Stocks Drop on Expectations for Aggressive Tightening by Global Central Banks

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.78%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.88%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.57%. 

Stocks on Wednesday moved lower for a fourth session, with the S&P 500 falling to a 1-month low and the Dow Jones Industrials dropping to a 6-week low.  Higher T-note yields are negative for stocks, as the 10-year T-note yield Wednesday climbed to a new 2-month high of 3.161%. T-note yields rose as record inflation in the Eurozone pushed the 10-year German bund yield to a 2-month high and increased the chances of the ECB tightening monetary policy aggressively. Eurozone Aug CPI climbed at a record pace of +9.1% y/y.  Also, hawkish comments Wednesday from Cleveland Fed President Mester weighed on stocks when she said, “in her view, it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there.” 

Stocks did garner some support Wednesday after monthly news from ADP showed U.S. companies increased headcount well below expectations, which is dovish for Fed policy.  Also, social-media stocks rallied Wednesday after Snap said it was cutting 20% of its payroll to rein in costs.

The U.S. Aug ADP employment change rose +132,000, weaker than expectations of +300,000 and the smallest increase in 19 months.

The U.S. Aug MNI Chicago PMI unexpectedly rose +0.1 to 52.2, stronger than expectations of no change at 52.1.

Cleveland Fed President Mester said, "her current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there” and that she does not anticipate the Fed cutting the fed funds rate target next year.

The China Aug manufacturing PMI rose +0.4 to 49.4, stronger than expectations of 49.2.  The China Aug non-manufacturing PMI fell -1.2 to 52.6, stronger than expectations of 52.3.

Today’s stock movers…

PVH Corp (PVH) closed down more than -10% Wednesday to lead losers in the S&P 500 after reporting Q2 revenue of $2.13 billion, weaker than the consensus of $2.21 billion, and said it sees Q3 revenue down -4% to -5%.

HP Inc (HPQ) closed down more than -7% Wednesday after reporting Q3 net revenue of $14.7 billion, weaker than the consensus of $15.6 billion, and cut its full-year adjusted EPS forecast to $4.02-$4/12 from a prior forecast of $4.24-$4.38, below the consensus of $4.30.

Seagate Technology Holdings Plc (STX) closed down more than -3% Wednesday after cutting its Q1 fiscal revenue forecast to $2.1 billion plus or minus $100 million from a previous forecast of $2.5 billion, plus or minus $150 million, citing a worsening macro-economic backdrop.  

Semiconductor chip stocks were weaker Wednesday after Citigroup warned that chip stocks might fall another 25% as profit estimates slide.  Advanced Micro Devices (AMD), Nvidia (NVDA), and Marvel Technology (MRVL) closed down by more than -2%.  Also, Intel (INTC), Qualcomm (QCOM), Broadcom (AVGO), Align Technology (ALGN), and Lam Research (LRCX) closed down by more than -1%.

Airline stocks fell Wednesday on signs of weaker air travel demand after total U.S. July airlines transactions dropped -19% versus 2019.  American Airlines Group (AAL), United Airlines Holdings (UAL), Alaska Air Group (ALK), and Delta Air Lines (DAL) all closed down by more than -2%. 

Social-media stocks rallied Wednesday after Snap said it would cut its workforce by 20% and scale back investments in select businesses as it attempts to rein in costs.  Snap (SNAP) closed up more than +8%, and Pinterest (PINS) closed up more than +4%.  Also, Meta Platforms (META) closed up more than +3% to lead gainers in the S&P 500. 

PayPal Holdings (PYPL) closed up more than +1% Wednesday after Bank of America upgraded the stock to buy from neutral. 

Amgen (AMGN) closed up more than +0.4% Wednesday to lead gainers in the Dow Jones Industrials after it said its Lumakras drug met the endpoint of progression-free survival for patients with KRAS G12C-mutated non-small cell lung cancer in a Phase 3 trial.

U.S.-listed Chinese stocks Wednesday moved higher after economic reports showed that Chinese manufacturing and service sector activity was stronger-than-expected in August. Pinduoduo (PDD) closed up more than +7% to lead gainers in the Nasdaq 100.  Also, Baidu (BIDU) closed up more than +4%, and JD.com (JD) closed up more than +3%.  In addition, NetEase (NTES) and Alibaba Group Holding (BABA) closed up more than +1%.

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed down -4 ticks, and the 10-year T-note yield rose +3.9 bp to 3.142%.  Sep T-notes Wednesday dropped to a fresh 2-month low, and the 10-year T-note yield rose to a new 2-month high of 3.161%.  Record high inflation in the Eurozone pushed up European government bond yields and weighed on T-note prices.  The 10-year UK gilt yield soared to an 8-1/2 year high Wednesday at 2.873%, and the 10-year German bund yield climbed to a 2-month high of 1.586%. 

T-note prices recovered from their worst levels Wednesday on the smaller-than-expected increase in the Aug ADP employment change, which is dovish for Fed policy.  Also, a decline in inflation expectations limited losses in T-note prices after the 10-year breakeven inflation rate fell to a 1-1/2 week low Wednesday at 2.458%. 

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