Stocks Settle Mixed as Bond Yields Grind Higher

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +0.02%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.24%.

Stocks on Wednesday settled mixed, with the Dow Jones Industrials falling to a 3-1/2 month low.  Strength in energy stocks helped the overall market recover from early losses Wednesday as crude prices surged more than +3% to an 11-month high.  Stocks also found support on dovish comments from Minneapolis Fed President Kashkari, who said a government shutdown and a prolonged auto strike may require the Fed to do less.

The broader market on Wednesday was under pressure after T-note yields resumed their upward trend as the 10-year T-note yield posted a new 16-year high.  Also, the gridlock in Washington is weighing on stocks as lawmakers struggle to agree on a plan to keep the government open after October 1.

The Mortgage Bankers Association (MBA) reported that U.S. mortgage applications fell -1.3% w/w in the week ended September 22.  The home purchase sub-index fell -1.5%, and the refinancing sub-index fell -0.9%.  The average 30-year fixed rate mortgage rose 10 bp to 7.41%, the highest in 22 years.

U.S. Aug capital goods new orders nondefense ex-aircraft rose +0.9% m/m, stronger than expectations of +0.1% m/m and the biggest increase in 7 months.

Minneapolis Fed President Kashkari said a government shutdown and a prolonged auto strike may slow the U.S. economy, which would mean the Fed "would have to less with monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us."

ECB Executive Board member Elderson said interest rates haven't necessarily reached their high point even after the ECB raised rates for a tenth straight time this month.

Reuters reported that five German economic institutes downgraded their German 2023 GDP projection to a contraction of -0.6% from a previous projection of an expansion of +0.3%.

China Aug industrial profits rose +17.2% y/y, the biggest increase in 11 months.

The markets are discounting a 25% 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 the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields on Wednesday moved higher.  The 10-year T-note yield rose to a new 16-year high of 4.640% and finished up +7.2 bp at 4.608%.  The 10-year German bund yield rose to a 12-year high of 2.848% and finished up +3.5 bp at 2.843%.  The 10-year UK gilt yield rose to a 1-week high of 4.368% and finished up +3.2 bp at 4.358%. 

Overseas stock markets Wednesday settled higher.  The Euro Stoxx 50 closed +0.06%.  China’s Shanghai Composite Index closed +0.16%. Japan’s Nikkei 225 today closed +0.18%.

Today’s stock movers…

Energy stocks and energy service companies rallied Wednesday after the price of WTI crude surged more than +3% to a 13-month high.  As a result, Marathon Oil (MRO) and Devon Energy (DVN) closed up more than +4%.  Also, Exxon Mobil (XOM), Hess Corp (HES), APA Corp (APA), Haliburton (HAL), and Occidental Petroleum (OXY) closed up more than +3%.  In addition, Schlumberger (SLB), ConocoPhillips (COP), and Diamondback Energy (FANG) closed up more than +2%. 

Paychex (PAYX) closed up more than +3% after reporting Q1 adjusted EPS of $11.4, above the consensus of $1.12.

ResMed (RMD) closed up more than +3%, adding to Tuesday’s +3% gain after Goldman Sachs said it sees less impact from weight loss drugs on the obstructive sleep apnea market.

MillerKnoll (MLKN) closed up more than +27% after reporting Q1 net sales of $917.7 million, stronger than the consensus of $896 million. 

Mattel (MAT) closed up more than +2% after Morgan Stanley initiated coverage of the stocks with a recommendation of overweight and said the stock is its top U.S. leisure pick. 

Levi Strauss & Co (LEVI) closed up more than +2% after Cowen started coverage on the stock with an outperform rating and a $16 price target.

Costco Wholesale (COST) closed up more than +1% after reporting Q4 total revenue of $78.94 billion, above the consensus of $77.72 billion. 

Zions Bancorp (ZION) closed down more than -2% after Morgan Stanley downgraded the stock to underweight from equal weight with a price target of $32.

CVS Health (CVS) closed down more than -2% after pharmacists at the company’s stores in Kansas City, Missouri, planned to resume walkouts due to staffing shortages and poor working conditions.

Tesla (TSLA) closed down more than -1% after Deutsche Bank said there is considerable risk to Tesla’s earnings expectations for 2024 due to a much lower volume outlook than the market believes. 

Across the markets…

December 10 year T-notes (ZNZ23) Wednesday closed down -17 ticks.  The 10-year T-note yield rose +7.2 bp to 4.608%.  Dec T-notes Wednesday tumbled to a new 16-year nearest-futures low, and the 10-year T-note yield climbed to a 16-year high of 4.640%.  Carryover pressure from a jump in German bund yields weighed on T-notes as the 10-year German bund yield rose to a 12-year high of 2.831%.  Also weighing on T-notes was Wednesday’s news that showed Aug capital goods new orders nondefense ex-aircraft rose more than expected. In addition, the surge in crude prices Wednesday to a 13-month high boosted inflation expectations and undercut T-notes.

T-notes Wednesday morning initially moved higher after Minneapolis Fed President Kashkari said a government shutdown and a prolonged auto strike might slow the U.S. economy, meaning the Fed would need to do less.   Also, decent demand for the Treasury’s $49 billion auction of 5-year T-notes was positive for T-note prices as the auction had a bid-to-cover ratio of 2.52, right on the 10-auction average.

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