Stocks Mostly Lower as Strong U.S. Economic Reports Push Bond Yields Higher

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.01%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.04%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.22%.

Stocks on Tuesday settled mixed, with the Dow Jones Industrials posting a 3-week high and the Nasdaq 100 posting a 1-week low.  The broader market was under pressure as bond yields jumped on Tuesday’s stronger-than-expected U.S. Sep retail sales and Sep manufacturing reports, reinforcing the case for the Fed to keep interest rates higher for longer. Also, weakness in chip stocks weighed on the overall market after Bloomberg News reported the U.S. is restricting the sale of chips to China that are used for AI.  A rally in regional bank stocks limited losses in the overall market.

The U.S. and its allies are ramping up diplomatic efforts to contain the conflict between Israel and Hamas.  German Chancellor Scholz was in Israel Tuesday, and U.S. President Biden will travel to Israel on Wednesday.  President Biden will also travel to Jordan to meet with Arab leaders, including Jordan King Abdullah II, Egyptian President Abdel Fatah El-Sisi, and Palestinian Authority President Mahmoud Abbas. 

U.S. Sep retail sales rose +0.7% m/m and +0.6% m/m ex-autos, stronger than expectations of +0.3% m/m and +0.2% m/m ex-autos.  Also, Aug retail sales were revised higher to +0.8% m/m and +0.9% m/m ex-autos from the initially reported +0.6% m/m and +0.6% m/m ex-autos.

U.S. Sep manufacturing production rose +0.4% m/m, stronger than expectations of unchanged m/m.

The U.S. Oct NAHB housing market index fell -4 to a 9-month low of 40, weaker than expectations of 44.

Comments from Richmond Fed President Barkin signaled his support for a pause in Fed rate hikes and were supportive of stocks when he said, "I am still looking to be convinced, both that demand is settling and that any weakness is feeding through to inflation."  He added that the path for inflation "isn't yet clear," and "we have time to see if we have done enough, or whether there's more work to do."

The markets are discounting a 12% 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 are higher.  The 10-year T-note yield rose to a 1-week high of 4.857% and finished up +12.8 bp at 4.834%.  The 10-year German bund yield rose to a 1-week high of 2.895% and finished up +9.6 bp at 2.882%.  The 10-year UK gilt yield rose to a 1-week high of 4.561% and ended up +3.1 bp at 4.512%. 

Overseas stock markets on Tuesday settled higher.  The Euro Stoxx 50 closed up +0.06%.  China’s Shanghai Composite Index closed up +0.32%. Japan’s Nikkei 225 today closed up +1.20%.

Today’s stock movers…

Moderna (MRNA) closed down more than -5% and added to Monday’s -6% fall to lead losers in the S&P 500 and Nasdaq 100 after Pfizer cut its full-year forecasts due to weaker-than-expected demand for its Covid-19 products. 

Chip stocks were under pressure Tuesday after the U.S. said it is restricting top-of-the-line chips used for powering artificial intelligence (AI) models, including chips Nvidia designed especially for the Chinese market.  As a result, Nvidia (NVDA) closed down more than -4%, and Western Digital (WDC) closed down more than -3%.  Also, Broadcom (AVGO) closed down more than -2%, and Intel (INTC), Advanced Micro Devices (AMD), Marvell Technology (MRVL), KLA Corp (KLAC), and NXP Semiconductors (NXPI) closed down more than -1%. 

Goldman Sachs (GS) closed down more than -1% to lead losers in the Dow Jones Industrials after reporting Q3 net interest income of $1.55 billion, weaker than the consensus of $1.86 billion.

Lucid Group (LCID) closed down more than -5% after reporting it delivered 1,457 vehicles in Q3, below expectations of 2,100. 

U.S.-listed Chinese stocks fell Tuesday after Bloomberg News reported the U.S. is restricting the sale of chips to China that are used for AI.  As a result, Baidu (BIDU) closed down more than -4%, and JD.com (JD) closed down more than -3%. Also, NetEase (NTES) closed down more than -2%, and Trip.com (TCOM) closed down more than -1%. 

NetScout (NTCT) closed down more than -16% after cutting its 2023 adjusted EPS forecast to $2.00-$2.20 from a prior forecast of $2.20-$2.32, weaker than the consensus of $2.27. 

Choice Hotels International (CHH) closed down more than -6% after offering to buy Wyndham Hotels for $90/share in a deal valued at $9.8 billion. 

Netflix (NFLX) closed down more than -1% after Truist Securities cut its price target on the stock to $430 from $485.

VF Corp (VFC) closed up more than +6% to lead gainers in the S&P 500 after activist investor Engaged Capital took a stake in the company. 

Regional bank stocks rallied after Bank of New York Mellon CEO Vince said he sees an end to the slide in bank deposits.  As a result, Bank of New York Mellon (BK), KeyCorp (KEY), and Comerica (CMA) closed up more than +3%.  Also, Synchrony Financial (SYF), Truist Financial (TFC), Northern Trust (NTRS), Fifth Third Bancorp (FITB), Citizens Financial Group (CFG), and Zions Bancorp (ZION) closed up more than +2%.

US Bancorp (USB) closed up more than +5% after the Federal Reserve released it from a commitment to meet requirements for larger banks by the end of the year. 

Wyndham Hotels & Resorts (WH) closed up more than +8% after Choice Hotels International proposed to buy the company for $90 a share in a deal valued at $9.8 billion. 

Dollar Tree (DLTR) closed up more than +4% to lead gainers in the Nasdaq 100 after Goldman Sachs upgraded the stock to buy from neutral with a price target of $137. 

Viasat (VSAT) closed up more than +9% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $30.

Fidelity National Information Services (FIS) closed up more than +1% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $65. 

Air Products & Chemicals (APD) closed up more than +1% after Wells Fargo Securities upgraded the stock to overweight from neutral with a price target of $345.   

Across the markets…

December 10-year T-notes (ZNZ23) Tuesday closed down -31.5 ticks, and the 10-year T-note yield rose +12.8 bp to 4.834%.   Dec T-notes Tuesday matched their 16-year nearest-futures low, and the 10-year T-note yield climbed to a 1-1/2 week high of 4.887%.  Tuesday’s stronger-than-expected U.S. retail sales and manufacturing production reports were hawkish for Fed policy and weighed on T-note prices.  Also, an increase in inflation expectations is bearish for T-notes after the 10-year breakeven inflation rate Tuesday climbed to a 2-1/4 month high of 2.420%.

• Dollar Gives Up Early Gains on Dovish Fed Comments
• Crude Little Changed on Diplomatic Efforts to Contain the Israeli-Hamas Conflict
• Nat-Gas Prices Remain Weak on Milder U.S. Weather Forecasts
• 1 Killer Stock to Buy Now for Long-Term Growth