Broader Market Under Pressure as Strong CPI Keeps Fed Rate Hikes in Play

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.09%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.22%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.41%.

Stocks this morning are mixed, with the Nasdaq 10 climbing to a 3-1/2 week high.  The broader market is under pressure today after T-note yields jumped when U.S. Sep consumer prices rose more than expected.  Also, weekly U.S. initial unemployment claims were unchanged, stronger than expectations for a slight increase and a hawkish factor for Fed policy. This morning’s hawkish reports keep in play the possibility of one more Fed rate hike this year.  Today's rally in chip stocks is keeping the Nasdaq 100 in positive territory.

Concern that the conflict between Israel and Hamas will spread in the Middle East is another negative factor for stocks on reports that Israel carried out airstrikes on the main airports in Damascus and Aleppo in Syria.

U.S. Sep CPI rose +3.7% y/y, unchanged from Aug and stronger than expectations of a decline to 3.6% y/y.  Sep CPI ex-food and energy eased to 4.1% y/y from +4.3% y/y in Aug, right on expectations and the smallest increase in 2 years.

U.S. weekly initial unemployment claims were unchanged at 209,000, showing a slightly stronger labor market than expectations of an increase to 210,000.

The markets are discounting a 14% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 44% 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 are higher.  The 10-year T-note recovered from a 1-1/2 week low of 4.515% and is up +8.7 bp at 4.645%.  The 10-year German bund yield rebounded from a 2-1/2 week low of 2.685% and is up +6.4 bp at 2.782%.  The 10-year UK gilt yield recovered from a 2-week low of 4.284% and is up +7.9 bp at 4.407%.  

Overseas stock markets are higher.  The Euro Stoxx 50 is up +0.01%.  China’s Shanghai Composite Index closed up +0.94%.  Japan’s Nikkei 225 today closed up +1.75 %.

Today’s stock movers…

Hormel Foods (HRL) is down more than -8% to lead losers in the S&P 500 on disappointment in its investors’ day conference. 

Homebuilding stocks are under pressure after the average 30-year fixed mortgage rate rose to a 23-year high of 7.67%, which weighs on housing demand.  As a result, DR Horton (DHI) and Toll Brothers (TOL)  are down more than -4%.  Also, Lennar (LEN) and PulteGroup (PHM) are down more than -3%. 

Keurig Dr Pepper (KDP) is down more than -4% after Berstein cut its price target on the stock to $37 from $40.

Boeing (BA) is down more than -2% to lead losers in the Dow Jones Industrials after Ryanair Holdings Plc said Boeing’s delays of its 737 Max aircraft have worsened, and it expects only 40 deliveries of the jet by Jun 2024 versus the previous estimate of 57. 

Atlassian (TEAM) is down more than -4% after it agreed to acquire vide-messaging startup Loom for $975 million. 

Commercial Metals (CMC) is down more than -8% after reporting Q4 net sales of $1.90 billion, below the consensus of $2.12 billion. 

Ford Motor (F) is down more than -2% after UAW autoworkers began a strike at the company’s largest plant in Kentucky. 

Jack Henry & Associates (JKHY) is down more than -1% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $140.

Fastenal (FAST) is up more than +6% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q3 EPS of 52 cents, above the consensus of 50 cents. 

Walgreens Boots Alliance (WBA) is up more than +4% to lead gainers in the Dow Jones Industrials after announcing a $1 billion cost-cutting program and reducing its capital expenditures by about $600 million.

Strength in chip stocks is a positive factor for the overall market.  KLA Corp (KLAC) and Applied Materials (AMAT) are up more than +4%.  Also, Broadcom (AVGO) and Lam Research (LRCX) are up more than +3%.  In addition, Advanced Micro Devices (AMD) and ASML Holding NV (ASML) are up more than +2%. 

Adobe (ADBE) is up more than +4%, adding to Wednesday’s +3% gain, on a positive response to its release of new features for generative AI models at the Max conference in Los Angeles. 

Albemarle (ALB) is up more than +2% after being granted an extension for seven days to close its deal to acquire Liontown Resources Ltd for $4.2 billion. 

Target (TGT) is up more than +1% after Bank of America upgraded the stock to buy from neutral with a price target of $135. 

Across the markets…

December 10-year T-notes (ZNZ23) this morning are down -14 ticks, and the 10-year T-note yield is up +8.7 bp at 4.645%. Dec T-notes today fell back from a 2-week high and moved lower, and the 10-year T-note yield rebounded from a 1-1/2 week low of 4.515%.  T-notes erased overnight gains and turned lower on this morning’s stronger-than-expected U.S. Sep CPI and weekly jobless claims reports, which are hawkish for Fed policy.  Also, an increase in inflation expectations is bearish for T-notes after the 10-year breakeven inflation rate climbed to a 1-week high today at 2.341%.   In addition, supply pressures are weighing on T-notes as the Treasury will auction $20 billion of 30-year T-bonds later today to conclude this week’s $101 billion T-notes and T-bonds auction package. 

The dollar index (DXY00) today is up by +0.35%.  The dollar this morning recovered from a 2-1/2 week low and moved higher after stronger-than-expected reports on U.S. Sep consumer prices and weekly jobless claims bolsters the outlook for the Fed to raise interest rates one more time this year.  Today's decline in bond yields is undercutting the dollar as the 10-year T-note yield fell to a 2-week low.  Also, dovish ECB comments undercut EUR/USD to the dollar’s benefit today. 

EUR/USD (^EURUSD) today is down by -0.62%.  The euro today fell back sharply from a 2-1/2 week high on dollar strength and dovish ECB comments.  ECB Governing Council members Centeno and Wunsch said today that current interest rates are appropriate, and they favor the ECB pausing its interest rate hike campaign.

ECB Governing Council member Centeno said, "With the current level of interest rates, we will be making a substantial contribution to the 2% inflation objective.  We will get there by continuing this monetary policy stance, holding on for a while until we are totally sure that inflation is coming down."

ECB Governing Council member Wunsch said, "If we keep seeing inflation numbers aligned with the forecast, then we don't have to hike interest rates anymore."

USD/JPY (^USDJPY) today is up by +0.27%.  The yen today dropped to a 1-week low against the dollar after stronger-than-expected U.S. reports on consumer prices and weekly jobless claims pushed T-note yields higher.  Also, a decline in Japanese government bond yields weighed on the yen after the 10-year JGB bond yield fell to a 2-week low of 0.754%.  In addition, weak economic news undercut the yen after Japan Aug machine tool orders unexpectedly declined and Japan's Sep PPI rose less than expected, dovish factors for BOJ policy.

Japan Sep PPI eased to +2.0% y/y from +3.3% y/y in Aug, weaker than expectations of +2.4% y/y and the slowest pace of increase in 2-1/2 years.

Japan Aug core machine orders unexpectedly fell -0.5% m/m, weaker than expectations of +0.6% m/m.

December gold (GCZ3) today is down -0.4 (-0.02%), and Dec silver (SIZ23) is down -0.073 (-0.33%).  Precious metals prices this morning gave up overnight gains and turned lower, with gold falling from a 2-week high and silver dropping from a 1-1/2 week high.  A recovery in the dollar weighed on metals after the dollar index rebounded from a 2-1/2 week low and moved higher.  Also, today’s stronger-than-expected U.S. economic reports on Sep consumer prices and weekly jobless claims pushed T-note yields high and undercut precious metals.   

Losses in metals were limited after U.S. inflation expectations rose when the 10-year breakeven inflation rate climbed to a 1-week high, which boosted demand for gold as an inflation hedge. Also, concerns that the Middle East turmoil may spread boosted safe-haven demand for precious metals after Israel carried out airstrikes on the main airports in Damascus and Aleppo in Syria.

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