Stocks Drop as Strong U.S. Economic News Curbs Fed Cut Expectations

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.63%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.12%.

Stocks this morning are weaker, with the S&P 500 and Nasdaq 100 falling to 1-week lows and the Dow Jones Industrials falling to a 3-1/2 week low. Stocks opened lower today as central bankers pushed back against market expectations for interest rate cuts.  ECB President Lagarde and ECB Governing Council member Knot downplayed the prospects of imminent rate cuts today, following Tuesday’s comments from Fed Governor Waller, who urged caution on the pace of easing. 

Losses in stock index futures accelerated as bond yields rose on stronger-than-expected U.S. economic news on Dec retail sales, Dec manufacturing production, and the Jan NAHB housing market index.  Today’s better-than-expected economic news has dampened Fed rate cut expectations and undercut stocks. 

Global equity markets are also under pressure after disappointing Chinese economic news today knocked the Shanghai Composite to a 3-1/2 year low and boosted concerns that economic weakness in China will weigh on global growth prospects.

Limiting losses in the overall market is the strength of defensive healthcare stocks and consumer food companies. 

U.S. Dec retail sales rose +0.6% m/m, stronger than expectations of +0.4% m/m.  Also, Dec retail sales ex-autos rose +0.4% m/m, stronger than expectations of +0.2% m/m. 

The U.S. Dec import price index ex-petroleum was unchanged m/m, weaker than expectations of +0.1% m/m.   

U.S. Dec manufacturing production rose +0.1% m/m, stronger than expectations of no change.

The U.S. Jan NAHB housing market index rose +7 to 44, stronger than expectations of 39.

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 59% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields today are higher. The 10-year T-note yield climbed to a 1-month high of 4.127% and is up +3.6 bp at 4.094%.  The 10-year German bund yield rose to a 6-week high of 2.326% and is up +5.6 bp at 2.315%.  The 10-year UK gilt yield rose to a 5-week high of 3.978% and is up +16.5 bp at 3.962%. 

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.17%.  China’s Shanghai Composite Index closed down -2.09%.  Japan’s Nikkei Stock Index closed down -0.40%.

Today’s stock movers…

Crowdstrike Holdings (CRWD) is down more than -4% to lead losers in the Nasdaq 100 after WestPark Capital downgraded the stock to hold from buy.

Chip stocks are falling today as T-note yields climb.  As a result, Globalfoundries (GFS) and ON Semiconductor (ON) are down more than -3%.  Also, Intel (INTC) is down more than -2% to lead losers in the Dow Jones Industrials.  In addition, NXP Semiconductors NV (NXPI), Marvell Technology (MRVL), Microchip Technology (MCHP), and Qualcomm (QCOM) are down more than -2%. 

Tesla (TSLA) is down more than -2% after Investor’s Business Daily reported that it cut its Model Y price in Europe from 4% to 9%. 

Rivian Automotive (RIVN) is down more than -4% after Deutsche Bank downgraded the stock to hold from buy. 

Charles Schwab (SCHW) is down more than -2% after reporting Q4 total net new assets fell -48% to $66.3 billion, below the consensus of $67.54 billion. 

Mattel (MAT) is down more than -2% after Morgan Stanley downgraded the stock to equal weight from overweight. 

Aptiv Plc (APTV) is down more than -2% after Raymond James cut their price target on the stock to $95 from $105. 

Morgan Stanley (MS) is down more than -1% after JPMorgan Chase downgraded the stock to neutral from overweight. 

Defensive healthcare stocks are climbing today as the broader market falls.  As a result, Humana (HUM) is up more than +2% to lead gainers in the S&P 500.  Also, UnitedHealth Group (UNH) is up more than +1% to lead gainers in the Dow Jones Industrials.  In addition, Elevance Health (ELV), Cigna Group (CI), and Cardinal Health (CAH) are up more than +1%. 

Defensive consumer food companies are moving higher today with the selloff in the broader market. As a result, JM Smucker (SJM), Conagra Brands (CAG), and Campbell Soup (CPB) are up more than +1%.  Also, Kraft Heinz (KHC) is up +0.88% to lead gainers in the Nasdaq 100, and Mondelez International (MDLZ) is up +0.50%. 

Citizens Financial Group (CFG) is up more than -1% after reporting Q4 net interest income of $1.50 billion, better than the consensus of $1.49 billion. 

Boeing (BA) is up more than +1% to lead gainers in the Dow Jones Industrials after the FAA completed the first 40 inspections on the Boeing 737-9 Max aircraft, a key step to eventually end the grounding of the aircraft. 

Maplebear Inc (CART) is up more than +6% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $35.

Nutanix (NTNX) is up more than +2% after William Blair upgraded the stock to outperform from market perform. 

ExlService (EXLS) is up more than +2% after Citigroup upgraded the stock to buy from neutral with a price target of $36. 

Across the markets…

March 10-year T-notes (ZNH24) this morning are down -13 ticks, and the 10-year T-note yield is up +3.6 bp to 4.094%.  Mar T-note prices today fell to a 1-1/2 week low, and the 10-year T-note yield climbed to a 1-month high of 4.127%. T-notes have carryover pressure from a fall in 10-year German bunds to a 6-week low today on hawkish ECB comments. T-notes fell to their lows after the release of today’s stronger-than-expected U.S. Dec retail sales report.  Supply pressures may limit much recovery in T-note prices as the Treasury will auction $13 billion of 20-year T-bonds later today. 

The dollar index (DXY00) today is up by +0.21% and climbed to a 1-month high. A jump in T-note yields today is strengthening the dollar's interest rate differentials and is boosting the dollar. Also, a slump in global equity markets today has boosted liquidity demand for the dollar.  In addition, today’s better-than-expected U.S. economic news on Dec retail sales, Dec manufacturing production, and Jan NAHB housing market index support the dollar. 

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 60% for the following meeting on March 19-20.

EUR/USD (^EURUSD) is down by -0.18% and extended Tuesday’s losses down to a 1-month low.  Dollar strength today is weighing on the euro.  Losses in EUR/USD are limited by today’s comments from ECB President Lagarde and ECB Governing Council member Knot, who both pushed back on market expectations of ECB interest rate cuts as swap markets now expect only a 19% chance of an ECB rate cut at the March ECB meeting, down from a 50% chance a week ago.

ECB President Lagarde said policymakers need more evidence before they can be sure that consumer prices are under control and that the ECB's first rate cut will probably be in the summer. 

ECB Governing Council member Knot said, "Markets are getting ahead of themselves," and the ECB will need to see a turnaround in wages before it can start to lower interest rates.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 19% for the following meeting on March 7.

USD/JPY (^USDJPY) is up by +0.70%.  The yen today extended this week’s losses to a 1-1/2 month low against the dollar.  Higher T-note yields today are bearish for the yen.   Also, expectations that the BOJ will maintain its negative interest rate policy at next week’s meeting are bearish for the yen.  In addition, today’s stronger-than-expected U.S. economic news pushes back the chances for Fed rate cuts, strengthening the dollar.

February gold (GCG24) today is down -8.5 (-0.42%), and Mar silver (SIH24) is down -0.253 (-1.10%).  Gold and silver prices this morning are posting moderate losses.  Today’s rally in the dollar index to a 1-month high is bearish for metals prices.  Also, higher global bond yields are negative for precious metals.  In addition, the ongoing long liquidation of gold by funds is bearish for gold after long gold holdings in ETFs fell to a 4-year low Tuesday. Finally, hawkish comments today from ECB President Lagarde and ECB Governing Council member Knot weighed on gold prices after they pushed back on market expectations of ECB interest rate cuts. Silver prices were undercut from today’s weakness in Chinese economic news on Q4 GDP and Dec new home prices, signaling weak industrial metals demand.

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