Stocks Rebound as Bond Yields Turn Lower

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed up +0.59%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.35%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.84%.

Stocks on Thursday posted moderate gains as technology stocks rallied after T-note yields gave up early gains and turned lower.  Also, weaker-than-expected U.S. economic news on Q2 GDP and Aug pending home sales stoked optimism that the Fed would continue its pause in rate hikes.  In a speech to educators, Fed Chair Powell did not discuss interest rates or the economic outlook Thursday afternoon after the markets had closed.

U.S. stock indexes also had carryover support from gains in European stocks on signs of easing European price pressures after German consumer prices this month rose less than expected. 

Soaring global bond yields are negative for stock prices as the 10-year T-note yield Thursday climbed to a new 16-year high, and the 10-year German bund yield rose to a new 12-year high.  Speculation that the world’s central banks will keep interest rates higher for longer is undercutting bond prices. 

Stocks are also under pressure as a government shutdown appears imminent on October 1 as House Speaker McCarthy cannot get GOP lawmakers to agree on a temporary spending bill to keep the government open.  Senate Republican leader McConnell is backing a bipartisan plan to avoid a shutdown and has publicly separated himself and Senate Republicans from House Republicans.   

U.S. Q2 GDP was unrevised at +2.1% (annualized q/q), weaker than expectations of an upward revision to +2.2%.  Q2 personal consumption was revised lower to +0.8% from the previously reported +1.7%.

U.S. weekly initial unemployment claims rose +2,000 to 204,000, showing a stronger labor market than expectations of 215,000.  Weekly continuing claims rose +12,000 to 1.670 million, showing a stronger labor market than expectations of 1.675 million.

U.S. Aug pending home sales fell -7.1% m/m, weaker than expectations of -1.0% m/m and the biggest decline in 11 months.

Chicago Fed President Goolsbee said policymakers were at risk of overshooting on interest rates by putting too much emphasis on the idea that steep job losses are needed to curb inflation.

The markets are discounting a 21% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 40% 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 Thursday were mixed.  The 10-year T-note yield climbed to a 16-year high of 4.686% but fell back and finished down -1.7 bp at 4.591%.  The 10-year German bund yield rose to a 12-year high of 2.984% and finished up +8.7 bp at 2.930%.  The 10-year UK gilt yield rose to a 5-week high of 4.560% and finished up +12.6 bp at 4.484%. 

German Sep CPI (EU harmonized) rose +0.2% m/m and +4.3% y/y, weaker than expectations of +0.3% m/m and +4.5% y/y, with the +4.3% y/y gain the smallest annual increase in two years.

ECB Governing Council member and Bundesbank President Nagel said additional ECB interest rate hikes may be on the way "if data indicate that further action is warranted."

Overseas stock markets Thursday settled mixed.  The Euro Stoxx 50 closed up +0.72%.  China’s Shanghai Composite Index closed +0.10%. Japan’s Nikkei 225 today closed -1.54%.

Today’s stock movers…

Chip stocks moved higher after T-note yields gave up early gains and turned lower.  Advanced Micro Devices (AMD) closed up more than +4%, and KLA Corp (KLAC) closed up more than +3%.  Also, Microchip Technology (MCHP), Marvell Technology (MRVL), Lam Research (LRCX), Applied Materials (AMAT), ON Semiconductor (ON), and Analog Devices (ADI) closed up more than +2%.  In addition, Intel (INTC) closed up more than +1% to lead gainers in the Dow Jones Industrials.   

Jabil Inc (JBL) closed up more than +18% after reporting Q4 core EPS of $2.45, better than the consensus of $2.32.

Palantir (PLTR) closed up more than +6% after winning a $250 million AI contract with the U.S. Defense Department. 

Trimble (TRMB) closed up more than +6% after AGCO Corp said it would acquire technology assets from Trimble for $2 billion to boost its offerings in the agriculture market.

Eastman Chemical (EMN) closed up more than +3% after it sold its Texas City operations to INEOS Acetyls for $490 million.

Trade Desk (TTD) closed up more than +3% after UBS started coverage on the stock with a buy rating and a price target of $100. 

Huntington Ingalls Industries (HII) closed up nearly +1% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $247. 

CarMax (KMX) closed down more than -13% to lead losers in the S&P 500 after reporting Q2 EPS of 75 cents, weaker than the consensus of 77 cents.

Workday (WDAY) closed down more than -8% to lead losers in the Nasdaq 100 after forecasting annual subscription revenue growth of 17% to 19% over the next three years, below expectations of +20% growth.

Accenture (ACN) closed down more than -4% after forecasting 2024 adjusted EPS of $11.97-$12.32, below the consensus of $12.37. 

Micron Technology (MU) closed down more than -4% after forecasting a Q4 adjusted per share of -$1.00 to -$1.14, a bigger loss than the consensus of -96 cents per share. 

Boeing (BA) closed down more than -2% to lead losers in the Dow Jomes Industrials after China Eastern Airlines ordered 100 C919 jest from Commercial Aircraft Corp of China, dealing a blow to Boeing, who has seen its orders from China dry up.

Johnson Controls International Plc (JCI) closed down more than -2% after reporting a cybersecurity incident that caused disruptions in parts of its information technology infrastructure and applications. 

Across the markets…

December 10 year T-notes (ZNZ23) Thursday closed up +9 ticks.  The 10-year T-note yield fell -1.7 bp to 4.5918%.  Dec T-notes Thursday recovered from a 16-year nearest-futures low and moved higher, and the 10-year T-note yield fell back from a 16-year high of 4.686%.  T-notes recovered from early losses Thursday on weaker-than-expected U.S. economic reports on Q2 GDP and Aug pending home sales.  Also, dovish comments from Chicago Fed President Goolsbee sparked short covering in T-notes when he said policymakers were at risk of overshooting on interest rates. 

T-notes Thursday initially moved lower on negative carryover from a slide in 10-year German bund prices to a 12-year low.  Also weighing on T-notes was Thursday’s news that showed U.S. weekly jobless claims rose less than expected, a sign of labor market strength that is hawkish for Fed policy. In addition, T-notes were undercut by slack demand for the Treasury’s $37 billion auction of 7-year T-notes with a bid-to-cover ratio of 2.47, below the 10-auction average of 2.52. 

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