Stocks Under Pressure on Reduced Fed Rate Cut Expectations

The S&P 500 Index ($SPX) (SPY) today is down by -0.34%, the Dow Jones Industrials Index ($DOWI) (DIA) is down by -0.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down by -0.22%.

Stocks today are moderately lower as a jump in global bond yields undercuts equity prices.  The 10-year T-note yield rose to a 2-3/4 month high today, the 10-year German bund yield climbed to a 7-week high, and the 10-year Japanese JGB yield rose to a 2-1/2 month high.  An increase in US bond yields is leading global yields higher on expectations for a slower pace of Fed rate cuts. 

Also, the US bond market is pricing in the possibility that whoever wins the US presidential election next month, there will be a sharp increase in fiscal spending that will prompt the Treasury to boost the supply of government debt securities to finance the soaring budget deficit.

On the positive side, General Motors is up more than +7% after reporting stronger-than-expected Q3 adjusted EPS and raising the lower end of its full-year adjusted EPS estimate.   Also, Philip Morris International is up more than +7% after reporting better-than-expected Q3 net revenue.

The US Oct Richmond Fed manufacturing survey rose +7 to a 4-month high of -14, stronger than expectations of -17.

The results of corporate Q3 earnings may determine the near-term direction of stocks.  About 70 companies in the S&P 500 have released earnings so far, with 76% announcing earnings that surpassed estimates.  Roughly 20% of S&P 500 companies are due to report earnings this week, including Tesla, Boeing, Coca-Cola, and United Parcel Service.  According to Bloomberg Intelligence, companies in the S&P 500 are expected to report an average +4.3% increase in quarterly earnings in Q3 from a year ago, down from +7.9% growth projected in July.

Middle East tensions continue to be a negative factor for stocks.  In addition to Gaza, Israel is waging a ground and air offensive in Lebanon to combat Hezbollah.  The Israel Defense Force (IDF) deployed a fourth division of troops in southern Lebanon while maintaining airstrikes in Beirut’s southern suburbs.  The markets are also awaiting Israel’s response to the October 1 missile barrage from Iran.

The markets are discounting the chances at 92% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.

Overseas stock markets today are mixed.  The Euro Stoxx 50 is up by +0.03%.  China's Shanghai Composite closed up by +0.54%.   Japan's Nikkei Stock 225 fell to a 2-1/2 week low and closed down by -1.39%.

Interest Rates

December 10-year T-notes (ZNZ24) today are down by -2 ticks.  The 10-year T-note yield is up +0.2 bp to 4.198%.  Dec T-notes fell to a 2-3/4 month low, and the 10-year T-note yield climbed to a 2-3/4 month high of 4.218%.  T-Notes have been under pressure over the past week as recent Fed comments suggest policymakers favor reducing interest rates at a slower pace. Also, yields are climbing on concerns that whoever wins the US presidential election next month there will be a sharp increase in fiscal spending, which will prompt the Treasury to boost the supply of government debt securities to finance the soaring budget deficit.  T-notes remained slightly lower after the Oct Richmond Fed manufacturing survey rose more than expected to a 4-month high.

European government bond yields today are moving higher.  The 10-year German bund yield rose to a 7-week high of 2.334% and is up +2.9 bp to 2.310%.  The 10-year UK gilt yield rose to a 1-week high of 4.176% and is up +2.6 bp to 4.163%.

Eurozone Sep new car registrations fell -6.1% y/y to 809,000 units.

ECB President Lagarde said the direction of travel of interest rates in the Eurozone is clear as inflation numbers are relatively assuring and wage growth is starting to abate now. 

ECB Governing Council member Escriva said that while interest rates in the Eurozone are likely to go lower, "they will still be higher than those we saw before the pandemic or the war in Ukraine."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the December 12 policy meeting and a 28% chance of a -50 bp rate cut at the same meeting.

US Stock Movers

Genuine Parts Co (GPC) is down more than -18% to lead losers in the S&P 500 after cutting its full-year adjusted EPS forecast to $8.00-$8.20 from a previous forecast of $9.30-$9.50, well below the consensus of $9.35.

General Electric (GE) is down more than -8% after reporting Q3 adjusted revenue of $8.94 billion, below the consensus of $9.00 billion. 

Paccar Inc (PCAR) is down more than -5% to lead losers in the Nasdaq 100 after reporting Q3 gross margin of 16.6%, below the consensus of 17.1%.

Homebuilders are sliding today after the 10-year T-note yield rose to a 2-3/4 month high, which lifts mortgage rates and is a bearish factor for housing demand.  As a result, PulteGroup (PHM) is down more than -5%.  Also, Toll Brothers (TOL), DR Horton (DHI), Lennar (LEN), and Builders FirstSource (BLDR) are down more than -3%. 

Verizon Communications (VZ) is down more than -3% to lead losers in the Dow Jones Industrials after reporting Q3 operating revenue of $33.30 billion, weaker than the consensus of $3.45 billion.

Polaris Inc (PII) is down more than -9% after lowering its full-year adjusted EPS forecast to a slump of -65%, weaker than a previous projection of -56% to -62%. 

Kimberly-Clark Corp (KMB) is down more than -3% after reporting Q3 net sales of $4.95 billion, weaker than the consensus of $5.05 billion. 

Sherwin-Williams (SHW) is down more than -4% after reporting Q3 adjusted EPS of $3.37, below the consensus of $3.53. 

Medpace Holdings (MEDP) is down more than -7% after reporting Q3 revenue of $533.3 million, weaker than the consensus of $541.4 million, and cut its full-year revenue forecast to $2.09 billion-$2.13 billion from a previous forecast of $2.13 billion-$2.18 billion, below the consensus of $2.13 billion. 

General Motors (GM) is up more than +7% to lead gainers in the S&P 500 after reporting Q3 adjusted EPS of $2.96, stronger than the consensus of $2.45, and raising the lower end of its full-year adjusted EPS estimate to $10.00-$10.50 from a prior estimate of $9.50-$10.50. 

Philip Morris International (PM) is up more than +7% after reporting Q3 net revenue of $9.91 billion, above the consensus of $9.66 billion. 

Quest Diagnostics (DGX) is up more than +5% after reporting Q3 net revenue of $2.49 billion, better than the consensus of $2.43 billion, and raising its full-year net revenue forecast to $9.80 billion-$9.85 billion from a previous forecast of $0.50 billion-$9.58 billion.

Norfolk Southern (NSC) is up more than +3% after reporting Q3 adjusted EPS of $3.25, stronger than the consensus of $3.11.

Targa Resources (TRGP) is up more than +1% after Raymond James raised its price target on the stock to $185 from $156.

Pentair Plc (PNR) is up more than +1% after reporting Q3 net sales of $993 million, stronger than the consensus of $989.9 million. 

Earnings Reports (10/22/2024)

3M Co (MMM), A O Smith Corp (AOS), Baker Hughes Co (BKR), CoStar Group Inc (CSGP), Danaher Corp (DHR), Enphase Energy Inc (ENPH), Fiserv Inc (FI), Freeport-McMoRan Inc (FCX), General Electric Co (GE), General Motors Co (GM), Genuine Parts Co (GPC), Interpublic Group of Cos Inc (IPG), Invesco Ltd (IVZ), Kimberly-Clark Corp (KMB), Lockheed Martin Corp (LMT), Moody's Corp (MCO), Norfolk Southern Corp (NSC), NVR Inc (NVR), PACCAR Inc (PCAR), Packaging Corp of America (PKG), Pentair PLC (PNR), Philip Morris International In (PM), PulteGroup Inc (PHM), Quest Diagnostics Inc (DGX), RTX Corp (RTX), Seagate Technology Holdings PL (STX), Sherwin-Williams Co/The (SHW), Texas Instruments Inc (TXN), Verizon Communications Inc (VZ).

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