Stocks Tumble on Concern Interest Rates Will Stay Higher for Longer

The S&P 500 Index ($SPX) (SPY) today is down -0.62%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.88%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.50%. 

US stock indexes today are moving lower as bond yields climb on concern the Fed will keep interest rates higher for longer. The 10-year T-note yield rose to a 3-1/2 week high today on the heels of Tuesday’s unexpected increase in US May consumer confidence and weak demand for the Treasury’s 2-year and 5-year T-note auctions.  The markets must contend with additional supply pressures as the Treasury will auction $44 billion of 7-year T-notes later this afternoon.

M&A activity today is supportive for stocks after ConocoPhillips agreed to acquire Marathon Oil in an all-stock deal valued at about $17 billion.  Also, Merck & Co. agreed to buy Eyebiotech Ltd for as much as $3 billion. 

The markets are awaiting this Friday’s April PCE core deflator, the Fed’s preferred inflation gauge, for clues as to when the Fed might begin cutting interest rates.  Expectations are for the Apr PCE core deflator to remain unchanged from March at +2.8% y/y. 

Generally positive Q1 earnings results are supportive of stocks.  Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

US MBA weekly mortgage applications fell -5.7% in the week ended May 24.  The purchase mortgage sub-index fell -1.1%, and the refinancing mortgage sub-index fell -13.6%.  The average 30-year fixed rate mortgage rose +0.04 bp to 7.05% from 7.01% in the prior week.

The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting and 10% for the following meeting on July 30-31.

Overseas stock markets today are mixed.  The Euro Stoxx 50 fell to a 3-week low and is down -1.27%.  China's Shanghai Composite closed up +0.05%.  Japan's Nikkei Stock Index closed down -0.77%. 

Interest Rates

June 10-year T-notes (ZNM24) today are down -11 ticks.  The 10-year T-note yield is up +3.6 bp at 4.586%.  June T-notes today extended Tuesday’s losses to a 3-1/2 week low, and the 10-year T-note yield rose to a 3-1/2 week high of 4.600%.  Today’s slump in 10-year German bunds to a 6-month low is weighing on T-note prices. Also, an increase in inflation expectations is negative for T-notes after the 10-year breakeven inflation rate today rose to a 2-week high of 2.357%.  In addition, supply pressures are bearish for T-notes as the Treasury will auction $44 billion of 7-year T-notes later today.

European government bond yields today are moving higher.  The 10-year German bund yield rose to a 6-month high of 2.653% and is up +5.3 bp at 2.645%.  The 10-year UK gilt yield rose to a 4-week high of 4.360% and is up +7.0 bp at 4.351%.

German May CPI (EU harmonized) rose +2.8% y/y, stronger than expectations of +2.7% y/y and the largest increase in 4 months.

The German Jun GfK consumer confidence index rose +3.1 to a 2-year high of -20.9, stronger than expectations of -22.5.

ECB Governing Council member Kazaks said the ECB shouldn't switch to "autopilot" in cutting interest rates following an expected rate cut next week.

US Stock Movers

Airline stocks are under pressure today after American Airlines Group cut its Q2 adjusted EPS forecast to $1.00-$1.5 from a previous estimate of $1.15-$1.45, well below the consensus of $1.30.  As a result, American Airlines Group (AAL) is down more than -11% to lead losers in the S&P 500.  Also, United Airlines (UAL), Delta Air Lines (DAL), and Southwest Airlines (LUV) are down more than -3%. 

Regional bank stocks are selling off today after Citigroup downgraded Banof OZK to sell from buy with a price target of $37, citing loan worries.  As a result, Bank OZK (OZK) is down more than -4%.  Also, Regions Financial (RF) and Comerica (CMA) are down more than -3%.  KeyCorp (KEY), Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), M&T Bank (MTB), and US Bancorp (USB) are down more than -2%. 

Managed healthcare stocks are falling today, with Centene (CNC) and Molina Healthcare (MOH) down more than -5%.  Also, UnitedHealth Group (UNH) is down more than -4% to lead losers in the Dow Jones Industrials.  Humana (HUM) and Elevance Health (ELV) are down more than -4%.

Cava Group (CAVA) is down more than -7% after reporting Q1 restaurant comparable sales rose +2.3%, saying sales growth was driven by a +3.5% increase from menu price and product mix, partially offset by a -1.2% decrease from guest traffic. 

Columbus McKinnon (CMCO) is down more than -6% after reporting Q4 adjusted EPS of 75 cents, weaker than the consensus of 84 cents. 

Bruker Corp (BRKR) is down more than -4% after Nephron Research LLOC downgraded the stock to sell from hold with a price target of $65.

Sage Therapeutics (SAGE) is down more than -4% after Citigroup downgraded the stock to sell from neutral with a price target of $8.   

Marathon Oil (MRO) is up more than +8% to lead gainers in the S&P 500 after ConocoPhillips agreed to acquire the company in an all-stock deal valued at about $17 billion. 

Apple (AAPL) is up more than +1% to lead gainers in the Dow Jones Industrials after a Chinese court dismissed a case filed against it for commission fees for purchases via its App Store. 

Dick’s Sporting Goods (DKS) is up more than +16% after reporting Q1 net sales of $3.02 billion, stronger than the consensus of $2.94 billion, and raising its full-year comparable sales forecast to +2% to +3% from a previous forecast of +1% to +2%, above the consensus of +2%. 

Chewy (CHWY) is up more than +21% after reporting Q1 net sales of $2.88 billion, above the consensus of $2.85 billion. 

Abercrombie & Fitch (ANF) is up more than +15% after reporting Q1 net sales of $1.0 billion, better than the consensus of $958.7 million, and raising its full-year net sales forecast to +10% from a previous estimate of +4% to +6%.

Earnings Reports (5/29/2024)

Advance Auto Parts Inc (AAP), Agilent Technologies Inc (A), Capri Holdings Ltd (CPRI), Dick's Sporting Goods Inc (DKS), HP Inc (HPQ), nCino Inc (NCNO), Nutanix Inc (NTNX), Okta Inc (OKTA), Pure Storage Inc (PSTG), Salesforce Inc (CRM), U-Haul Holding Co (UHAL), UiPath Inc (PATH).

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