Stocks Fall and Bond Yields Rise on Hawkish FOMC Meeting Minutes

Rich Asplund - Barchart - Wed Jul 5, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.20%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.38%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.03%.

Stock indexes Wednesday settled with modest losses. The broader market was under pressure Wednesday after weaker-than-expected news on China’s services industry sparked concerns about the outlook for the global economy. The China Caixin Jun services PMI fell -3.2 to a 5-month low of 53.9, weaker than expectations of 56.2.

Stock indexes remained lower as T-note yields rose Wednesday afternoon following the release of the hawkish minutes of the Jun 13-14 FOMC meeting. The minutes stated that "some" officials favored an interest rate hike but went along with a pause, and almost all officials expected more rate increases this year. Policymakers supporting a hike cited tight labor markets and relatively few signs that inflation was slowing toward the Fed's 2% goal.

Strength in the mega-cap tech stocks of Meta Platforms and Alphabet on Wednesday limited losses in the Nasdaq 100. Meta rallied on speculation that its Threads app, an alternative to Twitter, could gain support on concern users of Twitter may abandon the platform after Twitter announced it would limit users to around 600 tweets a day. Alphabet moved higher after Piper Sandler raised its price target on the stock.

Wednesday’s U.S economic news was weaker-than-expected and bearish for stocks after May factory orders rose +0.3% m/m, weaker than expectations of +0.8% m/m.

The markets are discounting the odds at 85% for a +25 bp rate hike at the next FOMC meeting on July 25-26. The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields Wednesday moved higher. The 10-year T-note yield rose +8.9 bp t0 3.943%. The 10-year German bund yield rose +2.5 bp to 2.478%, and the 10-year UK Gilt yield rose +7.9 bp at 4.494%.

Overseas stock markets Wednesday settled lower. The Euro Stoxx 50 closed down -0.92%. China’s Shanghai Composite Index closed down -0.69%. Japan’s Nikkei Stock Index closed down -0.25%.

Today’s stock movers…

Semiconductor stocks retreated Wednesday after China imposed restrictions on exporting gallium and germanium, two metals crucial to parts of the chip industry. As a result, ON Semiconductor (ON) closed down more than -4% to lead losers in the Nasdaq 100, and Intel (INTC) closed down more than -3% to lead losers in the Dow Jones Industrials. Also, Lam Research (LRCX), KLA Corp (KLAC), Qualcomm (QCOM) closed down more than -3%. In addition, Microchip Technology (MCHP), ASML Holding NV (ASML), Micron Technology (MU), Marvell Technology (MRVL), and Globalfoundries (GFS) closed down more than -2%. Finally, Applied Materials (AMAT), Texas Instruments (TXN), Advanced Micro Devices (AMD), and NXP Semiconductors NV (NXPI) closed down more than -1%.

Generac Holdings (GNRC) closed down more than -8% to lead losers in the S&P 500 on signs of insider selling after an SEC filing showed CEO Jagdfeld sold $745,750 of shares on Monday.

Qorvo (QRVO) closed down more than -5%, and Skyworks Solutions (SWKS) closed down more than -3% after Wells Fargo Securities said the companies would be impacted by China’s decision to restrict exports of rare metals gallium and germanium.

United Parcel Service (UPS) closed down more than -2% on strike concerns after talks between the company and the Teamsters union fell apart this morning.

Mining stocks were under pressure Wednesday as the latest negative economic news from China, the U.S., and the Eurozone fueled concerns over the demand outlook for industrial metals. As a result, Freeport-McMoRan (FCX) and ArcelorMittal (MT) closed down more than -3%.

Steel Dynamics (STLD) and U.S. Steel (X) closed down more than -4% after BXP Paribas Exane downgraded the stocks to neutral from outperform.

Fidelity National Information Services (FIS) closed up more than +3% and added to Monday’s +6% surge on reports private equity firm GTCR is in advanced talks to buy a majority stake in the merchant acquiring business of Fidelity National Information Services.

Meta Platforms (META) closed up more than +2% on speculation the company’s Threads app, an alternative to Twitter, could gain support on concern users of Twitter may abandon the platform after Twitter announced it would limit users to around 600 tweets a day.

Alphabet (GOOGL) closed up more than +1% after Piper Sandler raised its price target on the stock to $140 from $128.

Moderna (MRNA) closed up more than +1% after it announced a $1 billion investment in China and said it signed a deal to make mRNA vaccines for China.

Netflix (NFLX) closed up more than +1% after Goldman Sachs upgraded the stock to neutral from underperform, saying management has executed its password-sharing crackdown more efficiently than expected.

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed down -18.5 ticks, and the 10-year T-note yield rose +8.9 bp to 3.943%. Sep T-notes Wednesday dropped to a 3-3/4 month low, and the 10-year T-note yield rose to a 3-3/4 month high of 3.945%. T-note prices are under pressure on the outlook for tighter Fed policy. The markets are discounting the odds at 85% for a +25 bp rate hike at the next FOMC meeting on July 25-26. T-note losses accelerated Wednesday afternoon after the release of the hawkish minutes of the Jun 13-14 FOMC meeting as policymakers stated they expected more rate increases this year.

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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.