Stocks Tumble as Bond Yields Soar on U.S. Labor Strength and Hawkish Fed

Rich Asplund - Barchart - Tue Oct 3, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.16%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.95%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.34%.

Stocks this morning are sharply lower, with the S&P 500 and Dow Jones Industrials falling to 4-month lows. Concern that the Fed will keep interest rates higher for longer is undercutting stocks today. Hawkish comments from Cleveland Fed President Mester and Atlanta Fed President Bostic pushed the 10-year T-note yield to a 16-year high when they signaled their support to keep interest rates higher for longer.

T-note yields pushed to their highs, and stocks fell further after this morning’s Aug JOLTS job openings unexpectedly rose +690,000 to 9.610 million, showing a stronger labor market than expectations for a decline to 8.815 million.

Late Monday night, Cleveland Fed President Mester said, "I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that have already occurred."

Atlanta Fed President Bostic said the Fed still "has a ways to go" on inflation, and he wants to hold interest rates at elevated levels "for a long time."

JPMorgan Asset Management warned that there’s a risk of further stock market declines due to rising interest rates, saying, “We have not anticipated such an increase in rates. This is something which will at least slow down, or even reverse, the progress of equity markets.”

The markets are discounting a 35% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 55% 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 today are moving higher. The 10-year T-note yield climbed to a 16-year high of 4.770% and is up +9.0 bp at 4.768%. The 10-year German bund yield is up +3.5 bp at 2.957%. The 10-year UK gilt yield rose to a 1-1/4 month high of 4.583% and is up +1.0 bp to 4.573%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -0.95%. China’s Shanghai Composite Index was closed for the Golden Week holidays. Japan’s Nikkei 225 today closed -1.64%.

Today’s stock movers…

McCormick (MCK) is down more than -8% to lead losers in the S&P 500 after reporting Q3 net sales of $1.68 billion, weaker than the consensus of $1.70 billion.

Airbnb (ABNB) is down more than -5% to lead losers in the Nasdaq 100 after KeyBanc Capital Markets downgraded the stock to sector weight from overweight.

Sealed Air (SEE) is down more than -2% after Truist Securities cut its price target on the stock to $38 from $43.

Goldman Sachs (GS) is down more than -3% to lead losers in the Dow Jones Industrials after Morgan Stanley cut its price target on the stock to $329 from $347.

The jump in the 10-year T-note yield to a new 16-year high is undercutting regional bank stocks. As a result, KeyCorp (KEY), Regions Financial (RF), Comerica (CMA), and Truist Financial (TFC) are down more than -2%. Also, Fifth Third Bancorp (FITB), Zions Bancorp (ZION), M&T Bank (MTB), Synchrony Financial (SYF), and Huntington Bancshares (HBAN) are down more than -1%.

WK Kellog (KLG) is down more than -5% after Goldman Sans initiated coverage of the stock with a recommendation of sell and a price target of $11.

Earnings concerns are weighing on cruise line stocks after analysts cut their price targets for Carnival by an average of 7.3% since it reported earnings last Friday. As a result, Carnival (CCL) is down more than -4%. Also, Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises (RCL) are down more than -2%.

Brown-Forman (BF/B) is up more than +2% to lead gainers in the S&P 500 after announcing a $400 million share buyback plan.

Boeing (BA) is up more than +2% to lead gainers in the Dow Jones Industrials after Reuters reported the company plans to raise production of its 737 jets to a record 57 planes per month by July 2025.

HP Inc (HPQ) is up more than +2% after Bank of America double-upgraded the stock to buy from underperform with a price target of $33.

CDW Corp (CDW) is up more than +1% after UBS initiated coverage on the stock with a buy recommendation and a price target of $237.

Intel (INTC) is up more than +1% to lead gainers in the Nasdaq 100 after MSCI ESG Research raised its credit rating on the stock to AAA from AA.

Fiverr International Ltd (FVRR) is up more than +1% after Roth MKM upgraded the stock to buy from neutral with a $33 price target.

Micron Technology (MU) is up nearly +1% after Japan’s government approved as much as 93 billion yen ($1.3 billion) in subsidies for the company’s new factory in Hiroshima.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -9 ticks, and the 10-year T-note yield is up +9.0 bp at 4.768%. Dec T-notes today slumped to a new 16-year nearest-futures low, and the 10-year T-note yield climbed to a 16-year high of 4.770%. T-notes retreated today on hawkish comments from Atlanta Fed President Bostic and Cleveland Fed President Mester, who signaled their support for higher interest rates for longer. T-notes dropped to their lows this morning after the Aug JOLTS job openings report unexpectedly increased, a sign of labor market strength that is hawkish for Fed policy.

The dollar index (DXY00) today is up by +0.03% at a 10-1/4 month high. Hawkish Fed comments that pushed T-note yields today are supporting the dollar. Also, the weakness in stocks today has boosted the liquidity demand for the dollar. The dollar fell back from its best levels after the yen rallied to a 1-1/2 week high on signs that Japan intervened in the currency market to support the yen.

EUR/USD (^EURUSD) today is unchanged. The euro today recovered from a 9-3/4 month low and is little changed as short-covering emerged when the dollar weakened on reports that Japan intervened in the forex market to support the yen. Hawkish ECB comments today also helped EUR/USD recover from early losses.

ECB Governing Council member Simkus said inflation still faces many "lines of resistance" and that "maintaining interest rates sufficiently high is very important and critically important on the path to returning inflation to the target."

ECB Chief Economist Lane said, "Price increases are still well above 2%, we are not at the inflation target yet, and therefore, there is still work to be done in terms of bringing inflation down." He added that ECB borrowing costs have now "reached a level that will make a substantial contribution to get inflation to target" and that the "base case is to maintain this level for as long as needed."

USD/JPY (^USDJPY) is down by -0.59%. The yen today recovered from an 11-1/2 month low against the dollar on reports that Japan was intervening in the forex market in support of the yen. Comments today from Japanese Finance Minister Suzuki warned of intervention when he said he won’t judge the possibility of forex intervention on currency levels but through market volatility. 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 0.785%. The yen today initially weakened on higher T-note yields.

December gold (GCZ3) today is down -1.7 (-0.09%), and Dec silver (SIZ23) is up +0.039 (+0.18%). Precious metals prices this morning are mixed, with gold posting a 6-3/4 month low. Dollar strength today is bearish for metals as the dollar index today rallied to a 10-1/4 month high. Also, higher global bond yields today are negative for metals. In addition, hawkish central bank comments were bearish for precious metals after Cleveland Fed President Mester, Atlanta Fed President Bostic, and ECB Governing Council member Simkus signaled their support for higher interest rates for longer. Finally, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low Monday.

Precious metals recovered from their worst levels today, with silver rebounding from a 6-1/2 month low and moving higher as the selloff in stocks sparked some safe-haven demand for precious metals.

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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.