Stocks Post Mild Losses After Inflation Expectations Unexpectedly Rise

Rich Asplund - Barchart - Fri May 12, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed down -0.16%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.37%.

Stock indexes Friday gave up early gains and closed moderately lower, with the Dow Jones Industrials falling to a 1-week low. Stocks retreated Friday on inflation fears after a gauge of long-term inflation expectations from the monthly University of Michigan survey unexpectedly rose to a 12-year high. Also, the University of Michigan U.S. May consumer sentiment index fell more than expected to a 6-month low.

Stocks Friday morning initially opened higher on signs of progress on a deal to raise the debt ceiling after President Biden and House Speaker McCarthy postponed Friday’s scheduled meeting due to reports of progress in staff-level talks.

Market sentiment also improved Friday as officials from China and the U.S. are taking steps to repair ties between the countries after U.S. Security Adviser Sullivan met with top Chinese diplomat Wang Yi to ease tensions.

The banking turmoil has prompted investors to withdraw from financial stocks and move into technology stocks. Bank of America said EPFR Global data show investors poured $3.8 billion into technology stocks in the week through May 10, the largest inflow since December 2021. Conversely, investors pulled $2.1 billion from financial stocks, the largest redemption in a year.

Fed Governor Bowman said inflation rates remain much too high, and she expects interest rates will need to stay restrictive for some time.

The U.S. Apr import price index ex-petroleum fell -0.1% m/m, the third consecutive month prices have fallen but a smaller decline than expectations of -0.3% m/m.

The University of Michigan U.S. May consumer sentiment index fell -5.8 to a 6-month low of 57.7, weaker than expectations of 63.0.

Longer-term inflation expectations unexpectedly rose after the University of Michigan U.S. May 5-10 year inflation expectations rose +0.2 to a 12-year high of +3.2% versus expectations of a decline of +2.9%.

Global bond yields Friday moved higher. The 10-year T-note yield rose +7.1 bp to 3.455%. The 10-year German bund yield rose +5.1 bp at 2.276%, and the UK 10-year gilt yield rose +7.1 bp to 3.778%.

On the bearish side for stocks, Gen Digital closed down more than -5% after reporting Q4 cash flow that was below consensus. Also, regional bank stocks moved lower as sentiment in the sector remained negative. In addition, cruise line operators fell after the decline in the University of Michigan U.S. May consumer sentiment index to a 6-month raised concerns about discretionary consumer spending.

On the bullish side, News Corp closed up more than +8% after reporting stronger-than-expected Q3 revenue. Also, Charles Schwab closed up more than +2% after reporting April new brokerage accounts and April net new client assets increased. In addition, Blue Bird closed up more than +36% after reporting Q2 adjusted Ebitda well above the consensus and raising its full-year adjusted Ebitda estimate.

Overseas stock markets Friday settled mixed. The Euro Stoxx 50 closed up +0.19%. China’s Shanghai Composite closed down -1.12%, and Japan’s Nikkei Stock Index closed up +0.90%.

Today’s stock movers…

Gen Digital (GEN) closed down more than -5% to lead losers in the S&P 500 after reporting Q4 cash flow from operations of $3324 million, well below the consensus of $448.8 million.

Regional bank stocks are under pressure as sentiment remains negative toward the sector. Lincoln National (LNC) closed down more than -4%, and Comerica (CMA) closed down more than -2%. Also, Bank of New York Mellon (BK), Synchrony Financial (SYF), and Zions Bancorp (ZION) closed down more than -1%.

The decline in the University of Michigan U.S. May consumer sentiment index to a 6-month low has raised concerns about discretionary consumer spending that is weighing on cruise line operators. As a result, Carnival (CCL) closed down -4%, Norwegian Cruise Line Holdings (NCLH) closed down more than -3%, and Royal Caribbean Cruises Ltd (RCL) closed down more than -1%.

Catalent (CTLT) closed down more than -3% after Jeffries cut its price target on the stock to $45 from $83.

SiriusPoint Ltd (SPNT) closed down more than -8% after Dan Loeb said he is no longer exploring an acquisition of the company.

Twilio (TWLO) closed down more than -3% after Mizuho Securities downgraded the stock to neutral from buy.

News Corp (NWSA) closed up more than +8% after reporting Q3 revenue of $2.45 billion, above the consensus of $2.38 billion.

Charles Schwab (SCHW) closed up more than +2% after reporting April new brokerage accounts were 331,000, with April net new client assets of $13.6 billion.

Ross Stores (ROST) closed up more than +1% after Bloomberg Intelligence said the company’s Q1 revenue could be up +3.3% y/y when it reports earnings next Thursday, at the upper end of guidance of +1% to +4%.

Seagate Technology Holdings Plc (STX) closed up more than +1% after Wellington Management Group reported a new 1.8% position in the company in Q1.

Blue Bird (BLBD) closed up more than +36% after reporting Q2 adjusted Ebitda of $19.8 million, well above the consensus of $10.1 million, and raising its full-year adjusted Ebitda estimate to $55 million-$65 million from a prior estimate of $40 million-$46 million, stronger than the consensus of $40.6 million.

Across the markets…

June 10-year T-notes (ZNM23) on Friday closed down -19.5 ticks, and the 10-year T-note yield rose by +7.1 bp to 3.455%. June T-notes Friday moved moderately lower after long-term U.S. inflation expectations rose in the monthly University of Michigan survey. Also, hawkish comments Friday from Fed Governor Bowman weighed on T-notes when she said interest rates would need to stay restrictive for some time. However, losses were limited after the University of Michigan’s U.S. May consumer sentiment index fell more than expected to a 6-month low.

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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.