Stocks Fall Back on Higher Bond Yields and Weakness in Chip Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.72%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.50%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.21%. 

Stocks on Wednesday posted moderate losses.  A jump in global bond yields Wednesday weighed on the overall market.  Soaring consumer prices in the UK sparked inflation concerns and pushed up bond yields.  The UK 10-year Gilt yield jumped to a 1-1/2 month high of 2.318% after UK July CPI rose more than expected at the fastest pace in 40 years.  The jump in European bond yields pushed T-note yields higher, and the 10-year T-note yield climbed to a 3-1/2 week high Wednesday at 2.915%. Weakness in semiconductor stocks weighed on the Nasdaq 100 after Analog Devices dropped more than -4% when CEO Roche said that “economic uncertainty is beginning to impact bookings.”  

Stock indexes recovered from their worst levels Wednesday on the dovish minutes of the July 26-27 FOMC meeting, when Fed officials said: “it likely would become appropriate at some point to slow the pace of policy rate increases.”  Stocks also found support Wednesday on strength in Asian markets after  China’s Shanghai Composite climbed to a 2-1/2 week high and Japan’s Nikkei Stock index rose to a 7-1/2 month high.  Asian markets rallied on speculation China may boost stimulus measures after Chinese Premier Li Keqiang vowed to "reasonably" step up policy support to stabilize employment, prices and ensure economic growth.

U.S. July retail sales were unchanged m/m, weaker than expectations of +0.1% m/m. However, July retail sales ex-autos unexpectedly rose +0.4% m/m, stronger than expectations for a -0.1% m/m decline.

The minutes of the July 26-27 FOMC meeting stated "as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation."  Also, many Fed officials saw a risk to over tightening, because of constant changes in the economic environment and the lag effect of monetary policy, saying "the committee could tighten the stance of policy by more than necessary to restore price stability."

China's CCTV state television reported that Chinese Premier Li Keqiang asked local officials from six provinces that account for 40% of China's economy to bolster pro-growth measures, including helping to boost consumption and offering more fiscal support via government bond issuance.  He also vowed to "reasonably" step up policy support to stabilize employment, prices and ensure economic growth.

UK July CPI rose +10.1% y/y, stronger than expectations of +9.8% y/y and the fastest pace of increase in 40 years.

Today’s stock movers…

Semiconductor stocks tumbled Wednesday, led by a more than -4% drop in Analog Devices (ADI) after CEO Roche said that “economic uncertainty is beginning to impact bookings.”  Also, Micron Technology (MU), Align Technology (ALGN), Marvell Technology (MRVL), Texas Instruments (TXN), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) closed down by more than -3%.  In addition, Nvidia (NVDA), Broadcom (AVGO), Lam Research (LRCX), and Applied Materials (AMAT) closed down by more than -2%.

Jack Henry & Associates (JKHY) closed down more than -6% Wednesday to lead losers in the S&P 500 after forecasting 2023 EPS of $5.05-$5.09, weaker than the consensus of $5.22. 

Zoom Video Communications (ZM) closed down more than -6% Wednesday to lead losers in the Nasdaq 100.  Zoom Video fell on negative carry-over from Tuesday when the stock fell more than -3% after Citigroup downgraded the stock to sell from neutral, citing “new hurdles to sustaining growth.” 

Homebuilders fell Wednesday after the 10-year T-note yield climbed to a 3-1/2 week high, which will push up mortgage rates and may crimp housing demand.  PulteGroup (PHM), Lennar (LEN), and DR Horton (DHI) closed down by more than -2%. Also, Toll Brothers (TOL) closed down by more than -1%. 

Agilent (A) closed up more than +7% Wednesday to lead gainers in the S&P 500 after reporting Q3 net revenue of $1.72 billion, stronger than the consensus of $1.64 billion.

Progressive Corp (PGR) closed up more than +3% Wednesday after the company reported July personal auto net premiums written increased by nearly +10% y/y, above estimates of +7% y/y. 

Apple (AAPL) closed up more than +0.8% Wednesday to lead gainers in the Nasdaq 100 after the company said it is aiming to hold a launch event on September 7 to unveil its iPhone 14 product line. 

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed down -20 ticks, and the 10-year T-note yield rose +8.6 bp to 2.890%.  Sep T-notes Wednesday fell to a 3-1/2 week low, and the 10-year T-note yield climbed to a 3-1/2 week high of 2.915%.  A slump in European government bonds Wednesday undercut T-note prices.  A surge in UK July consumer prices to a four-decade high of +10.1% y/y hammered European bond markets and pushed T-note yields higher. The 10-year UK gilt yields rose to a 1-1/2 month high Wednesday at 2.318%, and the 10-year German bund yield rose to a 3-1/2 week high of 1.107%.  T-notes maintained moderate losses on weak demand for the Treasury’s $15 billion auction of 20-year T-bonds that had a bid-to-cover ratio of 2.30, well below the 10-auction average of 2.54.

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