Stocks Sharply Lower as a Strong US Jobs Report Signals Fed Pause

The S&P 500 Index ($SPX) (SPY) today is down -1.58%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.82%.  March E-mini S&P futures (ESH25) are down -1.64%, and March E-mini Nasdaq futures (NQH25) are down -1.98%. 

Stocks are selling off today, with the S&P 500 and the Dow Jones Industrials dropping to 2-month lows and the Nasdaq 100 falling to a 6-week low. Rising global bond yields are hammering stock prices.  The US 10-year T-note yield soared to a 14-month high, the 10-year German bund yield climbed to a 6-month high, and the Japanese 10-year JGB yield rose to a 13-year high. 

Stocks are sinking today on unexpected signs of strength in the US labor market that bolsters the chances that the Fed will pause its interest rate cuts.  US Dec nonfarm payrolls rose by +256,000, stronger than expectations of +165,000 and the largest increase in 9 months.  Also, the Dec unemployment rate unexpectedly fell -0.1 to 4.1%, showing a stronger labor market than expectations of no change at 4.2%.  On the positive side, Dec average hourly earnings unexpectedly eased to +3.9% y/y versus expectations of no change at +4.0% y/y.

Also, weakness in chip stocks is weighing on the overall market.  After the close Wednesday, Bloomberg reported that the Biden administration wants to curb the sale of AI chips used in data centers on both a country and company basis.

Stock losses accelerated today after the report from the University of Michigan showed US consumer sentiment unexpectedly fell and inflation expectations rose.  The University of Michigan US Jan consumer sentiment index fell -0.8 to 73.2, weaker than expectations of no change at 74.0.

The University of Michigan US Jan 1-year inflation expectations indicator unexpectedly accelerated to an 8-month high of +3.3%, stronger than expectations of no change at +2.8%. Also, the Jan 5-10 year inflation expectations indicator unexpectedly jumped to a 16-year high of +3.3%, stronger than expectations of no change at +3.0%. 

Hawkish Fed comments Thursday, when equity markets were closed, were bearish for bonds and stocks.  Fed Governor Bowman said, "The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the FOMC's 2% goal. Thus, I continue to prefer a cautious and gradual approach to adjusting policy."  Also, Boston Fed president Collins said she favored fewer rate cuts this year than she had anticipated just a few months ago and that a slower approach to adjusting interest rates is merited now as officials confront "considerable uncertainty" over the US economic outlook.  In addition, Kansas City Fed President Schmid said, "With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral."

The markets are discounting the chances at 3% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets today are lower.  The Euro Stoxx 50 is down -0.40%.  China's Shanghai Composite Index fell to a 2-1/2 month low and closed down -1.33%.  Japan's Nikkei Stock 225 slid to a 2-week low and closed down -1.05%.

Interest Rates

March 10-year T-notes (ZNH25) today are down -17 ticks.  The 10-year T-note yield is up +5.2 bp to 4.741%.  Mar T-notes today tumbled to an 8-1/2 month low, and the 10-year T-note yield climbed to a 14-month high of 4.786%.  T-note prices are being undercut today by the stronger-than-expected US Dec payroll report, which dampened the outlook for Fed rate cuts.  Also, hawkish comments on Thursday from Fed Governor Bowman, Boston Fed President Collins, and Kansas City Fed President Schmid undercut T-notes as they expressed their support for the Fed to pause its rate-cutting campaign.  In addition, rising inflation expectations are negative for T-notes after the 10-year breakeven inflation rate today rose to a 14-month high of 2.474% and after the University of Michigan’s US Jan inflation expectations indicator unexpectedly accelerated. 

European government bond yields today are moving higher.  The 10-year German bund yield rose to a 6-month high of 2.624% and is up +1.6 bp to 2.582%.  The 10-year UK gilt yield is up +2.7 bp to 4.838%.

Swaps are discounting the chances at 94% for a -25 bp rate cut by the ECB at its January 30 policy meeting.

US Stock Movers

Chip stocks are falling today after Bloomberg reported late Wednesday that the Biden administration wants to curb the sale of AI chips used in data centers on both a country and company basis.  As a result, Nvidia (NVDA) is down more than -3%.  Also, Applied Materials (AMAT) and ARM Holdings Plc (ARM) are down more than -3%.  In addition, Marvell Technology (MRVL), GlobalFoundries (GFS), Intel (INTC), and Lam Research (LRCX) are down more than -2%.

Constellation Brands (STZ) is down more than -13% to lead losers in the S&P 500 after reporting Q3 comparable sales of $2.46 billion, weaker than the consensus of $2.54 billion, and forecasting full-year comparable EPS of $13.40-$13.80, with the midpoint below the consensus of $13.71. 

ON Semiconductor (ON) is down more than -7% to lead losers in the Nasdaq 100 after Truist Securities downgraded the stock to hold from buy.

Advanced Micro Devices (AMD) is down more than -4% after Goldman Sachs downgraded the stock to neutral from buy. 

Insurance stocks are falling today as the cost of damage from the California wildfires continues to rise.  Allstate (ALL) is down more than -4% and Travelers Cos (TRV) is down more than -4% to lead losers in the Dow Jones Industrials.  Also, Chubb Ltd (CB) is down more than -3%, and American Insurance Group (AIG) is down more than -1%. 

Californian utility stocks are selling off today due to the risk of being blamed for the Southern California wildfires.  As a result, PG&E Corp (PCG) is down more than -9%, Edison International (EIX) is down more than -4%, and Sempra (SRE) is down more than -3%.

Roku Inc (ROKU) is down more than -3% after MoffettNathanson downgraded the stock to sell from neutral with a price target of $55.

Hims & Hers Health (HIMS) is down more than -3% after Citigroup downgraded the stock to sell from neutral with a price target of $25. 

Walgreens Boots Alliance (WBA) is up more than +24% to lead gainers in the S&P 500 after reporting Q1 sales of $39.46 billion, well above the consensus of $37.34 billion.

Delta Air Lines (DAL) is up more than +9% to lead airline stocks higher after reporting Q4 adjusted EPS of $1.85, better than the consensus of $1.76, and forecasting Q1 adjusted EPS of 70 cents-$1.00, with the midpoint above the consensus of 76 cents.  Also, United Airlines Holdings (UAL) is up more than +5%, and American Airlines Group (AAL) and Alaska Air Group (ALK) are up more than +3%.  In addition, Southwest Airlines (LUV) is up more than +1%.

Government-service stocks are climbing today after Elon Musk expressed doubt that his government efficiency panel in the incoming Trump administration will actually be able to achieve $2 trillion in cuts to the US federal budget.  As a result, CACI International (CACI) and Booz Allen Hamilton Holding (BAH) are up more than +3%.  Also, Science Applications International (SAIC) is up more than +2%, and Leidos Holdings (LDOS) is up more than +1%. 

Burlington Stores (BURL) is up more than +1% after UBS upgraded the stock to buy from neutral with a price target of $360.

Valero Energy (VLO) is up more than +1% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $149.

Royalty Pharma Plc (RPRX) is up more than +8% after announcing a $3 billion share buyback plan. 

Earnings Reports (1/10/2025)

Constellation Brands Inc (STZ), Delta Air Lines Inc (DAL), TD SYNNEX Corp (SNX), and Walgreens Boots Alliance Inc (WBA).