Stocks Fall as Economic Strength May Keep Interest Rates Higher for Longer

Rich Asplund - Barchart - Wed Sep 6, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.70%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.57%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.88%.

Stocks on Wednesday posted moderate losses, with the S&P 500 and Nasdaq 100 posting 1-week lows and the Dow Jones Industrials posting a 1-1/2 week low. Stocks opened lower Wednesday on negative carryover from a fall in the Euro Stoxx 50 to a 1-1/2 week low on weaker-than-expected Eurozone economic news.

Stocks extended their losses as bond yields jumped after Wednesday’s Aug ISM services report expanded more than expected, bolstering speculation the Fed will keep interest rates higher for longer. The U.S. Aug ISM services index unexpectedly rose +1.8 to a 6-month high of 54.5, stronger than expectations of a decline to 52.5.

The U.S. Jul trade deficit widened to -$65.0 billion from -$63.7 billion in June, a smaller deficit than expectations of -$68.0 billion.

The Fed Beige Book was neutral for stocks as it stated U.S. economic activity was modest during July and August, and most districts said price growth slowed overall. Also, job growth was subdued across the U.S. during the survey period.

Boston Fed President Collins said it's "too early" to say if inflation is on a sustained path to 2%, and further tightening may be warranted depending on the data. She added that the Fed will "need to hold rates at restrictive levels for some time" as while demand is moderating, it continues to outpace supply, adding to price pressures.

The markets are discounting the odds at 7% for a +25 bp rate hike at the September 20 FOMC meeting and 50% for that +25 bp rate hike at the November 1 FOMC meeting.

Global bond yields Wednesday moved higher. The 10-year T-note yield rose to a 2-week high of 4.302% and finished up +2.8 bp at 4.288%. The 10-year German bund yield rose to a 2-week high of 2.664% and finished up +4.2 bp at 2.653%. The 10-year UK gilt yield rose to a 2-week high of 4.559% and finished up +0.8 bp at 4.533%.

Overseas stock markets Wednesday settled mixed. The Euro Stoxx 50 closed down -0.72%. China’s Shanghai Composite Index closed up +0.12%. Japan’s Nikkei Stock Index closed up +0.62%.

Eurozone July retail sales fell -0.2% m/m, right on expectations and the first decline in four months.

German July factory orders fell -11.7% m/m, weaker than expectations of -4.3% m/m and the biggest decline in 3-1/4 years.

ECB Governing Council member Kazimir said the ECB needs to raise interest rates one more time to make sure inflation returns to 2%, and a September rate hike is "preferable" to a later increase.

ECB Governing Council member Knot said investors betting against an ECB rate hike next week are "maybe" underestimating the likelihood of it happening.

Today’s stock movers…

Apple (AAPL) closed down more than -3%, leading losers in the Dow Jones Industrials after the Wall Street Journal reported that Chinese government agencies had barred staff from using the iPhone and other foreign-branded devices at work. Losses in Apple accelerated on technical selling after the stock fell below its 50-day moving average.

MarketAxess Holdings (MKTX) closed down more than -5% after Morgan Stanley and Keefe Bruyette & Woods said overall average daily credit trading volume in August tracked below estimates.

Albemarle (ALB) closed down more than -5% after global lithium prices fell -14% m/m in August. Lithium products account for about 70% of the company’s total revenue.

Lockheed Martin (LMT) closed down more than -4% after it pushed back the delivery timing of the new F-35 jet to April 2024 from this December due to testing issues.

Nvidia (NVDA) closed down more than -3% after Research Affiliates said the stock is “a textbook story of a Big Market Delusion,” and with shares trading around 110 times earnings, the stock is priced beyond perfection.

Regional bank stocks retreated Wednesday and weighed on the overall market. Comerica (CMA) closed down more than -4%. Also, Zions Bancorp (ZION) and KeyCorp (KEY) closed down more than -3%. In addition, Citizens Financial Group (CFG), Huntington Bancshares (HBAN), and Truist Financial (TFC) closed down more than -2%.

Southwest Airlines (LUV) closed down more than -2% after it said that due to surging jet fuel costs, revenue for each seat flown mile would fall -5% to -7% from a year earlier compared with an earlier outlook for a drop of -3% to -7%.

Tesla (TSLA) closed down more than -1% after Indonesian Coordinating Maritime Affairs and Investment Minister Panjaitan said Tesla CEO Musk is concerned about the state of the global economy and possible overcapacity in the EV market and shelved expansion plans in Indonesia.

Gilead Sciences (GILD) closed down more than -1% after HSBC initiated coverage of the stock with a recommendation of reduce and a price target of $71.

Dexcom (DXCM) closed up more than +6% to lead gainers in the S&P 500 and Nasdaq 100 after Jeffries said the use of obesity drugs appears to increase the use of type 2 diabetes continuous glucose monitors, which Dexcom manufactures.

Zimmer Biomet Holdings (ZBH) closed up more than +4% after CEO Tornos said he sees demand for GLP-a weight-loss drugs as “definitely a tailwind” for the company in the short term.

Salesforce (CRM) closed up more than +1% to lead gainers in the Dow Jones Industrials after it said it added new artificial intelligence (AI) capabilities and automation improvements.

AeroVironment (AVAV) closed up more than +20% after reporting Q1 revenue of $152.3 million, better than the consensus of $128.5 million, and raising its 2024 revenue forecast to $635 million-$675 million from a previous forecast of $630 million-$660 million, stronger than the consensus of $656 million.

NexGen Healthcare (NXGN) closed up more than +14% after Thoma Bravo agreed to acquire the company for $23.95 a share.

Trade Desk (TTD) closed up more than +2% after William Blair initiated coverage on the stock with an outperform recommendation.

Nasdaq Inc (NDAQ) closed up more than +1% after reporting August equity options volume rose +8.8% y/y to 298 million contracts.

Across the markets…

December 10-year T-notes (ZNZ23) on Wednesday closed down -8.5 ticks, and the 10-year T-note yield rose +2.8 bp to 4.288%. Dec T-notes Wednesday gave up an early advance and fell to a 1-1/2 week low, and the 10-year T-note yield rose to a 2-week high of 4.302% on stronger-than-expected U.S. economic news after the Aug ISM services index unexpectedly expanded by the most in 6 months.

Also, comments Wednesday from Boston Fed President Collins weighed on T-note prices when she said it is "too early" to say if inflation is on a sustained path to 2% and further tightening may be warranted depending on the data. In addition, an increase in inflation expectations weighed on T-notes after the 10-year breakeven inflation rate Wednesday rose to a 1-week high of 2.33%.

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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.