Stocks Pressured as Bond Yields Rise on Bank of Canada Rate Hike

Rich Asplund - Barchart - Wed Jun 7, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.15%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.68%.

U.S. stocks this morning gave up early gains and are mixed. Strength in energy stocks and chip stocks are supportive of the overall market. However, stocks fell back from their best levels after the Bank of Canada unexpectedly raised interest rates. Stocks are being undercut by concern about slowing global demand after China’s May exports fell more than expected.

Market expectations for the Fed to raise the fed funds target range by +25 bp at next week’s FOMC meeting rose to 34% from 23% Tuesday after today’s unexpected BOC rate hike.

The Bank of Canada unexpectedly raised its key rate by +25 bp to 4.75% from 4.50% and said demand “looks to be more persistent” than it expected, and “concerns have increased” inflation may get stuck above 2%.

The U.S Apr trade deficit widened to -$74.6 billion from -$64.2 billion in Mar, the largest deficit in six months but smaller than expectations of -$75.8 billion.

The Organization for Economic Cooperation and Development (OECD) forecast 2023 global GDP of +2.7%, below the +3.3% pace in 2022.

Global bond yields are higher. The 10-year T-note yield rose to a 1-week high of 3.766% and is up +10.2 bp at 3.762%. The 10-year German bund yield rose to a 1-week high of 2.439% and is up +6.6 bp at 2.438%, and the UK 10-year gilt yield is up +3.0 bp at 4.237%.

On the bullish side of stocks, chip makers are moving higher today to lead gainers in technology stocks. Also, energy stocks are moving higher, with WTI crude prices up more than +1%. In addition, Brown-Forman is up more than +2% after reporting better-than-expected Q2 EPS.

On the bearish side, packaged-food stocks are moving lower, led by a -5% fall in Campbell Soup after it forecasted full-year adjusted EPS below consensus. Also, United Natural Foods is down more than -21% after reporting Q3 adjusted EPS below consensus and cutting its full-year adjusted EPS forecast. In addition, Couchbase is down more than -20% after forecasting a bigger than-expected Q2 operating loss.

Overseas stock markets are mixed. The Euro Stoxx 50 is down -0.19%. China’s Shanghai Composite closed up +0.08%, and Japan’s Nikkei Stock Index closed down -1.82%.

Today’s stock movers…

Chip makers are moving higher today to lead a rally in technology stocks. Microchip Technology (MCHP) is up more than +4% to lead gainers in the Nasdaq 100. Also, Globalfoundries (GFS) and NXP Semiconductor NV (NXPI) are up more than +3%. In addition, Marvell Technology (MRVL), Applied Materials (AMAT), Analog Devices (ADI), and ON Semiconductor (ON) are up more than +2%.

Energy stocks and energy service providers are moving higher, with WTI crude prices up more than +1%. Marathon Oil (MRO) is up more than +4%. Also, APA Corp (APA), ConocoPhillips (COP), and Diamondback Energy (FANG) are up more than +3%. In addition, Exxon Mobil (XOM), Chevron (CVX), and Haliburton (HAL) are up more than +2%.

Brown-Forman (BF/B) is up more than +2% after reporting Q2 EPS of 43 cents, better than the consensus of 42 cents.

Dave & Buster’s Entertainment (PLAY) is up more than +24% after reporting Q1 EPS of $1.45, stronger than the consensus of $1.25.

Super Micro Computer (SMCI) is up more than +9% after Rosenblatt Securities initiated coverage of the stock with a buy rating.

Tesla (TSLA) is up more than +1% after the U.S. Treasury Department said the car maker’s Model 3 sedans became eligible for the full $7,500 tax credit under new criteria for battery sourcing.

Packaged-food stocks are selling off today, with Campbell Soup (CPB) down more than -5% to lead losers in the S&P 500 after forecasting full-year adjusted EPS of $2.95-$3.00, below the consensus of $3.02. Also, General Mills (GIS), Kellogg (K), and Kraft Heinz Foods (KHC) are down more than -2%.

Datadog (DDOG) is down more than -4% to lead losers in the Nasdaq 100 after an SEC filing showed CEO Pomel sold $1.87 million of shares last Friday.

Fair Isaac (FICO) is down more than -3% on signs of insider selling after director Rey sold $791,054 worth of shares last Friday.

United Natural Foods (UNFI) is down more than -21% after reporting Q3 adjusted EPS of 54 cents, well below the consensus of 65 cents, and cut its full-year adjusted EPS forecast to $1.80-$2.30 from a previous forecast of $3.05-$3.90, weaker than the consensus of $3.35.

Couchbase (BASE) slumped more than -14% in pre-market trading after forecasting a Q2 operating loss of -$10.1 million to -$10.9 million, wider than the consensus of -$9.79 million.

Casey’s General Stores (CASY) dropped more than -4% in pre-market trading after reporting Q4 revenue of $3.33 billion, below the consensus of $3.38 billion.

Across the markets…

September 10-year T-notes (ZNU23) today are down -16 ticks, and the 10-year T-note yield is up +10.2 bp at 3.762%. Sep T-notes this morning fell to a 1-week low, and the 10-year T-note yield rose to a 1-week high of 3.766%. T-notes are weighed down by carry-over weakness from a decline in 10-year German bunds to a 1-week low on hawkish ECB comments. T-notes dropped to their lows this morning after the BOC unexpectedly raised interest rates.

The dollar index (DXY00) this morning is down -0.09%. The dollar is under pressure on expectations the Fed will pause its rate-hike campaign at next week’s FOMC meeting. The market expects only a 34% chance the Fed raises the fed funds target range by 25 bp next week. The dollar recovered from its worst levels after the 10-year T-note yield rose to a 1-week high.

EUR/USD (^EURUSD) today is up by +0.35%. Central bank divergence is boosting the euro today on the prospects for the Fed to pause raising interest rates next week while the ECB raises rates. Also, hawkish comments today from ECB Executive Board member Schnabel and ECB Governing Council member Knot boosted EUR/USD when they said they favored additional rate hikes from the ECB.

Eurozone economic news today was bearish for the euro. German Apr industrial production rose +0.3% m/m, weaker than expectations of +0.6% m/m. Also, Italy’s Apr retail sales rose +0.2% m/m, weaker than expectations of +0.3% m/m.

Hawkish ECB comments today were bullish for EUR/USD. ECB Executive Board member Schnabel said the ECB has "more ground to cover" on raising interest rates as core inflation proves stubborn. Also, ECB Governing Council member Knot said, "I'm not yet convinced that the ECB's current tightening is sufficient" and that prolonged inflation may prompt further increases in borrowing costs.

USD/JPY (^USDJPY) today is down by -0.29%. Dollar weakness today has sparked some short covering in the yen. The yen also has support on signs of strength in Japan’s economy as Japan was the only G-7 country to see its manufacturing sector in expansion territory in May, according to PMI data. A slump in Japanese stocks today also boosted safe-haven demand for the yen after the Nikkei Stock Index fell -1.8%.

The Japan Apr leading index CI rose +0.7 to a 5-month high of 97.6, although weaker than expectations of 98.2.

August gold (GCQ3) this morning is down -9.4 (-0.47%), and July silver (SIN23) is up +0.225 (+0.95%). Precious metals prices this morning are mixed. Higher T-note yields today are undercutting gold prices. Also, hawkish comments today from ECB Executive Board member Schnabel and ECB Governing Council member Knot undercut gold prices when they said they favored additional rate hikes from the ECB. In addition, the unexpected rate hike from the Bank of Canada today weighed on gold prices.

However, a weaker dollar today is supportive of metals prices along with expectations for the Fed to pause its rate hike campaign at next week’s FOMC meeting. Silver also has carry-over support from a rally in copper prices today to a 3-1/2 week high.

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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.