What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.38%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.98%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -2.21%.

Stocks on Wednesday closed sharply lower, with the S&P 500 dropping to a 2-week low and the Nasdaq 100 falling to a 3-week low.  Stocks opened lower after Fitch Ratings’ downgrade of its U.S. government debt rating spurred a risk-off sentiment in stocks.  Stocks fell further as T-note yields jumped when the Treasury announced a larger-than-expected quarterly refunding operation, and after Wednesday’s July ADP employment change rose more than expected.

Fitch Ratings late Tuesday cut the sovereign credit rating of the U.S. by one level to AA+ from AAA, saying, "The rating downgrade of the U.S. reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA and AAA rated peers over the last two decades.”

The U.S. Jul ADP employment change rose +324,000, showing a stronger labor market than expectations of +190,000, which was hawkish for Fed policy.

The U.S. Treasury boosted the size of its quarterly refunding operation for the first time in 2-1/2 years, saying it will sell $103 billion of T-notes and T-bonds in its quarterly refunding auctions next week, up from last quarter’s $96 billion and slightly above estimates of $102 billion. The Treasury also said, “While these changes will make substantial progress towards aligning auction sizes with intermediate to long-term borrowing needs, further gradual increases will likely be necessary in future quarters.”

The markets are discounting the odds at 17% for a +25 bp rate hike at the September 20 FOMC meeting. 

Global bond yields on Wednesday were mixed.  The 10-year T-note yield climbed to an 8-1/2 month high of 4.122% and finished up +4.4 bp at 4.067%.  The 10-year German bund yield fell -2.2 bp to 2.535%.  The 10-year UK Gilt yield rose to a 2-week high of 4.426% and finished up +0.3 bp at 4.403%. 

Overseas stock markets Wednesday settled lower.  The Euro Stoxx 50 closed down -1.61%. China’s Shanghai Composite Index today closed down -0.89%.  Japan’s Nikkei Stock Index closed down -2.30%.

Today’s stock movers…

Generac Holdings (GNRC) closed down more than -24% to lead losers in the S&P 500 after reporting Q2 adjusted EOS of $1.08, weaker than the consensus of $1.17, and cut its full-year net sales forecast to a decline of -10% to -12% from a prior view of -6%  to -10%.   

Paycom Software (PAYC) closed down more than -19% after forecasting Q3 revenue of $410 million-$412 million, below the consensus of $412.1 million.

Johnson Controls International (JCI) closed down more than -9% after reporting Q3 adjusted net sales of $7.13 billion, weaker than the consensus of $7.18 billion.

Electronic Arts (EA) closed down more than -7% to lead losers in the Nasdaq 100 after reporting Q1 net bookings of $1.58 billion, below the consensus of $1.59 billion, and forecasts 2024 net bookings of $7.3 billion-$7.7 billion, the midpoint below the consensus of $7.6 billion. 

Chip stock sold off Wednesday after the 10-year T-note yield rose to an 8-1/2 month high.  As a result, Advanced Micro Devices (AMD) closed down more than -7%.  Also, Nvidia (NVDA), Lam Research (LRCX), and ON Semiconductor (ON) closed down more than -4%.  In addition, Intel (INTC) closed down more than -3% to lead losers in the Dow Jones Industrials.  Finally, Microchip Technology (MCHP), Analog Devices (ADI), Applied Materials (AMAT), Texas Instruments (TXN), and NXP Semiconductors NV (NXPI) closed down more than -3%.

Devon Energy (DVN) closed down more than -7% after reporting Q2 core EPS of $1.18, weaker than the consensus of $1.20.

Allstate (ALL) closed down more than -5% after reporting a Q2 adjusted loss per share of -$4.42, wider than the consensus of -$4.25. 

Pinterest (PINS) closed down more than -4% after reporting Q2 average revenue per user of $1.53, below the consensus of $1.54. 

Norwegian Cruise Line Holdings (NCLH) closed down more than -3% after Susquehanna Financial downgraded the stock to neutral from positive. 

Waters (WAT) closed up more than +6% to lead gainers in the S&P 500 after reporting Q2 adjusted EPS of $2.80, well above the consensus of $2.58. 

Aflac (AFL) closed up more than +5% after reporting Q2 revenue of $5.20 billion, stronger than the consensus of $4.47 billion.

Assurant (AIZ) closed up more than +5% after reporting Q2 adjusted Ebitda of $323.1 million, well above the consensus of $223.6 million. 

Humana (HUM) closed up more than +5% after reporting Q2 revenue of $26.75 billion, above the consensus of $26.25 billion.

CDW Corp (CDW) closed up more than +5% after reporting Q2 net sales of $5.63 billion, better than the consensus of $5.38 billion.

Bunge Ltd (BG) closed up more than +4% after reporting Q2 adjusted EPS of $3.72, stronger than the consensus of $2.65 billion, and raised its full-year adjusted EPS estimate to at least $11.75 from a previous estimate of at least $11.00.

Emerson Electric (EMR) closed up more than +3% after reporting Q3 adjusted EPS of $1.29, better than the consensus of $1.07, and raised its full-year adjusted EPS forecast to $4.40-$4.45 from a previous estimate of $4.15-$4.25, stronger than the consensus of $4.10.

Trane Technologies (TT) closed up more than +3% and posted a record high after reporting Q2 adjusted EPS continuing operations of $2.68, better than the consensus of $2.55.

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed down -2.5 ticks, and the 10-year T-note yield rose +4.4 bp to 4.067%.  Sep T-notes Wednesday fell to a 3-week low, and the 10-year T-note yield rose to an 8-1/2 month high of 4.122%.   Upcoming supply pressures weighed on T-notes after the Treasury raised the amount of next week’s quarterly refunding auctions to $103 billion from $96 billion last quarter, more than expectations of $102 billion, and said “further gradual increases will likely be necessary in future quarters.”  T-note prices also fell on Fitch’s debt rating downgrade, which made U.S. Treasury securities less attractive and boosted the risk premium.

T-notes remained under pressure after Wednesday’s ADP employment report was stronger than expected, a hawkish factor for Fed policy.  However, T-notes recovered from their worst levels after a stock selloff boosted some safe-haven demand for T-notes. 

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