Stocks Give Up Early Gains as Bond Yields Resume Their Climb

Rich Asplund - Barchart - Wed Sep 27, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.08%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.28%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.11%.

Stocks this morning are mixed, with the Dow Jones Industrials falling to a 3-1/2 month low. The broader market gave up early gains and turned lower after T-note yields resumed their upward trend after the 10-year German bund yield climbed to a new 12-year high. Stocks initially moved higher this morning after T-note yields fell on dovish comments today from Minneapolis Fed President Kashkari, who said a government shutdown and a prolonged auto strike may require the Fed to do less.

Stocks also have support after Senate Democratic and Republican leaders Tuesday evening agreed on a plan to keep the government open through mid-November and provide $6 billion in assistance to Ukraine. However, the plan to avert a government shutdown on October 1 still needs to overcome gridlock in the House.

The Mortgage Bankers Association (MBA) reported that U.S. mortgage applications fell -1.3% w/w in the week ended September 22. The home purchase sub-index fell -1.5%, and the refinancing sub-index fell -0.9%. The average 30-year fixed rate mortgage rose 10 bp to 7.41%, the highest in 22 years.

U.S. Aug capital goods new orders nondefense ex-aircraft rose +0.9% m/m, stronger than expectations of +0.1% m/m and the biggest increase in 7 months.

Minneapolis Fed President Kashkari said a government shutdown and a prolonged auto strike may slow the U.S. economy, which would mean the Fed "would have to less with monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us."

The markets are discounting a 24% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 47% 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 higher. The 10-year T-note yield matched Tuesday’s 16-year high of 4.562% and is up +1.9 bp at 4.554%. The 10-year German bund yield rose to a 12-year high of 2.831% and is up +2.2 bp at 2.830%. The 10-year UK gilt yield rose to a 1-week high of 4.366% and is up +2.8 bp at 4.354%.

Overseas stock markets are mixed today. The Euro Stoxx 50 is down -0.10%. China’s Shanghai Composite Index closed +0.16%. Japan’s Nikkei 225 today closed +0.18%.

Today’s stock movers…

Energy stocks and energy service companies are climbing, with the price of WTI crude up more than +3%. As a result, Haliburton (HAL), Hess Corp (HES), Marathon Oil (MRO), and Occidental Petroleum (OXY) are up more than +3%. Also, Devon Energy (DVN), Schlumberger (SLB), APA Corp (APA), and ConocoPhillips (COP) are up more than +2%. In addition, Chevron (CVX), Exxon Mobil (XOM), Diamondback Energy (FANG), and Valero Energy (VLO) are up more than +1%.

Paychex (PAYX) is up more than +3% to lead gainers in the Nasdaq 100 after reporting Q1 adjusted EPS of $11.4, above the consensus of $1.12.

ResMed (RMD) is up more than +2% in pre-market trading, adding to Tuesday’s +3% gain after Goldman Sachs said it sees less impact from weight loss drugs on the obstructive sleep apnea market.

Public Storage (PSA) is up more than +2% after Goldman Sachs raised its recommendation on the stock to buy from suspended coverage and assigned a price target of $310.

MillerKnoll (MLKN) is up more than +26% after reporting Q1 net sales of $917.7 million, stronger than the consensus of $896 million.

Costco Wholesale (COST) is up more than +2% after reporting Q4 total revenue of $78.94 billion, above the consensus of $77.72 billion.

Hasbro (HAS) is up more than +1%, and Mattel (MAT) is up more than +4% after Morgan Stanley initiated coverage of the stocks with a recommendation of overweight.

Johnson Controls International Plc (JCI) is up more than +1% after HSBC upgraded the stock to buy from hold with a price target of $69.

Levi Strauss & Co (LEVI) is up more than +1% after Cowen started coverage on the stock with an outperform rating and a $16 price target.

CVS Health (CVS) is down more than -1% after pharmacists at the company’s stores in Kansas City, Missouri, planned to resume walkouts due to staffing shortages and poor working conditions.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -2 ticks, and the 10-year T-note yield is up +1.9 bp at 4.554%. Dec T-notes today are slightly lower and just above Tuesday’s 16-year nearest-futures low, and the 10-year T-note yield matched Tuesday’s 16-year high of 4.562%. T-notes gave up early gains and turned lower on negative carryover from a slump in 10-year German bunds to a 12-year low. Also weighing on T-notes was today’s news that showed Aug capital goods new orders nondefense ex-aircraft rose more than expected. In addition, supply pressures are bearish for T-notes as the Treasury will auction $49 billion of 5-year T-notes and $24 billion of 2-year floating-rate notes later today as part of this week’s $158 billion auctions of T-notes and floating-rate notes.

T-notes today initially moved higher after Minneapolis Fed President Kashkari said a government shutdown and a prolonged auto strike might slow the U.S. economy, meaning the Fed would need to do less.

The dollar index (DXY00) today is up by +0.26% and posted a 9-3/4 month high. The dollar found support from today’s stronger-than-expected U.S. Aug capital goods new orders report. , weakness in the euro and the yen is supporting the dollar as the euro fell to an 8-1/2 month low against the dollar, and the yen tumbled to an 11-month low against the dollar.

EUR/USD (^EURUSD) today is down by -0.56% and dropped to an 8-1/2 month low. Dollar strength today is weighing on the euro. Also, the action by five German economic institutes to downgrade their German 2023 GDP projections to contraction is bearish for EUR/USD. In addition, weaker-than-expected measures of consumer confidence in France and Germany are undercutting the euro after the France Sep consumer confidence indicator fell to a 4-month low and the German Oct GfK consumer confidence index fell to a 6-month low.

Reuters reported that five German economic institutes downgraded their German 2023 GDP projection to a contraction of -0.6% from a previous projection of an expansion of +0.3%.

ECB Executive Board member Elderson said interest rates haven't necessarily reached their high point even after a tenth straight hike this month.

Eurozone Aug M3 money supply fell a record -1.3% y/y, weaker than expectations of -1.0% y/y.

The German Oct GfK consumer confidence index fell -0.9 to a 6-month low of -26.5, weaker than expectations of -26.0.

The French Sep consumer confidence indicator fell -2 to a 4-month low of 83, weaker than expectations of 84.

USD/JPY (^USDJPY) is up by +0.21%. The yen today retreated for the fourth consecutive session and posted an 11-month low against the dollar. Central bank divergence continues to weigh on the yen, with the BOE, ECB, and the Fed all raising interest rates while the BOJ maintains record-low interest rates.

Today’s Japanese economic news supported the yen after the Japan Jul leading index CI was revised upward by +0.6 to108.2 from the previously reported 107.6.

October gold (GCV3) today is down -17.5 (-0.92%), and Dec silver (SIZ23) is down -0.541 (-2.33%). Precious metals prices today are moderately lower, with gold matching a 6-1/2 month low and silver posting a 1-1/2 week low. Today’s rally in the dollar index to a 9-3/4 month high is bearish for metals prices. Also, speculation the Federal Reserve will keep interest rates higher-for-longer is undercutting metals prices. In addition, gold prices are also being weighed down by long liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Tuesday. Silver prices also saw some pressure after German economic institutes downgraded their German 2023 GDP projection to a contraction of -0.6% from a previous projection of an expansion of +0.3%, a negative factor for industrial metals demand.

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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.