What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.62%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.51%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.37%.

Stocks on Thursday posted moderate losses as T-note yields rose on the stronger-than-expected U.S. Sep CPI report.  Also, weekly U.S. initial unemployment claims were unchanged, stronger than expectations for a slight increase and a hawkish factor for Fed policy.  Thursday’s hawkish reports keep in play the possibility of one more Fed rate hike this year.  Stocks extended their losses Thursday afternoon when T-note yields rose even higher on weak demand for the Treasury’s $20 billion 30-year T-bond auction.

Concern that the conflict between Israel and Hamas will spread in the Middle East is another negative factor for stocks on reports that Israel carried out airstrikes on the main airports in Damascus and Aleppo in Syria.

U.S. Sep CPI rose +3.7% y/y, unchanged from Aug and stronger than expectations of a decline to +3.6% y/y.  Sep CPI ex-food and energy eased to 4.1% y/y from +4.3% y/y in Aug, right on expectations and the smallest increase in 2 years.

U.S. weekly initial unemployment claims were unchanged at 209,000, showing a slightly stronger labor market than expectations of an increase to 210,000.

Comments from Boston Fed President Collins suggest she favors pausing Fed rate hikes when she said, "The rise in long-term yields implies some tightening of financial conditions, and if it persists, it likely reduces the need for further monetary-policy tightening in the near term."

The markets are discounting a 12% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 38% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields Thursday moved higher.  The 10-year T-note recovered from a 1-1/2 week low of 4.515% and finished up +14.5 bp at 4.703%.  The 10-year German bund yield rebounded from a 2-1/2 week low of 2.685% and finished up +6.8 bp at 2.786%.  The 10-year UK gilt yield recovered from a 2-week low of 4.284% and finished up +9.4 bp at 4.423%. 

The account of the Sep 13-14 ECB meeting showed the decision to raise interest rates by 25 bp was a "close call," as policymakers assessed that the risks of tightening too much and the risks of tightening too little had become "more balanced."  The minutes suggest the ECB may pause its rate hike campaign. 

ECB Governing Council member Centeno said, "With the current level of interest rates, we will be making a substantial contribution to the 2% inflation objective.  We will get there by continuing this monetary policy stance, holding on for a while until we are totally sure that inflation is coming down."

ECB Governing Council member Wunsch said, "If we keep seeing inflation numbers aligned with the forecast, then we don't have to hike interest rates anymore."

Overseas stock markets Thursday settled mixed.  The Euro Stoxx 50 closed down -0.06%.  China’s Shanghai Composite Index closed up +0.94%. Japan’s Nikkei 225 today closed up +1.75 %.

Today’s stock movers…

Hormel Foods (HRL) closed down more than -9% to lead losers in the S&P 500 on disappointment in its investors’ day conference. 

Homebuilding stocks retreated after the average 30-year fixed mortgage rate rose to a 23-year high of 7.67%, which weighs on housing demand.  As a result, DR Horton (DHI), Lennar (LEN), and Toll Brothers (TOL) closed down more than -5%. Also, PulteGroup (PHM) closed down more than -4%. 

Keurig Dr Pepper (KDP) closed down more than -4% after Bernstein cut its price target on the stock to $37 from $40.

Boeing (BA) closed down more than -2% to lead losers in the Dow Jones Industrials after Ryanair Holdings Plc said Boeing’s delays of its 737 Max aircraft have worsened, and it expects only 40 deliveries of the jet by Jun 2024 versus the previous estimate of 57. 

Atlassian (TEAM) closed down more than -4% after it agreed to acquire vide-messaging startup Loom for $975 million. 

Commercial Metals (CMC) closed down more than -9% after reporting Q4 net sales of $1.90 billion, below the consensus of $2.12 billion. 

Ford Motor (F) closed down more than -2% after UAW autoworkers began a strike at the company’s largest plant in Kentucky. 

Jack Henry & Associates (JKHY) closed down more than -1% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $140.

Fastenal (FAST) closed up more than +7% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q3 EPS of 52 cents, above the consensus of 50 cents. 

Walgreens Boots Alliance (WBA) closed up more than +7% to lead gainers in the Dow Jones Industrials after announcing a $1 billion cost-cutting program and reducing its capital expenditures by about $600 million.

Strength in chip stocks was a positive factor for the overall market.  KLA Corp (KLAC) and Broadcom (AVGO) closed up more than +3%. Also, Lam Research (LRCX) closed up more than +2%.  In addition, Applied Materials (AMAT) and ASML Holding NV (ASML) closed up more than +1%. 

Adobe (ADBE) closed up more than +1%, adding to Wednesday’s +3% gain, on a positive response to its release of new features for generative AI models at the Max conference in Los Angeles. 

Albemarle (ALB) closed up more than +3% after being granted an extension for seven days to close its deal to acquire Liontown Resources Ltd for $4.2 billion. 

CME Group (CME) closed up more than +1% after Citigroup raised its price target on the stock to $240 from $215.

Target (TGT) closed up more than +1% after Bank of America upgraded the stock to buy from neutral with a price target of $135. 

Across the markets…

December 10-year T-notes (ZNZ23) Thursday closed down -22.5 ticks, and the 10-year T-note yield rose +14.5 bp to 4.703%.   Dec T-notes Thursday today fell back from a 2-week high and moved lower, and the 10-year T-note yield rebounded from a 1-1/2 week low of 4.515%.  T-notes erased overnight gains and turned lower on Thursday’s stronger-than-expected U.S. Sep CPI and weekly jobless claims reports, which are hawkish for Fed policy.  Also, an increase in inflation expectations was bearish for T-notes after the 10-year breakeven inflation rate climbed to a 1-week high Thursday at 2.345%.   T-notes dropped to their lows Thursday afternoon on weak demand for the Treasury’s $20 billion 30-year T-bond auction with a bid-to-cover ratio of 2.35, below the 10-auction average of 2.39. 

T-notes climbed from their lows as weakness in stocks sparked some safe-haven buying of government debt.  Also, comments from Boston Fed President Collins suggesting she favors pausing Fed rate hikes supported T-notes.

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