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Markets Today: Stocks Tumble and Bond Yields Soar on U.S. Labor Market Strength

Barchart - Thu Jul 6, 7:47AM CDT

Morning Markets

September E-Mini S&P 500 futures (ESU23) this morning are down -0.67%, and Sep Nasdaq 100 E-Mini futures (NQU23) are down -0.76%.

U.S. stock index futures this morning are moderately lower.  Global stocks are under pressure for a second day today on signs that central banks will keep raising interest rates to tame inflation.  Bond yields continued higher this morning on the heels of Wednesday’s hawkish minutes of the Jun 13-14 FOMC meeting, where policymakers stated they expected more rate increases this year.

Stock index futures were under pressure in the overnight session, and bond yields rose on comments late Wednesday from New York Fed President Williams, who said the incoming data the Fed has seen so far support the "hypothesis" that the Fed has more work to do on monetary policy.

Stock index futures extended their losses, and bond yields rose even further this morning on a blowout Jun ADP employment report that showed employers added the most jobs in 16 months.

The U.S. Jun ADP employment change surged by +497,000, well above expectations of +225,000 and the most in 16 months, signaling strength in the U.S. labor market.

U.S. weekly initial unemployment claims rose +12,000 to 248,000, slightly more than expectations of +245,000.  Weekly continuing claims fell -13,000 to a 4-month low of 1.720 million, showing a stronger labor market than expectations of 1.737 million.

The U.S. May trade deficit shrank to -$69.0 billion from -$74.4 billion in Apr, right on expectations.

The markets are discounting the odds at 90% for a +25 bp rate hike at the next FOMC meeting on July 25-26, up from 85% on Wednesday.  The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields are sharply higher.  The 10-year T-note yield jumped to a 4-month high of 4.033% and is up +9.4 bp to 4.023%. The 10-year German bund yield rose to a 3-3/4 month high of 2.594% and is up +11.2 bp at 2.590%.  The 10-year UK Gilt yield soared to a 14-year high of 4.642% and is up +14.5 bp at 4.639%.  

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.69%.  China’s Shanghai Composite Index today closed -0.54%.  Japan’s Nikkei Stock Index today closed -1.70%.

The Euro Stoxx 50 today tumbled to a 1-week low and is moderately lower.  A jump in European government bond yields is weighing on stocks following the hawkish minutes of the Federal Reserve’s last policy meeting.  The UK 10-year gilt yield rose to a 14-year high, and the 10-year German bund yield climbed to a 3-3/4 month high.  Consumer stocks are under pressure today on signs of weak consumer spending after Eurozone May retail sales were stagnant.  On the positive side, German May factory orders rose by the most in almost three years. 

Eurozone May retail sales were unchanged m/m, weaker than expectations of +0.2% m/m.

The German Jun S&P construction PMI fell -2.5 to 41.4, the steepest pace of contraction in 2-1/3 years.

German May factory orders rose +6.4% m/m, stronger than expectations of +1.0% m/m and the largest increase in almost three years.

China’s Shanghai Composite closed moderately lower. The slowing recovery in the Chinese economy and disappointment the government is hesitant to roll out stronger support measures are weighing on stocks.   Chinese bank stocks led losses in the overall market today after Goldman Sachs downgraded several Chinese lenders, citing increased risks that dividend payouts may fall short of targets.  On the positive side, Chinese artificial intelligence-related stocks rallied today as a two-day conference kicked off in Shanghai, where Tesla CEO Musk praised China’s advances in AI in a keynote speech at the conference. 

Japan’s Nikkei Stock Index today fell to a 1-week low and closed sharply lower.  The hawkish minutes of the Jun 13-14 FOMC meeting pushed global bond yields higher and is weighing on stocks.  Also, ETF selling pressure is undercutting Japanese stocks as investors are expecting quarter-end selling by ETF managers as they sell shares to pay dividends.  Daiwa Securities estimates ETF managers will need to sell a record 1.16 trillion yen ($8 billion) of cash stocks and futures combined, with the selling concentrated on July 7 and 10.  Negative carryover from the Wednesday sell-off in U.S. semiconductor stocks dragged Japanese semiconductor stocks lower today.  In addition, today’s rally in the Japanese yen to a 1-week high against the dollar sparked the selling of Japanese exporter stocks.

The recent rally in the Nikkei Stock Index to a 33-year high was supported by foreign buying of Japanese stocks. According to Ministry of Finance data compiled by Bloomberg, overseas investors bought a net 9.49 trillion yen ($65.8 billion) of Japanese stocks during the April-June period, the most for available quarterly figures back to 1996. 

Pre-Market U.S. Stock Movers

Exxon Mobil (XOM) fell more than -1% in pre-market trading after it said lower natural gas prices and refining margins would reduce Q2 earnings by about $4 billion compared with the previous quarter.

American Express (AXP) dropped more than -2% in pre-market trading after Baird downgraded the stock to neutral from outperform.   

U.S. retailers are under pressure today after Morgan Stanley said they face risk from the end of the moratorium on student loan payments as consumers divert cash to cover their student loans and away from other debt, including credit cards.  Abercrombie & Fitch (ANF), Wayfair (W), Target (TGT), Dick’s Sporting Goods (DKS), Ulta Beauty (ULTA), and Williams-Sonoma (WSM) are most at risk.

Affirm Holdings (AFRM) tumbled more than -5% in pre-market trading after Piper Sandler downgraded the stock to underweight from neutral. 

Microsoft (MSFT) rose more than +1% in pre-market trading after Morgan Stanley raised its price target on the stock to $415 from $355 and said artificial intelligence-driven gains could propel the stock to a more than $3 trillion valuation. 

Fidelity National Information Services (FIS) climbed more than +2% in pre-market trading after GTCR said it would buy a majority stake in FIS’s Worldpay Merchant Solutions business at an $18.5 billion valuation.

Meta Platforms (META) rose more than +1% in pre-market trading after launching its Threads app, a rival to Twitter.

Keurig Dr Pepper (KDP) is up more than +1% in pre-market trading after Morgan Stanley upgraded the stock to overweight from equal weight, noting the stock’s “compelling” valuation.

Cryptocurrency-exposed stocks are gaining in pre-market trading, with the price of Bitcoin up more than +1% at a 13-month high.  As a result, Coinbase Global (COIN), Riot Platforms (RIOT), Marathon Digital (MARA), MicroStrategy (MSTR), and Hut 8 Mining (HUT) are up +1% or more.

Today’s U.S. Earnings Reports (7/6/2023)

Kura Sushi USA Inc (KRUS), Mitek Systems Inc (MITK), Park Aerospace Corp (PKE), Simulations Plus Inc (SLP).

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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.

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