Stocks Tumble as Bond Yields Jump on Deficit Concern and Weak Auction

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.61%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.91%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.34%.  June E-mini S&P futures (ESM25) are down -1.66%, and June E-mini Nasdaq futures (NQM25) are down -1.43%. 

Stock indexes on Wednesday settled sharply lower, with the S&P 500 and Nasdaq 100 falling to 1-week lows.  Stocks and the dollar retreated Wednesday due to the reduced attractiveness of US assets to foreign investors with the ongoing trade war, last Friday’s Moody downgrade of the US credit rating, and the negative US budget deficit outlook in the Republican’s reconciliation bill.  Losses in stocks accelerated Wednesday afternoon when weak demand for the Treasury’s $16 billion 20-year T-bond auction sent bond yields soaring, with the 10-year T-note yield jumping +10 bp to 4.59%.

T-note yields rose in part on concern about rising US deficits. House Republicans reached an agreement Wednesday morning to raise the SALT deduction to $40,000 a year from the current $10,000 a year.  If spending cuts don’t pay for the tax cuts, the Treasury will be forced to finance the soaring deficit by boosting the sales of US debt securities, which could push bond yields even higher. 

Escalation of geopolitical risks is another negative factor for stocks after CNN reported that new US intelligence suggests Israel is preparing for a potential strike on Iranian nuclear facilities.

The price of Bitcoin (^BTCUSD) rose more than +1% to a new record high today as stablecoin legislation advanced in the US Senate after a group of Democrats dropped their opposition to it on Monday.  The stablecoin-friendly regulatory bill is being debated in the Senate with a bipartisan group hoping to pass it as soon as this week.

US MBA mortgage applications fell -5.1% in the week ended May 16, with the purchase mortgage sub-index down -5.2% and the refinancing sub-index down -5.0%.  The average 30-year fixed rate mortgage rose +6 bp to 6.92% from 6.85% in the prior week.

This week, the markets will focus on any tariff news or announcements of new trade deals.  G-7 finance ministers and central bank governors are meeting this week on Tuesday through Thursday in Braniff, Canada.  On Thursday, weekly initial unemployment claims are expected to climb +1,000 to 230,00. Also, the May S&P manufacturing PMI is expected to fall -0.3 to 49.9.  Finally, on Thursday, Apr existing home sales are expected to climb +2.0% m/m to 4.10 million.  On Friday, Apr new home sales are expected to fall -4.7% m/m to 690,000.

The markets are discounting the chances at 5% for a -25 bp rate cut at the next FOMC meeting on June 17-18.

Q1 earnings reporting season is winding down.  So far, almost 90% of companies in the S&P 500 have reported quarterly results, and 77% have beaten estimates, the highest since Q2 of 2024.  Earnings growth in Q1 is running at +13.1%, compared with just +6.6% expected before the start of the season.  Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January.  

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed unchanged.  China’s Shanghai Composite closed up +0.21%.  Japan’s Nikkei Stock 225 fell to a 1-1/2 week low and closed down -0.61%.

Interest Rates

June 10-year T-notes (ZNM25) Wednesday closed down -22.5 ticks.  The 10-year T-note yield rose +10.0 bp to 4.587%.  June T-notes on Wednesday sold off to a 5-week low, and the 10-year T-note yield jumped to a 3-1/4 month high of 4.603%.  T-notes were under pressure Wednesday on negative carryover from a slide in 10-year UK gilt prices to a 6-week low after UK Apr CPI rose more than expected.  T-notes were also pressured by concern that unfunded tax cuts in President Trump’s budget would force the Treasury to increase the sales of Treasury debt securities to finance the burgeoning deficit.  T-note losses accelerated Wednesday afternoon on weak demand for the Treasury’s $16 billion auction of 20-year T-bonds with a bid-to-cover ratio of 2.46, well below the 10-auction average of 2.58.   

European government bond yields on Wednesday moved higher.  The 10-year German bund yield rose +4.0 bp at 2.646%. The 10-year UK gilt yield jumped to a 6-week high of 4.776% and finished up +5.4 bp to 4.757%.

The ECB, in its bi-annual Financial Stability Review, said the “atypical shifts” away from traditional havens like the dollar and US Treasuries after April’s trade announcements may point to a “fundamental regime change.” That raises the danger of “broader shifts in capital flows that could have potentially far-reaching consequences for the global financial system.”

UK Apr CPI rose +3.5% y/y, stronger than expectations of +3.3% y/y and the fastest pace of increase in 15 months.  Also, Apr core CPI rose +3.8% y/y, stronger than expectations of +3.6% y/y and the fastest pace of increase in a year.

Swaps are discounting the chances at 93% for a -25 bp rate cut by the ECB at the June 5 policy meeting.

US Stock Movers

Credit reporting companies sold off Wednesday after FHFA Director Pulte questioned the cost of some credit reports.  Fair Isaac (FICO) closed down more than -15% to lead losers in the S&P 500.  Also, TransUnion (TRU) closed down more than -9%, and Equifax (EFX) closed down more than -7%. 

Palo Alto Networks (PANW) closed down more than -6% to lead losers in the Nasdaq 100 after forecasting Q4 next-generation security ARR of $5.52 billion to $5.57 billion, the midpoint below the consensus of $5.57 billion. 

VF Corp (VFC) closed down more than -16% after forecasting a Q1 adjusted operating loss from continuing operations of -$110 million to -$125 million, a wider loss than expectations of -$73.1 million. 

UnitedHealth Group (UNH) fell more than -5% to lead losers in the Dow Jones Industrials after the Guardian reported the company secretly paid nursing homes to reduce hospital transfers for ailing residents.

Moderna (MRNA) closed down more than -7% after it “voluntarily” withdrew its application for regulatory approval for its combination Covid and flu vaccine for people 50 and older.

Target Corp (TGT) closed down more than -5% after reporting that Q1 comparable sales fell -3.8%, weaker than the consensus of -1.94%.  Target also cut its 2026 adjusted EPS forecast to $7.00-$9.00 from a previous estimate of $8.80-$9.80, below the consensus of $8.43. 

Take-Two Interactive Software (TTWO) closed down more than -4% after announcing an underwritten public offering of 4.75 million shares of its common stock at $225 per share to the public.

Alphabet (GOOGL) closed up more than +2% to lead gainers in the S&P 500 and Nasdaq 100 after analysts said an AI event eased fears over competition. 

Dycom Industries (DY) closed up more than +14% after reporting Q1 contract revenue of $1.26 billion, above the consensus of $1.20 billion. 

L3Harris Technologies (LHX) closed up +0.77% after Indiana Senator Banks said the company would work on the “Golden Dome” missile defense shield.

Earnings Reports (5/22/2025)

Analog Devices Inc (ADI), Autodesk Inc (ADSK), Copart Inc (CPRT), Deckers Outdoor Corp (DECK), Intuit Inc (INTU), Ralph Lauren Corp (RL), Ross Stores Inc (ROST), Williams-Sonoma Inc (WSM), Workday Inc (WDAY).