Stocks Pressured by Higher T-note Yields and Weak Chip Stocks

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.22%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.83%. 

Stocks Wednesday saw downward pressure from the +4.1 bp rise in the 10-year T-note and a sell-off of more than -2% in key chip stocks. 

However, the Dow Jones Industrials saw support from blue chips such as 3M (MMM), with a gain of +5.42%, and gains of more than +1% in Travelers (TRV), Chevron (CVX), Caterpillar (CAT), Home Depot (HD), NIKE (NKE), and Goldman Sachs (GS), and Coca Cola (KO). 

Stocks on Wednesday gave back some ground after Tuesday’s +1.5% rally in the Nasdaq 100 index that was sparked by optimism that the U.S. Feb CPI report was not as bad as feared and the Feb core CPI dipped to a 2-3/4 year low of +3.8% y/y.  However, the Feb headline CPI of +3.2% y/y was slightly above expectations of +3.1% and was 0.2 points above last June’s 2-3/4 year low of +3.0%.  Both CPI measures remain well above the Fed’s +2% inflation target.

Fed Chair Powell said last week that the Fed is “not far” from having enough confidence to cut interest rates.  However, the markets are discounting the odds at virtually zero that the Fed will cut interest rates at its meeting next week since inflation is still too far above target. The odds for a rate cut are much better for the June meeting.

The markets are discounting the chances for a -25 bp rate cut at 1% for next week’s March 19-20 FOMC meeting, 13% for the following meeting on April 30-May 1, and 73% for the meeting after that on June 11-12.

In some positive news for the housing market, the MBA mortgage applications index rose +7.1% in the week ended March 8, after rising +9.7% in the previous week.  Mortgage purchases rose +4.7%, and refinancings rose +12.2%.  The MBA’s average 30-year fixed mortgage rate in the latest week fell to a 5-week low of 6.84% from 7.02% in the previous week.  The mortgage rate is currently only 13 bp above the 10-month low of 6.71% posted in December.

On the U.S. economic report front, the markets are awaiting Thursday’s U.S. retail sales and PPI reports. Feb retail sales are expected to show an increase of +0.8% m/m, reversing Jan’s -0.8% decline.  Feb retail sales ex-autos are expected to rise +0.5% m/m, reversing most of Jan’s -0.6% decline.  The Feb final-demand PPI is expected to rise to +1.2% y/y from Jan’s +0.9%, but the core PPI is expected to ease to +1.9% y/y from Jan’s +2.0%.

Overseas stock markets Wednesday closed mixed.  The Euro Stoxx 50 closed up +0.35%.  China’s Shanghai Composite closed down -0.40%.  Japan’s Nikkei Stock Index closed down -0.26%.

Interest Rates

June 10-year T-notes (ZNM24) Wednesday closed down -7.5 ticks.  The 10-year T-note yield rose by +4.1 bp to 4.192%, up from last Friday’s 5-week low of 4.034%.  T-note prices saw weakness on (1) carry-over bearishness from Tuesday’s stronger-than-expected CPI report, and (2) Wednesday’s slight rise in the 10-year breakeven inflation expectations rate to 2.31%.

T-note prices also saw supply overhang with the Treasury in the market again Wednesday, along with strong corporate bond issuance.  The Treasury Wednesday sold $25 billion of 30-year T-bonds, after selling $54 billion of 3-year T-notes on Monday and $42 billion of 10-year T-notes on Tuesday.

ECB Council member Martins Kazaks said today that rate cuts could come “within the next few meetings.” Also, Bank of France Governor Francois Villeroy de Galhau said the ECB’s first rate cut is more likely in June than April. 

European government bond yields on Wednesday were higher.  The 10-year German bund yield rose +1.7 bp to 2.347%, well above last Friday’s 5-week low of 2.234%.  The 10-year UK gilt yield rose +5.5 bp to 4.001%.

U.S. Stock Movers

Chip stocks were weak after cloud provider Rackspace Technology (RXT) plunged -18% on a weaker-than-expected Q1 forecast.  Marvell Technology (MRVL) fell -5.77%.  Advanced Micro Devices (AMD) and Micron Technology (MU) fell more than -3%.  Nvidia (NVDA) fell -1.12%. 

Intel (INTL) fell -4.44% after Bloomberg reported that the Pentagon pulled out of a plan to give Intel a chip grant of as much as $2.5 billion.

Tesla (TSLA) fell -4.54% after Wells Fargo downgraded the stock to underweight from equal-weight due to the view that EV sales volumes will suffer since price cuts are not helping as much as they did previously.

Tech stocks that provided underlying support for the market included a +0.9% rally in Alphabet (GOOG) and a +0.7% rally in Amazon.com (AMZN).

Eli Lilly (LLY) saw support after announcing a partnership with Amazon.com to expand its sales of weight-loss drugs directly to patients and closed the day slightly higher by +0.10%.

Dollar Tree (DLTR) plunged by -14.45% after missing Q4 sales and profit estimates.  The company also said it would close about 600 Family Dollar stores in the first half of fiscal 2024  and another 370 Family Dollar and 30 Dollar Tree locations as their leases expire. Dollar Tree operates more than 16,000 stores in the U.S. and Canada.

U.S. Steel (X) plunged -13% on Wednesday after media reports that President Biden will soon release a statement of concern about Nippon Steel’s proposed purchase of U.S. Steel. 

Bitcoin (^BTCUSD) edged to a new record high Wednesday and ended the day up about +3.3% as cash continues to flood into the cryptocurrency space.  Coinbase (COIN) fell -2.00%, Marathon Digital (MARA) fell -2.70%.

Earnings Reports (3/13/2024)

Dollar Tree Inc (DLTR), Chemours Co/The (CC), Petco Health & Wellness Co Inc (WOOF), Williams-Sonoma Inc (WSM), SentinelOne Inc (S), UiPath Inc (PATH), Lennar Corp (LEN).

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