Stocks Fall as Fed Comments Signal Aggressive Rate Hikes to Continue

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.04%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.70%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.62%. 

Stocks this morning are moderately lower, with the S&P 500, the Dow Jones Industrials, and the Nasdaq 100 falling to 1-week lows.  Today's slump in technology stocks weighs on the overall market due to a surge in T-Note yields.  The 10-year T-note yield jumped to a 4-week high today at 2.983% T-note yields are climbing on concern the Fed will maintain its aggressive rate-hake path. Comments Thursday from St. Louis Fed President Bullard and Kansas City Fed President George, two voting FOMC members, emphasized the Fed will continue to raise interest rates until inflation eases back to the Fed’s 2% target. 

A more than -2% drop in Deere & Co today is weighing on the overall market after the company trimmed its annual profit forecast. Also, Ross Stores is down more than -2% after reporting weaker-than-expected Q2 sales, and Meta Platforms is down more than -3% after Morgan Stanley cut their price target on the stock.

Comments today from Richmond Fed President Barkin were hawkish for Fed policy and bearish for stocks when he said the Fed is "very seriously committed to returning inflation to our 2% target, and we’ll do what it takes to get there.”  He added that he expects bond yields to rise as the Fed balance sheet shrinks.

Today’s stock movers…

A jump in the 10-year T-note yield to a 4-week high today is undercutting technology stocks.  Okta (OKTA) is down more than -7%.  Also, Datadog (DDOG), Atlassian Group Plc (TEAM), Zscaler (ZS), and Lam Research (LRCX) are down more than -4%.  In addition, Nvidia (NVDA), Advanced Micro Devices (AMD), Netflix (NFLX), Adobe (ADBE), and Marvel Technology (MRVL) are down more than -3%.

Economic concerns are weighing on airlines and cruise stocks today.  Carnival (CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Cruises (RCL) are down more than -4%.  Also, American Airlines Group (AAL) and Delta Airlines (DAL) are down more than -3%.  In addition, United Airlines Holdings (UAL) and Southwest Airlines (LUV) are down more than -2%.   

Meta Platforms (META) is down more than -3% today after Morgan Stanley cut their price target on the stock to $225 from $280, saying the company’s shift toward Reels and declining user engagement pose a risk to its revenue growth. 

Deere & Co (DE) is down more than -2% today after narrowing its net income forecast for the full year to $7.0 billion-$7.2 billion from a prior forecast of $7 billion-$7.4 billion. 

Ross Stores (ROST) is down more than -2% today after reporting Q2 sales of $4.58 billion, weaker than the consensus of $4.63 billion, and cutting its 2023 EPS forecast to $3.84-$4.12 from a prior forecast of $4.34-$4.48, below the consensus of $4.36.

HP Inc (HPQ) is down more than -3% today after Wells Fargo Securities downgraded the stock to underweight from equal weight. 

Davita (DVA) is up more than +4% today to lead gainers in the S&P 500 after UBS raised its recommendation on the stock to buy from neutral. 

General Motors (GM) is up more than +2% today after the company resumed its share buyback program and reinstated its 9-cent per share quarterly dividend. 

Warner Bros Discovery (WBD) is up more than +2% today on optimism the HBO “Game of Thrones” prequel “House of Dragons” series that begins this Sunday night will be a hit. 

Across the markets…

Sep 10-year T-notes (ZNU22) today are down -17 ticks, and the 10-year T-note yield is up +9.4 bp at 2.976%.  Sep T-notes this morning dropped to a 4-week low, and the 10-year T-note yield rose to a 4-week high of 2.983%.  T-notes are falling on negative carry-over from Thursday, when St. Louis Fed President Bullard and Kansas City Fed President George, two voting FOMC members, emphasized the Fed will continue to raise interest rates until inflation eases back to the Fed’s 2% target.  Also, a surge in German July producer prices to a record high pushed European government bond yields higher and weighed on T-notes.  As a result, the 10-year German bund yield today climbed to a 4-week high of 1.237%, and the UK 10-year gilt yield jumped to a 1-1/2 month high at 2.457%.

The dollar index (DXY00) today is up by +0.47% and posted a 5-week high. Expectations for the Fed to maintain its aggressive rate-hike path are boosting T-note yields and supporting the dollar. Also, weakness in the Chinese yuan is giving the dollar a boost as central bank divergence between the PBOC and Fed pushed the yuan down to a 1-3/4 year low today at 6.8183 yuan/USD.  In addition, today’s slide in stocks has boosted the liquidity demand for the dollar. 

EUR/USD (^EURUSD) today is down -0.27% and dropped to a 5-week low. Soaring German producer prices are bearish for EUR/USD after today’s data showed German July PPI rose a record +37.2% y/y.  The euro is also under pressure on concern that the ongoing energy crisis in Europe will throw the Eurozone economy into recession.  Losses in EUR/USD were limited after the 10-year German bund yield rose to a 4-week high, strengthening the euro’s interest rate differentials.   

German July PPI rose a record +37.2% y/y, stronger than expectations of +31.8% y/y.

USD/JPY (^USDJPY) today is up +0.69% and climbed to a 3-week high. The yen is under pressure today on higher T-note yields as the 10-year T-note yield climbed to a 4-week high.  Also, central bank divergence continues to undercut the yen with the Fed in the middle of a rate-hike cycle while the BOJ maintains QE and record-low interest rates.

October gold (GCV22) is down -4.8 (-0.27%), and September silver (SIU22) is down -0.504 (-2.59%).  Precious metals this morning are moderately lower and posted 3-week lows.  A rally in the dollar index today to a 5-week high is undercutting metals prices.  Gold prices are also weighed down today from rising global bond yields.  In addition, the ongoing liquidation of long gold positions by funds is bearish for gold prices after long gold positions in ETFs fell to a 5-1/2 month low Thursday.  Losses in gold were limited on increased demand for gold as an inflation hedge after German July PPI rose a record +37.2% y/y.

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