Stocks Sink as US Jobs Strength Reduces Fed Easing Chances

The S&P 500 Index ($SPX) (SPY) Friday closed down -1.54%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.63%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.57%.  March E-mini S&P futures (ESH25) are down -1.57%, and March E-mini Nasdaq futures (NQH25) are down -1.63%. 

Stocks sold off Friday, with the S&P 500 and the Dow Jones Industrials falling to 2-month lows and the Nasdaq 100 sliding to a 6-week low. Rising global bond yields Friday hammered 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 sank Friday 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, the weakness in chip stocks weighed 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 Friday 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 on Friday settled lower.  The Euro Stoxx 50 closed down -0.81%.  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) Friday closed down -26.5 ticks.  The 10-year T-note yield rose +8.3 bp to 4.772%.  Mar T-notes Friday 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 were undercut Friday 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 rose to a 14-month high of 2.474% Friday and after the University of Michigan’s US Jan inflation expectations indicator unexpectedly accelerated. 

European government bond yields Friday moved higher.  The 10-year German bund yield rose to a 6-month high of 2.624% and finished up +2.8 bp to 2.595%.  The 10-year UK gilt yield rose +2.7 bp to 4.838%.

Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at its January 30 policy meeting.

US Stock Movers

Chip stocks fell Friday 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), ARM Holdings Plc (ARM), Analog Devices (ADI), and Intel (INTC) closed down more than -3%.  Also, Applied Materials (AMAT), Marvell Technology (MRVL), Microchip Technology (MCHP), and Lam Research (LRCX) closed down more than -2%.

Constellation Brands (STZ) closed down more than -17% 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, the midpoint below the consensus of $13.71. 

ON Semiconductor (ON) closed 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) closed down more than -4% after Goldman Sachs downgraded the stock to neutral from buy. 

Insurance stocks retreated Friday as the cost of damage from the California wildfires continues to rise.  Allstate (ALL) closed down more than -5%, and Travelers Cos (TRV) closed down more than -4% to lead losers in the Dow Jones Industrials.  Also, Chubb Ltd (CB) closed down more than -3%, and American Insurance Group (AIG) closed down more than -1%. 

Californian utility stocks sold off Friday due to the risk of being blamed for the Southern California wildfires.  As a result, PG&E Corp (PCG) closed down more than -10%, Edison International (EIX) closed down more than -6%, and Sempra (SRE) closed down more than -4%.

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

Hims & Hers Health (HIMS) closed down more than -1% after Citigroup downgraded the stock to sell from neutral with a price target of $25. 

Walgreens Boots Alliance (WBA) closed up more than +27% 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) closed up more than +8% 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, American Airlines Group (AAL) closed up more than +4%, United Airlines Holdings (UAL) closed up more than +3%, and Alaska Air Group (ALK) closed up more than +1%.  In addition, Southwest Airlines (LUV) closed up nearly +1%.

Government-service stocks moved higher Friday 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) closed up more than +4%.  Also, Booz Allen Hamilton Holding (BAH), Science Applications International (SAIC), and Leidos Holdings (LDOS) closed up more than +2%. 

Energy stocks rose Friday as the price of WTI crude oil rose more than +3% to a 3-month high.  As a result, Coterra Energy (CTRA), Devon Energy (DVN), and Diamondback Energy (FANG) closed up more than +2%.  Also, Hess Corp (HES) closed up more than +1% and Chevron (CVX) closed up more than +1% to lead gainers in the Dow Jones Industrials.

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) closed up more than +12% after announcing a $3 billion share buyback plan. 

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