Stocks Slip as Rising US Labor Costs May Keep the Fed Hawkish

The S&P 500 Index ($SPX) (SPY) this morning is down -0.29%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.48%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.35%. 

US stock indexes this morning are moderately lower.  Rising labor costs are pushing bond yields higher today and are weighing on stocks after the US Q1 employment cost index rose more than expected, a hawkish factor for Fed policy. 

Corporate earnings results today are mixed for stocks.  F5 Inc. is down more than -8% after forecasting Q2 adjusted EPS below consensus.  Also, GE Healthcare is down more than -7% after reporting weaker-than-expected Q1 adjusted Ebitda.  In addition, McDonald’s is down more than -2% after reporting weaker-than-expected Q1 comparable sales.

On the positive side, Corning is up more than +7% after reporting stronger-than-expected Q1 core sales and forecasting Q3 core sales above consensus.  Also, Eli Lilly is up more than +6% after raising its full-year revenue estimate.  In addition, NXP Semiconductors is up more than +5% after reporting stronger than expected Q1 adjusted EPS and forecasting Q2 adjusted EPS above consensus.

Q1 earnings results have been mostly better than expected, a supportive factor for stocks.  Q1 earnings are now expected to climb +4.7% from a year ago, compared with the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of the S&P 500 companies that have already reported have beaten Q1 earnings estimates. 

The markets will focus on the results of the Tue/Wed FOMC meeting and comments from Fed Chair Powell on just how long the Federal Reserve is willing to wait before cutting interest rates.  Recent US price data signals stubborn underlying inflation that has pushed back rate cut expectations and may prompt Fed Chair Powell to say interest rates will stay higher for longer. 

The US Q1 employment cost index rose +1.2% q/q, stronger than expectations of +1.0% q/q.

The US Feb S&P CoreLogic composite-20 home price index rose +6.38% y/y, right on expectations and the largest increase in 15 months.

Mixed economic activity in China may weigh on global growth prospects and is negative for stocks. Today’s news showed that China's April manufacturing PMI fell from 0.4 to 50.4, slightly better than expectations of 50.3.  However, the China Apr non-manufacturing PMI fell -1.8 to 51.2, weaker than expectations of 52.3.   

The markets are discounting the chances for a -25 bp rate cut at 2% for the next FOMC meeting on April 30-May 1 and 10% for the following meeting on June 11-12.

Overseas stock markets today are mixed.  The Euro Stoxx 50 is down -0.70%.  China's Shanghai Composite closed down -0.26%.  Japan's Nikkei Stock Index rose to a 2-week high and closed up +1.24%. 

Interest Rates

June 10-year T-notes (ZNM24) this morning are down -12 ticks.  The 10-year T-note yield is up +5.2 bp to 4.665%.  T-notes prices today are under pressure on higher-than-expected US labor costs after the Q1 employment index rose more than expected, a hawkish factor for Fed policy.  T-notes are also weighed down on negative carryover from Monday afternoon when the Treasury said its Q2 net borrowing would be $243 billion, well above a January estimate of $202 billion, signaling increased government debt sales this quarter.  

European government bond yields today are moving higher.  The 10-year German bund yield is up +5.6 bp at 2.589%.  The 10-year UK gilt yield is up +5.0 bp at 4.343%.

Eurozone Q1 GDP rose +0.3% q/q and +0.4% y/y, stronger than expectations of +0.1% q/q and +0.2% y/y.

Eurozone Apr CPI was unchanged from Mar at +2.4% y/y, right on expectations.  The Apr core CPI eased to a 2-year low of +2.7% y/y from +2.9% y/y in Mar.

German Mar retail sales rose +1.8% m/m, stronger than expectations of +1.4% m/m and the largest increase in 2-1/4 years.

US Stock Movers

F5 Inc (FFIV) is down more than -8% to lead losers in the S&P 500 after forecasting Q2 adjusted EPS of $2.89-$3.01, weaker than the consensus of $3.07.

GE Healthcare (GEHC) is down more than -8% to lead losers in the Nasdaq 100 after reporting Q1 adjusted Ebitda of $681 million, below the consensus of $697.3 million. 

Paccar (PCAR) is down more than -5% after forecasting a full-year CAPEX of $700 million-$750 million, the midpoint below the consensus of $728.9 million.

Yum China Holdings (YUMC) is down more than -8% after reporting Q1 revenue of $2.96 billion, weaker than the consensus of $3.02 billion. 

Stellantis (STLA) is down more than -8% after reporting Q1 vehicle sales fell -10% y/y to 1.34 million units, weaker than the consensus of 1.47 million. 

Sysco Co (SYY) is down more than -3% after reporting Q3 sales of $19.40 billion, below the consensus of $19.73 billion.

McDonald’s (MCD) is down more than -2% to lead losers in the Dow Jones Industrials after reporting Q1 comparable sales rose +1.9%, weaker than the consensus of +2.33%. 

Tesla (TSLA) is down more than -2% after the Information reported that CEO Musk is planning hundreds more job cuts across the company after two more senior executives would be leaving. 

Corning (GLW) is up more than +7% to lead gainers in the S&P 500 after reporting Q1 core sales of $3.26 billion, better than the consensus of $3.12 billion, and forecasting Q3 core sales of about $3.40 billion, stronger than the consensus of $3.33 billion.

Eli Lilly (LLY) is up more than +7% after raising its full-year revenue estimate to $42.4 billion-$43.6 billion from a prior view of $40.4 billion-$41.6 billion. 

Trane Technologies Plc (TT) is up more than +6% after raising its full-year adjusted continuing operations EPS to $10.40-$10.50 from a previous estimate of $10.00-$10.30.   

NXP Semiconductors (NXPI) is up more than +5% to lead gainers in the Nasdaq 100 after reporting Q1 adjusted EPS of $3.24, stronger than the consensus of $3.18 and forecast Q2 adjusted EPS of $3.00-$3.41, the midpoint above the consensus of $3.12.    

3M Co (MMM) is up more than +3% to lead gainers in the Dow Jones Industrials after forecasting dull-year EPS of $6.80-$7.30 and said it expects to pay a dividend of about 40% of its adjusted free cash flow.   

PayPal Holdings (PYPL) is up more than +2% after reporting Q1 revenue of $7.70 billion, stronger than the consensus of $7.51 billion. 

Earnings Reports (4/30/2024)

3M Co (MMM), Advanced Micro Devices Inc (AMD), Air Products and Chemicals Inc (APD), Amazon.com Inc (AMZN), Amcor PLC (AMCR), American Electric Power Co Inc (AEP), American Tower Corp (AMT), Archer-Daniels-Midland Co (ADM), Boston Properties Inc (BXP), Caesars Entertainment Inc (CZR), CenterPoint Energy Inc (CNP), Clorox Co/The (CLX), Coca-Cola Co/The (KO), Corning Inc (GLW), Diamondback Energy Inc (FANG), Eaton Corp PLC (ETN), Ecolab Inc (ECL), Edison International (EIX), Eli Lilly & Co (LLY), Essex Property Trust Inc (ESS), Extra Space Storage Inc (EXR), Gartner Inc (IT), GE HealthCare Technologies Inc (GEHC), Hubbell Inc (HUBB), Illinois Tool Works Inc (ITW), Incyte Corp (INCY), Invitation Homes Inc (INVH), Leidos Holdings Inc (LDOS), Marathon Petroleum Corp (MPC), Martin Marietta Materials Inc (MLM), McDonald's Corp (MCD), Molson Coors Beverage Co (TAP), Mondelez International Inc (MDLZ), ONEOK Inc (OKE), PACCAR Inc (PCAR), PayPal Holdings Inc (PYPL), Prudential Financial Inc (PRU), Public Service Enterprise Grou (PEG), Public Storage (PSA), Republic Services Inc (RSG), Skyworks Solutions Inc (SWKS), Starbucks Corp (SBUX), Stryker Corp (SYK), Super Micro Computer Inc (SMCI), Sysco Corp (SYY), Trane Technologies PLC (TT), UDR Inc (UDR), Zebra Technologies Corp (ZBRA).

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