Stocks Retreat and Bond Yields Rise on a Hawkish Fed Outlook

Rich Asplund - Barchart - Mon Feb 6, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Monday closed down -0.61%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.87%.

Stock indexes Monday extended last Friday’s losses on concern the Fed will have to raise interest rates for longer after last Friday’s stronger-than-expected Jan payroll report. Stocks are also lower on concern about the escalation of U.S.-China geopolitical tensions after the U.S. shot down an alleged Chinese spy balloon over the weekend.

Negative corporate news Monday was another bearish factor for stock index futures. Semiconductor chip makers fell on demand concerns after Dell Technologies said it would cut about 5% of its global workforce due to plummeting demand for personal computers. Also, Tyson Foods closed down more than -4% after reporting weaker-than-expected Q1 sales. In addition, PayPal Holdings, Datadog, and Edwards Lifesciences closed down at least -3% after being downgraded.

Hawkish comments Monday from Atlanta Fed President Bostic were bearish for stocks when he said the stronger-than-expected U.S. Jan payroll report raises the possibility that the Fed will need to increase interest rates to a higher peak than policymakers had previously expected. He also said that he expects inflation to be in the "low 3s" this year, still well above the Fed's 2% target, requiring rates to be higher for longer.

Rising global bond yields were bearish for stocks, as the 10-year T-note yield climbed to a 1-month high of 3.653%, and the 10-year German bund yield climbed +10.4 bp to 2.299%.

On the positive side for stocks was an increase in M&A activity, with Catalent rising more than +19% after a Bloomberg report said that Danaher is interested in acquiring the company. Also, Life Storage closed up more than +11% after Public Storage made an $11 billion unsolicited bid for the company.

Overseas markets on Monday settled mixed. The Euro Stoxx 50 index closed down -1.23%. China’s Shanghai Composite stock index closed down -0.76%, and Japan’s Nikkei Stock index closed up +0.67%.

Today’s stock movers…

Chip makers retreated Monday on demand concerns after Dell Technologies said it would cut about 6,650 jobs, or about 5% of its global workforce, due to plummeting demand for personal computers. Intel (INTC) closed down by more than -5% Monday to lead losers in the Dow Jones Industrials and Nasdaq 100. Also, Micron Technology (MU) and Marvel Technology (MRVL) closed down more than -3%. In addition, Advanced Micro Devices (AMD) and ASML Holding NV (ASML) closed down more than -2%.

Tyson Foods (TSN) closed down more than -4% after reporting Q1 sales of $13.26 billion, below the consensus of $13.52 billion.

Newmont (NEM) closed down more than -4% after it offered to buy Newcrest Mining in a deal worth $17 billion.

Datadog (DDOG) closed down more than -3% after KeyBanc Capital Markets downgraded the stock to sector weight from overweight.

Edwards Lifesciences (EW) closed down more than -3% after Raymond James downgraded the stock to market perform from outperform.

PayPal Holdings (PYPL) closed down more than -3% after Raymond James downgraded the stock to market perform from outperform.

Catalent (CTLT) closed up more than +19% to lead gainers in the S&P 500 after a Bloomberg report said that Danaher is said to be interested in acquiring the company.

Life Storage (LSI) closed up more than +11% after Public Storage made an $11 billion unsolicited bid for the company.

Defense contractors moved higher Monday on rising geopolitical tension with China after the U.S. shot down an alleged Chinese spy balloon over the weekend. As a result, Huntington Ingalls Industries (HII) and Lockheed Martin (LMT) closed up more than +2%. Also, Northrup Grumman (NOC) closed up more than +1%.

Consumer staple stocks moved higher Monday as a defensive play against a decline in the broader market. Campbell Soup (CPB), General Mills (GIS), and Kellogg (K) closed up more than +2%. Also, Hershey (HSY), PepsiCo (PEP), Kraft Heinz (KHC), and Conagra Brands (CAG) closed up more than +1%.

Tesla (TSLA) closed up more than +2% after the company raised the prices of its Model Y SUV in the U.S. and after CEO Musk was cleared by a federal jury on a suit about defrauding investors.

Across the markets…

March 10-year T-notes (ZNH23) on Monday closed down -29.5 ticks, and the 10-year T-note yield rose by +10.4 bp to 3.629%. Mar T-notes Monday extended last Friday’s sell-off to a 1-month low, and the 10-year T-note yield rose to a 1-month high of 3.653%. T-note prices were under pressure on negative carry-over from last Friday’s stronger-than-expected U.S. Jan payroll and Jan ISM services reports, which bolstered the outlook for the Fed to continue raising interest rates. T-notes dropped to their lows Monday afternoon on comments from Atlanta Fed President Bostic, who said the stronger-than-expected U.S. Jan payroll report raised the possibility that the Fed will need to increase interest rates to a higher peak than policymakers had previously expected.

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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.