Stocks Mixed as Bond Rout Eases

Rich Asplund - Barchart - Wed Oct 4, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.11%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.29%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.42%.

Stocks this morning are mixed, with the Dow Jones Industrials falling to a 4-month low. Lower bond yields today have temporarily eased interest rate concerns and support stocks. T-note yields fell after September's monthly ADP employment report showed fewer jobs than expected, a dovish factor for Fed policy. Stock indexes fell back from their best levels as energy stocks declined after crude prices tumbled more than -3% to a 3-week low. Also, the stronger-than-expected Sep ISM services and Aug factory orders reports lifted T-note yields from their lowest levels and weighed on stocks.

The U.S. Sep ADP employment change rose +89,000, weaker than expectations of +150,000 and the smallest increase in over 2-1/2 years.

The U.S. Sep ISM services index fell -0.9 to 53.6, stronger than expectations of 53.5.

U.S. Aug factory orders rose +1.2% m/m, stronger than expectations of +0.3% m/m.

Weekly U.S. MBA mortgage applications fell -6.0% in the week ended Sep 29 to its lowest level since 1996. The home purchase sub-index fell -5.7% to 136.6, the lowest since 1995. The refinancing sub-index fell -6.6% w/w. The 30-year fixed mortgage rate rose +12 bp to 7.53%, the highest in almost 23 years.

The markets are discounting a 20% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 40% chance for that +25 bp rate hike at the following meeting that ends on December 13. The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields are mixed. The 10-year T-note yield fell back from a new 16-year high of 4.880% and is down -1.9 bp at 4.777%. The 10-year German bund yield fell back from a 12-year high of 3.026% and is down -0.3 bp at 2.968%. The 10-year UK gilt yield rose to a 1-1/2 month high of 4.666% and is up +3.4 at 4.631%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -0.11%. China’s Shanghai Composite Index was closed for the Golden Week holidays. Japan’s Nikkei 225 today closed -2.28%.

Today’s stock movers…

Airline stocks are climbing today as crude prices are down more than -3% at a 3-week low, which lowers fuel costs and may boost airline profits. American Airlines Group (AAL) is up more than +2%. Also, Delta Air Lines (DAL), Southwest Airlines (LUV), and United Airlines (UAL) are up more than +1%.

Molson Coors Beverage (TAP) is up more than +2% after announcing a new $2 billion stock buyback plan.

Cruise line stocks are moving higher today after Shore Capital Stockbrokers upgraded Carnival to hold from sell. As a result, Carnival (CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Cruises Ltd (RCL) are up more than +1%.

Matson Inc (MATX) is up more than +3% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $113.

Palantir Technologies (PLTR) is up more than +2% as the company has emerged as the top pick for a contract to overhaul the UK’s National Health Service.

Hub Group (HUBG) is up more than +2% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $98.

Energy companies and energy service stocks are under pressure today, with the price of WTI crude down more than -3% at a 3-week low. As a result, Phillips 66 (PSX) is down more than -4% to lead losers in the S&P 500, and Valero Energy (VLO) and Marathon Petroleum (MPC) are also down more than -4%. In addition, Haliburton (HAL), Marathon Oil (MRO), Devon Energy (DVN), Diamondback Energy (FANG), and Schlumberger (SLB) are down more than -3%. Finally, Chevron (CVX) is down more than -2% to lead losers in the Dow Jones Industrials.

A10 Networks (ATEN) is down more than -33% after forecasting preliminary Q3 revenue between $56.5 million-$58.5 million, well below the consensus of $74.5 million.

Cal-Maine Foods (CALM) is down more than -7% after reporting Q1 net sales of $459.3 million, weaker than the consensus of $479.5 million.

ON Semiconductor (ON) is down more than -1% after BNP Paribas Exane downgraded the stock to neutral from outperform.

PPL Corp (PPL) is down more than -1% after UBS downgraded the stock to neutral from buy.

Across the markets…

December 10-year T-notes (ZNZ23) this morning are up +6 ticks, and the 10-year T-note yield is down -1.9 bp at 4.777%. Dec T-notes today recovered from a new 16-year nearest-futures low, and the 10-year T-note yield fell back from a 16-year high of 4.880%. Short covering emerged in T-notes today after the Sep ADP employment report rose less than expected, a sign of a slowing labor market that is dovish for Fed policy. T-notes fell back from their best levels on the stronger-than-expected Sep ISM services and Aug factory orders reports.

The dollar index (DXY00) today is down by -0.33%. The dollar is under pressure today after the monthly ADP employment report rose less than expected, which knocked T-note yields lower and undercut the dollar. Also, a rebound in stocks today has curbed the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is up by +0.47%. The euro today is moving higher on weakness in the dollar. Also, hawkish comments today from ECB President Lagarde gave EUR/USD a boost when she said the ECB will keep interest rates restrictive “for as long as necessary.”

Today’s Eurozone economic news was mixed for the euro. On the positive side, the Eurozone Sep S&P composite PMI was revised upward by +0.1 to 47.2 from the initially reported 47.1. Conversely, Aug retail sales fell -1.2% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 8 months. Also, Aug PPI fell a record -11.5% y/y from a -7.6% y/y decline in July, a dovish factor for ECB policy.

ECB President Lagarde said future ECB decisions "will ensure that the interest rates will be set at sufficiently restrictive levels for as long as necessary."

USD/JPY (^USDJPY) is down by -0.09%. The yen today is posting modest gains as T-note yields fall. The yen also garnered support from today’s economic news that showed the Japan Sep Jibun Bank services PMI was revised upward. In addition, the yen garnered support from higher Japanese government bond yields after the 10-year JGB bond yield rose to a 10-year high of 0.810%.

December gold (GCZ3) today is down -2.1 (-0.11%), and Dec silver (SIZ23) is down -0.032 (-0.15%). Precious metals prices this morning are modestly lower. Strength in stocks today has reduced safe-haven demand for precious metals. Also, hawkish comments from ECB President Lagarde undercut gold today when she said the ECB will keep interest rates restrictive “for as long as necessary.” In addition, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low on Tuesday. A weaker dollar today is limiting losses in precious metals along with a decline in T-note yields.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.