Stocks Gain as T-Note Yields Fall Ahead of FOMC

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up by +1.51%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +1.26%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.83%. 

Stocks today are moderately higher as a decline in T-note yields has sparked short-covering in stocks.  The 10-year T-note yield is down -8.7 bp at 3.387% on positive carry-over from a rally in European government bonds.  Stock indexes remained moderately higher despite this morning’s U.S. economic data, which was weaker than expected.

European bond yields fell after the ECB announced today after an emergency meeting that it will accelerate work on a new tool to combat unwarranted jumps in European bond yields.  The ECB said it is studying whether to use the reinvestment of bond purchases conducted under the now-halted pandemic emergency purchase program (PEPP) to slow soaring bond yields. 

U.S. stocks also garnered support from today’s rally in the Shanghai Composite to a 3-1/4 month high.  Better-than-expected Chinese economic data today is supportive of global growth prospects and stocks.   China's May industrial production unexpectedly rose +0.7% y/y, stronger than expectations of -0.9% y/y.  Also, China's May retail sales fell -6.7% y/y, a smaller decline than expectations of -7.1% y/y.

The markets fully expect the FOMC to raise the target on the fed funds range by 50 bp after its two-day policy meeting ends this afternoon. However, expectations are building for a 75 bp Fed rate hike today after a Wall Street Journal report Tuesday suggested the Fed may raise rates as much as 75 bp.  In addition, JPMorgan Chase said that even a full percentage point (100 bp) increase Wednesday is a possibility.

U.S. May retail sales unexpectedly fell -0.3% m/m, weaker than expectations of +0.1% m/m.  May retail sales ex-autos rose +0.5% m/m, weaker than expectations of +0.7% m/m.

The U.S. Jun Empire manufacturing survey general business conditions index rose +10.4 to -1.2, weaker than expectations for a rise to 2.3.

The U.S. May import price index ex-petroleum unexpectedly fell -0.1% m/m, weaker than expectations of +0.6% m/m and the first decline in 19 months.

The U.S. Jun NAHB housing market index fell -2 to a 2-year low of 67, right on expectations.

Today’s stock movers…

A decline in T-note yields today is supporting a rally in technology stocks.  Netflix (NFLX) is up more than +5%.  Also, Nvidia (NVDA), Splunk (SPLK), Intuit (INTU), Okta (OKTA), and Align Technology (ALGN) are up more than +3%.  In addition, Amazon.com (AMZN), Microsoft (MSFT), Tesla (TSLA), Analog Devices (ADI), and Atlassian Corp Plc (TEAM) are up more than +2%. 

MercadoLibre (MELI) is up more than +4% today to lead gainers in the Nasdaq 100 after Mexican retailer Chedraui said it opened a store on the MercadoLibre platform to sell groceries. 

Boeing (BA) is up more than +5% today to lead gainers in the Dow Jones Industrials on positive carry-over from Tuesday after the Seattle Times reported that Boeing may resume 787 Dreamliner deliveries in the coming weeks, citing a Federal Aviation Administration official.

A decline of nearly -1% in crude oil prices today is weighing on energy stocks and energy service providers.  Valero Energy (VLO) is down more than -2% to lead losers in the S&P 500.  Also, Occidental Petroleum (OXY), Marathon Oil (MRO), Hess Corp (HES), Schlumberger (SLB), and Marathon Petroleum (MPC) are down by more than -1%.   

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are up +26 ticks, and the 10-year T-note yield is down -8.7 bp at 3.387%.  A rally in European government bonds today has sparked short-covering in T-notes.   The 10-year German bund yield fell back from an 8-year high and is down -14.1 bp at 1.616% after the ECB announced today after an emergency meeting that it will accelerate work on a new tool to combat unwarranted jumps in European bond yields. T-notes also found support in this morning’s U.S. economic data that showed May retail sales unexpectedly fell and May import prices ex-petroleum unexpectedly declined. 

The dollar index (DXY00) this morning is down -0.14%, falling back slightly from Tuesday’s 19-year high.  Lower T-note yields today are undercutting the dollar.  Also, a rally in stocks has reduced liquidity demand for the dollar.  In addition, weaker-than-expected U.S. economic data on May retail sales and the Jun Empire manufacturing survey were bearish for the dollar. 

EUR/USD (^EURUSD) is up +0.03% today.  EUR/USD is slightly higher today on dollar weakness.  Gains in the euro were limited when the ECB announced after today’s emergency meeting that it is studying the reinvestment of bond purchases conducted under the now-halted pandemic purchase program. Weaker than expected Eurozone industrial production data for May was also bearish for EUR/USD. 

The ECB announced an emergency meeting today "to discuss current market conditions" and whether to use the reinvestment of bond purchases conducted under the now-halted pandemic emergency purchase program (PEPP) to slow soaring bond yields.

ECB Executive Board member Schnabel said the ECB won't tolerate "changes in financing conditions that go beyond fundamental factors and that threaten monetary-policy transmission."

Eurozone May industrial production rose +0.4% m/m, weaker than expectations of +0.5% m/m.

USD/JPY (^USDJPY) today is down -0.65%.  USD/JPY retreated from a 23-year high today and is moderately lower. A fall in T-note yields today has sparked short covering in the yen and pushed USD/JPY lower.  The yen also garnered support today from higher Japanese government bond yields after the 10-year JGB bond yield climbed to a 6-1/2 year high today at 0.308%.  Gains in the yen are limited after the BOJ boosted QE and the BOJ announced unlimited purchases of cheapest-to-deliver 10-year bonds for Thursday and Friday.   

Today’s Japanese economic data was mixed for the yen.  On the positive side,   Japan Apr core machine orders unexpectedly rose +10.8% m/m, stronger than expectations of -1.3% m/m and the largest increase in 1-1/2 years.  Conversely, the Japan Apr tertiary industry index rose +0.7% m/m, weaker than expectations of +0.8% m/m.

August gold (GCQ22) this morning is up +13.9 (+0.77%), and July silver (SIN22) is up +0.586 (+2.80%).  Precious metals today are moderately higher on a weaker dollar.  Gold also has support from lower global bond yields, and increased demand as an inflation hedge after the ECB announced plans to create a new tool to combat unwarranted jumps in bond yields.  Gains in metals are limited ahead of the results of the 2-day FOMC meeting later this afternoon.  Several money-center banks have raised their forecasts for the Fed to raise rates today by 75 bp instead of 50 bp.  Also, a recovery in stocks has curbed the safe-haven demand for precious metals.