Stocks Rebound as Rising Bond Yields Bolsters Fed-Pause Speculation

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed up +1.18%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.87%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.70%.

Stocks on Friday recovered from early losses and posted moderate gains, with the Nasdaq 100 climbing to a 2-week high.  Stocks rebounded Friday despite the strong Sep payrolls report that pushed the 10-year T-note yield to a 16-year high as the rise in yields represents a major tightening of financial condition and fostered speculation the rise in yields will let the Fed pause its rate-hike campaign.  Also, average hourly earnings rose less than expected, which was a dovish factor for Fed policy.

Stocks initially retreated Friday morning, with the Dow Jones Industrials falling to a 4-month low, after bond yields jumped on the surge in U.S. payrolls of +336,000.

M&A news also supported stocks after Pioneer Natural Resources closed up more than +10% after Bloomberg News reported that Exxon Mobil is in talks to acquire the company in a deal worth as much as $60 billion.

U.S. Sep nonfarm payrolls surged +336,000, well above expectations of +170,000 and the largest increase in eight months.  Also, Aug nonfarm payrolls were revised upward by 40,000 to +227,000 from the initially reported +187,000.  The Sep unemployment rate was unchanged at 3.8%, weaker than expectations of a decline to 3.7%. 

U.S. Sep average hourly earnings rose +0.2% m/m and +4.2% y/y, weaker than expectations of +0.3% m/m and +4.3% y/y.

U.S. Aug consumer credit unexpectedly fell -$15.62 billion, the biggest decline in 3-1/4 years and weaker than expectations of a +$11.700 billion increase.

The markets are discounting a 31% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 47% 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 Friday moved higher.  The 10-year T-note yield rose to a 16-year high of 4.885% and finished up +6.3 bp at 4.782%.  The 10-year German bund yield rose +0.7 bp to 2.884%.  The 10-year UK gilt yield rose +3.2 bp to 4.573%. 

ECB Executive Board member Schnabel said, "I still see upside risks to inflation, and if they materialized, further interest rate hikes could be necessary." 

German Aug factory orders rose +3.9% m/m, stronger than expectations of +1.5% m/m.

Japan Aug household spending fell -2.5% y/y, a smaller decline than expectations of -3.9% y/y.

Japan Aug labor cash earnings rose +1.1% y/y, weaker than expectation of +1.5% y/y.

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +1.09%.  China’s Shanghai Composite Index was closed for the Golden Week holidays.  Japan’s Nikkei 225 closed -0.26%.

Today’s stock movers…

Pioneer Natural Resources (PXD) closed up more than +10% to lead gainers in the S&P 500 after Bloomberg News reported that Exxon Mobil is in talks to acquire the company.  Exxon Mobil (XOM) closed down more than -1% on the Bloomberg report.

MarketAxess Holdings (MKTX) closed up more than +6% after UBS initiated coverage of the stock with a buy recommendation and a price target of $285. 

MGM Resorts International (MGM) closed up more than +5% after several analysts said the recent cyberattack on the company will have a limited impact on earnings going forward. 

Eli Lilly (LLY) closed up more than +4% after Bank of America raised its price target on the stock to $700 from $600.

Eaton Corp Plc (ETN) closed up more than +3% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $230.

U.S.-listed Chinese stocks rose Friday after the Shanghai Securities News reported that spending on China’s online platforms during the Golden Week holiday topped pre-pandemic levels. As a result, PDD Holdings (PDD) closed up more than +7% to lead gainers in the Nasdaq 100.  Also, JD.com (JD) and Baidu (BIDU) closed up more than +3%.  In addition, Alibaba Group Holding (BABA) closed up more than +2%, and NetEase (NTES) closed up more than +1%. 

Elf Beauty (ELF) closed up more than +3% after Jeffries upgraded the stock to buy from hold with a price target of $115. 

Walt Disney (DIS) closed up more than +2% after Seaport Global Securities initiated coverage on the stock with a buy recommendation and a price target of $93.

Telecommunications companies fell on concerns that the Federal Communications Commission will force the companies to build new networks in areas of the U.S. deemed to be digitally deprived.  As a result, Verizon Communications (VZ) closed down more than -3% to lead losers in the Dow Jones Industrials.  AT&T (T) closed down more than -2%.

Walmart (WMT) closed down more than -1%, and Costco Wholesale (COST) closed down more than -2%, after Walmart said it’s already seeing an impact on food shopping demand from people taking the diabetes drug Ozempic, Wegovy, and other appetite-suppressing medications. 

Restaurant stocks tumbled on speculation the rising popularity of the Ozempic weight-loss phenomenon will negatively impact demand for restaurant and take-out food.  As a result, Domino’s Pizza (DPZ) closed down more than -5% to lead losers in the S&P 500.  Also, Brinker International (EAT) closed down more than -3%, and Darden Restaurants (DRI) and Chipotle Mexican Grill (CMG) closed down more than -2%.  In addition, Yum!  Brands (YUM), McDonald’s (MCD), and Bloomin’ Brands (BLMN) closed down more than -1%. 

LCI Industries (LCII) closed down more than -6% after DA Davidson downgraded the stock to underperform from neutral. 

AES Corp (AES) closed down more than -1% after UBS downgraded the stock to neutral from buy.

Across the markets…

December 10-year T-notes (ZNZ23) Friday closed down -15 ticks.  The 10-year T-note yield rose +6.3 bp to 4.782%.  Dec T-notes Friday retreated but held just above Wednesday’s 16-year nearest-futures low. However, the 10-year T-note yield posted a new 16-year high of 4.885%.  Friday’s larger-than-expected jump in U.S Sep nonfarm payrolls and the upward revision to Aug payrolls undercut T-notes and bolster the chance of the Fed raising interest rates at the November 1 FOMC meeting.  Also, a recovery in stocks curbed the safe-haven demand for T-notes.  On the positive side, U.S. Sep hourly earnings rose less than expected, easing concern about wage pressures. 

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