Stocks Fall as Bond Yields Jump on Hawkish Fed Comments and Strong ISM Services Report

Rich Asplund - Barchart - Mon Feb 5, 10:23AM CST

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.76%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.04%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.98%.

Stock indexes this morning are moderately lower. Stocks opened lower after hawkish Fed comments pushed bond yields higher. Fed Chair Powell pushed back against hopes of a Fed rate cut next month, and Minneapolis Fed President Kashkari said a higher neutral rate gives the Fed room to wait on interest rate cuts. Also, Chicago Fed President Goolsbee said he wants to see more progress on reducing inflation before the Fed starts cutting rates. Stocks extended their losses as bond yields rose even higher on this morning’s stronger-than-expected Jan ISM services index.

Fed Chair Powell Sunday evening said in an interview on “60 Minutes” that the Fed is wary of cutting interest rates too soon and reiterated that a March rate cut is unlikely.

Minneapolis Fed President Kashkari said today that the neutral policy rate has possibly risen. That "gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery."

Chicago Fed President Goolsbee said, "We need to see more data showing inflation progress" before the Fed starts lowering interest rates.

The U.S. Jan ISM services index rose +2.9 to a 4-month high of 53.4, stronger than expectations of 52.0. The Jan ISM services prices paid sub-index unexpectedly rose +7.3 to an 11-month high of 64.0, stronger than expectations of a decline to 56.7.

The markets are discounting the chances for a -25 bp rate cut at 18% at the March 19-20 FOMC meeting and 80% for that -25 bp rate cut at the following meeting April 30-May 1.

U.S. and European government bond yields today are higher. The 10-year T-note rose to a 1-week high of 4.170% and is up +14.6 bp at 4.167%. The 10-year German bund yield rose to a 1-week high of 2.335% and is up +9.3 bp at 2.334%. The 10-year UK gilt yield rose to a 1-week high of 4.038% and is up +11.1 bp at 4.029%.

Overseas stock markets are mixed. The Euro Stoxx 50 is down -0.20%. China’s Shanghai Composite Index closed down -1.02%. Japan’s Nikkei Stock Index closed up +0.54%.

Today’s stock movers…

Air Products and Chemicals (APD) is down more than -15% to lead losers in the S&P 500 after reporting Q1 adjusted EPS of $2.82 billion, weaker than the consensus of $3.01 billion, and cutting its full-year adjusted EPS forecast to $12.20-$12.50 from a previous estimate of $12.80-$13.10, below the consensus of $12.98.

Zscaler (ZS) is down more than -5% to lead losers in the Nasdaq 100 after COO Rajic unexpectedly resigned last Friday.

Humana (HUM) is down more than -4% after it said the proposed rate update for Medicare Advantage benchmark funding is 160 basis points worse than its expectations for a flat rate, potentially reducing profit margins.

McDonald’s (MCD) is down more than -3% to lead losers in the Dow Jones Industrials after reporting Q4 comparable sales of +3.4%, weaker than the consensus of +4.79%.

Charter Communications (CHTR) is down more than -3% after Wells Fargo Securities downgraded the stock to equal weight from overweight.

Boeing (BA) is down more than -2% after it found more misdrilled holes on its 737 Max jets, potentially further delaying deliveries.

WW Grainger (GWW) is down more than -2% after CFRA downgraded the stock to strong sell from hold with a price target of $830.

Mattel (MAT) is down more than -2% after JPMorgan Chase downgraded the stock to neutral from overweight.

Estee Lauder (EL) is up more than +13% to lead gainers in the S&P 500 after saying it’s cutting as many as 3,000 positions as part of a restructuring plan.

Catalent (CTLT) is up more than +10% after Novo Holdings agreed to buy the company for $16.5 billion or $63.50 per share.

ON Semiconductor (ON) is up more than +8% to lead gainers in the Nasdaq 100 after reporting Q4 adjusted EPS of $1.25, better than the consensus of $1.21.

IDXX Laboratories (IDXX) is up more than +5% after reporting Q4 revenue of $901.6 million, stronger than the consensus of $890.3 million.

Tyson Foods (TSN) is up more than +4% after reporting Q1 sales of $13.32 billion, better than the consensus of $13.27 billion.

Nvidia (NVDA) is up more than +2% after Goldman Sachs raised its price target on the stock to $800 from $625, citing robust AI demand.

Caterpillar (CAT) is up more than +1% to lead gainers in the Dow Jones Industrials after reporting Q4 adjusted operating income of $3.23 billion, stronger than the consensus of $3.10 billion.

Cigna Group (CI) is up more than +1% after RBC Capital Markets upgraded the stock to outperform from sector perform with a price target of $354.

Across the markets…

March 10-year T-notes (ZNH24) this morning are down by -27 ticks, and the 10-year T-note yield is up +14.6 bp at 4.157%. Mar T-note prices this morning fell to a 1-week low, and the 10-year T-note yield rose to a 1-week high of 4.170%. Hawkish Fed comments today from Fed Chair Powell, Minneapolis Fed President Kashkari, and Chicago Fed President Goolsbee reduced the chances of a Fed interest rate cut at the March FOMC meeting. T-notes extended their losses after the Jan ISM services index rose more than expected.

The dollar index (DXY00) today is up by +0.57% and posted a 2-1/2 month high. Hawkish Fed comments curbed expectations for Fed rate cuts and boosted the dollar. The dollar added to its gains today after the stronger-than-expected Jan ISM services index pushed the 10-year T-note yield to a 1-week high.

EUR/USD (^EURUSD) is down by -0.45% and fell to a 1-3/4 month low. Dollar strength today is undercutting the euro. Also, economic concerns are weighing on the euro after German Dec exports declined by the most in a year. Also, the weaker-than-expected Eurozone PPI report was dovish for ECB policy and bearish for the euro.

ECB Governing Council member Vujcic said the ECB "needs to have patience at the moment before getting into an easing cycle to make sure that wage costs aren't translating into sustained wage pressure."

The Eurozone Dec PPI fell -10.6% y/y, weaker than expectations of -10.5% y/y.

The Eurozone Feb Sentix investor confidence index rose +2.9 to a 10-month high of -12.9, stronger than expectations of -15.0.

German trade data was below expectations as Dec exports fell -4.6% m/m, weaker than expectations of -2.8% m/m and the biggest decline in a year. Also, Dec imports fell -6.7% m/m, weaker than expectations of -1.9% m/m and the biggest decline in a year.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 13% for its next meeting on March 7 and at 66% for the following meeting on April 11.

USD/JPY (^USDJPY) is up by +0.07%. The yen today extended last Friday’s losses to a 2-1/4 month low against the dollar. Hawkish Fed comments today from Fed Chair Powell and Minneapolis Fed President Kashkari pushed T-note yields higher and weighed on the yen. The yen found support after the Japan Jan Jibun Bank services PMI was revised upward to a 4-month high.

The Japan Jan Jibun Bank services PMI was revised upward by +0.4 to 53.1 from the previously reported 52.7, the highest level in 4 months.

Swaps are pricing in the chances for a +10 bp BOJ rate hike at 20% for its next meeting on March 19 and at 83% for the following meeting on April 26.

April gold (GCJ24) this morning is down -20.8 (-1.01%), and Mar silver (SIH24) is down -0.401 (-1.76%). Gold and silver prices this morning are moderately lower, with gold sliding to a 1-week low and silver falling to a 1-1/2 week low. Today’s rally in the dollar index to a 2-1/2 month high is undercutting metals prices. Also, hawkish comments today from Fed Chair Powell, Minneapolis Fed President Kashkari, and Chicago Fed President Goolsbee pushed back expectations of Fed interest rate cuts and weighed on precious metals. Gold is also under pressure from ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low last Friday.

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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.