Stocks Mixed on Higher Bond Yields and Strength in Big Tech

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.23%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.48%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.47%.

Stocks this morning are mixed as rising bond yields weigh on the broader market.  Hawkish comments from Fed Governor Bowman pushed bond yields higher today when she said, "I continue to expect that further interest rate increases will likely be needed to return inflation to 2% in a timely way as high energy prices could reverse some of the progress we have seen on inflation in recent months."

T-note yields remained higher after the Sep ISM manufacturing index rose more than expected.  Strength in mega-cap technology stocks is keeping the Nasdaq 100 in positive territory. 

Stock index futures initially moved higher in overnight trading after U.S. lawmakers late Saturday night reached a deal to avoid a government shutdown, sparking a relief rally in stock index futures. 

Adding to positive sentiment is better-than-expected Chinese economic news that supports global growth after China Sep manufacturing and Sep non-manufacturing activity expanded more than expected.   

Goldman Sachs today said mega-cap U.S. tech stocks are likely to do well during the Q3 earnings season after a recent selloff led to lower valuations and "The divergence between falling valuations and improving fundamentals represents an opportunity for investors."

The U.S. Sep ISM manufacturing index rose +1.4 to 49.0, stronger than expectations of 47.9.

U.S. Aug construction spending rose +0.5% m/m, right on expectations.

The markets are discounting a 33% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 51% 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 today are moving higher.  The 10-year T-note yield is up +10.5 bp at 4.677%. The 10-year German bund yield is up +7.7 bp at 2.915%.  The 10-year UK gilt yield rose to a 1-1/4 month high of 4.568% and is up +11.5 bp at 4.552%. 

The China Sep manufacturing PMI rose +0.5 to a 6-month high of 50.2, stronger than expectations of 50.1.  Also, the Sep non-manufacturing PMI rose +0.7 to 51.7, stronger than expectations of 51.6.

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.27%.  China’s Shanghai Composite Index was closed for the Golden Week holidays. Japan’s Nikkei 225 today closed -0.31%.

Today’s stock movers…

Strength in mega-cap technology stocks is supportive of the overall market.  Alphabet (GOOGL) is up more than +2%.  Also, Apple (AAPL), Metal Platforms (META), Amazon.com (AMZN), and Microsoft (MSFT) are up more than +1%.

Discover Financial Services (DFS) climbed more than +3% in pre-market trading after agreeing to improve its consumer compliance management system and enhance related corporate governance and enterprise risk management practices as part of a consent order issued by the FDIC.

Viatris (VTRS) is up more than +4% after it said it received an offer of $2.17 billion for its over-the-counter health business from Cooper Consumer Health, a company owned by CVC Capital Partners. 

Zscaler (ZS) is up more than +3% to lead gainers in the Nasdaq 100 after Piper Sandler upgraded the stock to overweight from neutral with a price target of $190.

Nvidia (NVDA) is up more than +2% after Goldman Sachs added the stock to its Conviction List, saying it sees strong long-term growth prospects for the company.

Xylem (XYL) is up more than +1% after Melius Research upgraded the stock to buy from hold with a price target of $122.

Macerich (MAC) is up more than +1% after Piper Sandler upgraded the stock to neutral from underweight. 

Utility stocks are under pressure today from higher T-note yields.  As a result, American Electric Power (AEP), CenterPoint Energy (CNP), Eversource Energy (ES), Exelon Corp (EXC), FirstEnergy (FE), and PPL Corp (PPL) are down more than -2%.

Norfolk Southern (NSC) is down more than -3% after Bank of America Global Research downgraded the stock to neutral from buy. 

Target (TGT) is down more than -2% after Bank of America Global Research cut its price target on the stock to $120 from $135. 

Fidelity National Financial (FNF) is down more than -2% after Keefe, Bruyette & Woods downgraded the stock to market perform from outperform. 

Tesla (TSLA) is down nearly -1% after reporting Q3 vehicle deliveries of 435,059, below the consensus of 456,722. 

United Parcel Service (UPS) is down more than -1% after Susquehanna Financial cut its price target on the stock to $160 from $173.

Toast (TOST) is down more than -1% after Mizuho Securities downgraded the stock to neutral from buy.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -23 ticks, and the 10-year T-note yield is up +10.5 bp at 4.677%.  Dec T-notes today are under pressure after U.S. lawmakers late Saturday night passed legislation to avert a government shutdown, which reduced the safe-haven demand for T-notes.  Losses in T-notes accelerated on this morning’s stronger-than-expected Sep ISM manufacturing index and hawkish comments from Fed Governor Bowman, who said she expects additional Fed rate hikes.

The dollar index (DXY00) today is up by +0.54% at a 10-month high.  The dollar index today is climbing on support from higher T-note yields.  Also, weakness in the yen is supportive for the dollar after the BOJ announced additional bond purchases, which knocked the yen down to an 11-1/4 month low against the dollar.  The dollar extended its gains after the U.S. Sep ISM manufacturing index rose more than expected, a hawkish factor for Fed policy.

EUR/USD (^EURUSD) today is down by -0.59%.  A stronger dollar today has sparked long liquidation pressure in the euro.  The downside for EUR/US is limited after ECB Vice President Guindos said talk of rate cuts by the ECB is premature.

The Eurozone Aug unemployment rate fell -0.1 to match the record low of 6.4%, right on expectations.

ECB Vice President Guindos said interest rates at their current levels will help bring down inflation to the ECB's 2% target, and talk of rate cuts by the ECB is premature.

USD/JPY (^USDJPY) is up by +0.31%.  The yen today tumbled to an 11-1/4 month low against the dollar. Higher T-note yields today are bearish for the yen.  Also, today’s action by the BOJ to announce an extra bond-buying plan of five- to 10-year bonds for this week undercut the yen.  Losses in the yen were contained after the Japan Q3 Tankan large manufacturing business conditions rose more than expected and after the 10-year JGB bond yield rose to a 10-year high of 0.783%, strengthening the yen’s interest rate differentials.

The Japan Q3 Tankan large manufacturing business conditions rose +4 to 9, stronger than expectations of 6.

The Japan Sep Jibun Bank manufacturing PMI was revised downward by -0.1 to 48.5 from the initially reported 48.6, the steepest pace of contraction in 7 months.

December gold (GCZ3) today is down -20.4 (-1.09%), and Dec silver (SIZ23) is down -0.900 (-4.01%).  Precious metals prices this morning are sharply lower, with gold sinking to a 6-3/4 month low and silver dropping to a 6-1/2 month low.  Today’s jump in the dollar index to a 10-month high is undercutting metals prices.  Also, higher global bond yields are bearish for precious metals.  In addition, hawkish central bank comments were bearish for precious metals after ECB Vice President Guindos said any talks of rate cuts by the ECB are premature.  Finally, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low last Friday.

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