutral.

Dow Inc (DOW) closed up more than +1% to lead gainers in the Dow Jones Industrials after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $55.

Nvidia (NVDA) closed up more than +1% after Morgan Stanley said the recent drop in the stock has created “another buying opportunity.”

Amazon.com (AMZN) closed up more than +1% after the company said it would invest as much as $4 billion in AI startup Anthropic and Wedbush said  that investment “should ease investor concerns that Amazon has been less proactive than its peers in its approach to generative AI.” 

Steel Dynamics (STLD) and Cleveland-Cliffs (CLF) closed up more than +3% after Citigroup upgraded both stocks to buy from neutral.

CarMax (KMX) closed up more than +1% after Wedbush upgraded the stock to outperform from neutral with a price target of $90.

Cruise line operators retreated Monday on rising interest rates after the 10-year T-note yield rose to a 16-year high.  The higher rates may reduce the profitability of the companies that rely on borrowing costs to finance their operations and fleet expansion.  As a result, Carnival (CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Cruises (RCL) closed down more than -1%.

Packaged food stocks and food producers moved lower Monday with Conagra Brands (CAG), Kellog (K), Keurig Dr Pepper (KDP), Campbell Soup (CPB), McCormick & Co (MCK), Coca-Cola (KO), and Modelez International (MDLZ) closing down more than -1%.

Morphic Holding (MORF) closed down more than -36% after BTIG downgraded the stock to neutral from buy. 

MarketAxcess Holdings (MKTX) closed down more than -2% after Citigroup placed the stock on a 30-day downside catalyst watch, citing its Q3 EPS estimate that is already 13% below consensus. 

Dexcom (DXCM) closed down more than -1% after a weekend article in Barron’s said the emergence of GLP-1 drugs to treat obesity has already started to hurt shares of companies treating obesity complications. 

HP Inc (HPQ) closed down more than -1% after an SEC filing showed holder Berkshire Hathaway sold $129 million of shares over the past three sessions.

Across the markets…

December 10-year T-notes (ZNZ23) Monday closed down -16.5 ticks.  The 10-year T-note yield rose +10.4 bp to 4.538%.  Dec T-notes Monday sold off to a 16-year nearest-futures low, and the 10-year T-note yield soared to a 16-year high of 4.546%.  Carryover pressure from a slide in German bunds weighed on T-note prices as the 10-year German bund yield Monday rose to a 12-year high of 2.812%.   Also, supply pressures are undercutting T-note prices as the Treasury readies to sell $158 billion of T-notes and floating-rate notes this week, starting with Tuesday’s $48 billion auction of 2-year T-notes.  In addition, a rebound in stocks on Monday reduced the safe-haven demand for T-notes.

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