Stocks Retreat as Bond Yields Climb

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down by -0.69%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down by -0.55%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down by -0.79%.  September E-mini S&P futures (ESU25) fell -0.65%, and September E-mini Nasdaq futures (NQU25) fell -0.76%. 

Stock indexes retreated on Tuesday, with the S&P 500 and Nasdaq 100 dropping to 1.5-week lows, and the Dow Jones Industrials falling to a 1-week low.  Higher bond yields on Tuesday weighed on stocks and sparked risk-off sentiment in asset markets, with the 10-year T-note yield rising +5 bp to 4.28%.  Global bond yields rose on Tuesday on concerns over government finances and lingering inflation risks.   

Stock indexes maintained their losses after Tuesday's US economic reports showed the Aug ISM manufacturing index rose less than expected and July construction spending declined for the third consecutive month.

The US Aug ISM manufacturing index rose +0.7 to 48.7, weaker than expectations of 49.0.  The Aug ISM prices paid sub-index price unexpectedly fell -1.1 to a 6-month low of 63.7, versus expectations of an increase to 65.0.

US July construction spending fell -0.1% m/m, right on expectations, and the third consecutive month that construction spending has declined.

This week's US economic calendar is busy.  On Wednesday, July JOLTS job openings are expected to fall by -64,000 to 7.373 million. Also, July factory orders are expected to drop -1.4% m/m.  Finally, on Wednesday, the Fed's Beige Book will be released.  On Thursday, the Aug ADP employment change is expected to increase by +80,000.  Also, weekly initial unemployment claims are expected to increase by +1,000 to 230,000, and Q2 nonfarm productivity is expected to be revised upward to 2.7% from the previously reported 2.4%, with Q2 unit labor costs expected to be revised downward to 1.4% from 1.6%.  In addition, the Aug trade deficit is expected to widen to -$78.0 billion from -$60.2 billion in June.  Finally, the Aug ISM services index is expected to climb by +0.8 to 50.9.  On Friday, Aug nonfarm payrolls are expected to rise by +75,000, and the Aug unemployment rate is expected to rise by 0.1 to 4.3%.  Aug average hourly earnings are expected to increase +0.3% m/m and +3.7% y/y.

Regarding tariffs, a federal appeals court ruled late last Friday that President Trump exceeded his authority by imposing global tariffs without Congressional approval, but the court let the tariffs remain in place while appeals continue.  The US Court of Appeals for the Federal Circuit Court said, "The statute bestows significant authority on the President to undertake a number of actions in response to a declared national emergency, but none of these actions explicitly include the power to impose tariffs, duties, or the like, or the power to tax."  The case now appears to be headed to the Supreme Court for a final decision.  According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.

Federal funds futures prices are discounting the chances of a -25 bp rate cut at 92% at the next FOMC meeting on September 16-17.  The markets are discounting the chances at 51% for a second -25 bp rate cut at the following meeting on October 28-29.

Overseas stock markets on Tuesday settled mixed.  The Euro Stoxx 50 fell to a 3-week low and closed down -1.42%.  China's Shanghai Composite closed down -0.45%.  Japan's Nikkei Stock 225 closed up +0.29.

Interest Rates

December 10-year T-notes (ZNZ5) on Tuesday closed down -11.5 ticks, and the 10-year T-note yield rose +5.1 bp to 4.279%. 

Dec T-notes retreated on Tuesday due to supply pressures. About $55 billion of corporate debt securities are expected to be priced this week, which will prompt bond dealers to enter short positions on T-note futures as a hedge against the incoming supply. Also, rising European government bond yields weighed on T-note prices, with the 10-year German bund yields climbing to a 5-month high and the 10-year UK gilt yield rising to a 3.25-month high. 

T-note prices recovered from their worst levels after Tuesday's US economic reports showed the Aug ISM manufacturing index rose less than expected and July construction spending declined for the third consecutive month. Also, the unexpected decline in the Aug ISM prices paid sub-index to a 6-month low is supportive for T-notes.

European government bond yields on Tuesday moved higher.  The 10-year German bund yield climbed to a 5-month high of 2.801% and finished up +3.9 bp to 2.786%.  10-year UK gilt yield rose to a 7.5-month high of 4.822% and finished up +5.0 bp to 4.800%.

The Eurozone Aug CPI rose +2.1% y/y, right on expectations.  The Aug core CPI rose 2.3% y/y, stronger than expectations of +2.2% y/y. 

ECB Executive Board member Schnabel said the ECB should maintain borrowing costs at current levels with inflation risks tilted to the upside.

ECB Governing Council member Muller said the ECB can afford to keep interest rates steady at next week's meeting as inflation hovers close to its target and the economy shows resilience.

Swaps are discounting the chances at 1% for a -25 bp rate cut by the ECB at the September 11 policy meeting.

US Stock Movers

The Magnificent Seven megacap technology stocks moved lower Tuesday and weighed on the overall market.  Nvidia (NVDA), Amazon.com (AMZN), Apple (AAPL), and Tesla (TSLA) closed down more than -1%.  In addition, Alphabet (GOOGL) closed down -0.72%, Meta Platforms (META) closed down -0.49%, and Microsoft (MSFT) closed down -0.31%.

Chip stocks retreated on Tuesday and pressured the broader market. ARM Holdings Plc (ARM) closed down more than -4%, and Lam Research (LRCX) and KLA Corp (KLAC) closed down more than -3%.   Also, Microchip Technology (MCHP) and ASML Holding NV (ASML) closed down more than -2%.  In addition, Applied Materials (AMAT), Analog Devices (ADI), Qualcomm (QCOM), ON Semiconductor Corp (ON), and Texas Instruments (TXN) closed down more than -1%.

Kraft Heinz Co (KHC) closed down more than -6% to lead losers in the Nasdaq 100 after announcing plans to split into two separate companies, one made up of its Heinz ketchup and other condiments and boxed meals, and one including grocery products. 

Constellation Brands (STZ) closed down more than -6% after cutting its full-year EPS estimate to $11.30 to $11.60 from a previous outlook of $12.66.   

Block Inc (XYZ) closed down more than -4% after BNP Paribas Exane downgraded the stock to neutral from outperform.

Commvault Systems (CVLT) closed down more than -3% after announcing it will offer $750 million of Convertible Senior Notes due 2030. 

Fortinet (FTNT) closed down more than -2% after Morgan Stanley downgraded the stock to underweight from equal weight with a price target of $67. 

Cytokinetics (CYTK) closed up more than +40% after giving data for a late-stage trial of its experimental therapy for heart disease that Citigroup and other analysts said exceeded expectations. 

Ionis Pharmaceuticals (IONS) closed up more than +35% after announcing that its Olezarsen drug significantly reduced triglycerides and acute pancreatitis events in Phase 3 CORE and CORE2 studies for people with severe hypertriglyceridemia. 

United Therapeutics (UTHR) closed up more than +33% after announcing a late-stage study of its Tyvaso Inhalation Solution for the treatment of a lung disease met its primary efficacy endpoint. 

Ulta Beauty (ULTA) closed up more than +8% to lead gainers in the S&P 500 after analysts raised their earnings estimate for the stock by an average of 7.1% since the company reported earnings last Thursday.

Air Lease Corp (AL) closed up more than +7% after a group led by Sumitomo Corp agreed to buy the company for about $7.4 billion, or $65 a share. 

Biogen (BIIB) closed up more than +5% to lead gainers in the Nasdaq 100 after receiving FDA approval for its weekly lecanemab-irmb subcutaneous injection for maintenance dosing in patients with Alzheimer's disease. 

PepsiCo (PEP) closed up more than +1% after the Wall Street Journal reported that Elliot Investment Management has built a $4 billion stake in the company and plans to push the board of directors to make changes. 

Earnings Reports(9/3/2025)

Dollar Tree Inc (DLTR), Gitlab Inc (GTLB), Hewlett Packard Enterprise Co (HPE), Macy's Inc (M), Salesforce Inc (CRM), The Campbell's Company (CPB).