Stocks Fall as Recession Odds Rise on Weak PMI Reports

Rich Asplund - Barchart - Fri Jun 23, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday fell by -0.77%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.65%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -1.00%.

U.S. stocks were undercut by Friday’s weak U.S. and Eurozone purchasing manager index (PMI) reports, which indicated that the U.S. and Eurozone economies are struggling even as the Fed and the ECB plan further rate hikes.

Stocks Friday did not get much of a lift from lower global bond yields, which fell on the weak U.S. and Eurozone PMI reports. The 10-year T-note yield fell by -6.2 bp, the German 10-year bund yield fell sharply by -14 bp, and the 10-year UK gilt yield fell by -5 bp.

Even before the PMI reports, investors were in a gloomy mood after Fed Chair Powell earlier this week warned that higher interest rates are likely and after the Bank of England raised rates by +50 bp. The FOMC, at its meeting last week, left its funds rate target range unchanged at 5.00%/5.25% but raised its dot-plot forecast to indicate FOMC members expect a further +50 bp rate hike by the end of this year. The markets are discounting the odds at 72% for a +25 bp rate hike at the next FOMC meeting on July 25-26, and are almost fully anticipating that +25 bp rate hike by November.

The markets currently expect weak U.S. GDP growth in the second half of the year, with a consensus of a 65% chance of a recession. The consensus among economists is for U.S. GDP growth of unchanged in Q3 and a -0.4% decline in Q4, according to a Bloomberg monthly survey released Friday. That would just narrowly avoid the short-hand definition of a recession of back-to-back quarters of negative growth.

Friday’s preliminary-June S&P U.S. PMI fell by -2.1 points to a 6-month low of 46.3, weaker than expectations for a +0.1 point increase to 48.5. The services PMI fell -0.8 points to a 2-month low of 54.1, which was slightly better than expectations for a -0.9 point drop to 54.0. The composite PMI fell by -1.3 points to a 3-month low of 53.0, which was weaker than expectations for a -0.8 point drop to 53.5.

Friday’s Eurozone PMI report suggested that the Eurozone might be in for another quarter of negative growth in Q2 after Eurozone GDP fell slightly by -0.1% q/q in both Q4-2022 and Q1-2023, meeting the short-hand definition of a recession. The consensus is that Eurozone GDP will show a slight increase of +0.1% q/q in Q2, but Friday’s weak PMI report called that forecast into question.

The preliminary-June S&P Eurozone composite PMI fell by -2.5 points to a 5-month low of 50.3, much weaker than market expectations of 52.5. The preliminary-June S&P Eurozone manufacturing PMI fell by -1.2 points to a very weak 43.6, which was weaker than expectations of unchanged at 44.8. The preliminary-June S&P Eurozone services PMI fell by -2.7 points to 52.4, weaker than expectations for a -0.6 point drop to 54.5. The preliminary-June S&P German composite PMI fell by -3.1 points to 50.8, while the French composite PMI fell by -3.9 points to 47.3.

On the more positive side, Eurozone input prices fell to the lowest level since December 2020, and selling prices for goods and services fell to the lowest level since March 2021.

Atlanta Fed President Bostic Friday delivered dovish comments for the second time this week, saying that he thinks rates should remain unchanged through year-end and long into next year.

Overseas stock markets were weak Friday. The Euro Stoxx 50 closed down -0.76%, for the fifth consecutive daily decline. Japan’s Nikkei Stock Index Friday closed down -1.45%. China’s stock market was closed on Thursday and Friday for public holidays.

Today’s stock movers…

Breadth in the Nasdaq 100 index Friday was bearish, with all but 14 of the index components showing a loss. Notable decliners included Tesla (TSLA) with a -3.0% loss, Starbucks (SBUX) with a -2.5% loss, and PayPal (PYPL) with a -2.4% loss.

U.S.-listed Chinese stocks were near the top of the decliner list with JD.com (JD) falling -4.7% and PDD Holdings (PDD) falling -4.2%.

Bitcoin (^BTCUSD) Friday extended this week’s rally to a 1-year high and was up +2.3% late Friday afternoon, bringing the week’s rally to a total of +15%. Bitcoin rose mainly on the recent physical bitcoin ETF applications to the SEC from Blackrock, Wisdom Tree, Schwab, and others, which indicated confidence in the long-term prospects for crypto. Marathon Digital (MARA) Friday rallied +7.8%, Coinbase (COIN) rallied +7.3%, Bit Digital (BTBT) rallied +5.9%, and Riot Blockchain (RIOT) rallied +3.5%.

Energy stocks were undercut after August WTI crude oil fell sharply by -4.16% on Thursday and -0.50% on Friday. On Friday, Marathon Oil (MRO) fell -1.04%, Haliburton (HAL) fell -0.91%, and Exxon (XOM) fell -0.56%.

Tesla (TSLA) fell -3.0% on some end-week fatigue after Tesla received three downgrades earlier in the week from Morgan Stanley, Barclays, and DZ Bank.

Accenture (ACN) fell -2.87% after TD Cowen cut its rating to market perform from outperform due to warning signs for demand.

Under Armour (UAA) fell -2.86% on a downgrade by Wells Fargo to equal-weight from overweight due to its view that the stock will stagnate during the next 6-12 months.

Virgin Galactic (SPCE) fell by -18.42% after the company announced a plan to sell up to $400 million of its stock over time.

Sofi Technologies (SOFI) fell -2.47% after Compass Point started its research coverage with a sell rating.

CarMax (KMX) rallied +10.07% after reporting better-than-expected fiscal Q1 adjusted profit of $1.44 per share, well above the consensus of 80 cents.

Wayfair (W) rose by +0.4% on an upgrade by Moffett Nathanson to market perform from underperform.

Across the markets…

September 10-year T-notes (ZNU23) Friday closed up +11 ticks, and the 10-year T-note yield fell -6.2 bp to 3.733%. T-note prices rallied on the weak U.S. and Eurozone PMI reports and on safe-haven demand with the sell-off in stocks. T-note prices also saw support from dovish comments from Atlanta Fed President Bostic.

The T-note market early next week will see supply pressures as the Treasury sells $42 billion of 2-year T-notes on Monday, $43 billion of 5-year T-notes on Tuesday, and $35 billion of 7-year T-notes on Wednesday. The Treasury will also sell $22 billion of 2-year floating rate notes on Wednesday.

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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.