Stocks Decline as Debt Ceiling Agreement Heads to the House

Rich Asplund - Barchart - Tue May 30, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.31%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.48%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.05%.

Over the weekend a tentative agreement was reached between White House negotiators and Republican leaders on a tentative deal to suspend the debt ceiling until January 2025 and cap federal spending for the next two years. This bill was expected to be voted on in the House on Wednesday. However, this afternoon two of the nine Republican's on the House Rules Committee have communicated they are against bringing it to the House floor for a vote.

In other news, a decline in bond yields today is giving technology stocks a boost. Weakness in energy stocks is limiting gains in the overall market. The market is pricing in a 60% chance for a +25 bp rate hike at the June 13-14 FOMC meeting.

The U.S. Mar S&P CoreLogic composite-20 home price index fell -1.15% y/y, the biggest decline in nearly 11 years but a smaller decline than expectations of -1.60% y/y

The Conference Board U.S. consumer confidence index fell -1.4 to 102.3, stronger than expectations of 99.0.

The U.S. May Dallas Fed manufacturing outlook level of general business activity unexpectedly fell -5.7 to a 3-year low of -29.1, weaker than expectations of an increase to -18.0.

Global bond yields are lower and are supportive of stocks. The 10-year T-note yield is down -10.2 bp at 3.696%. The 10-year German bund yield fell to a 1-1/2 week low of 2.344% and is down -9.0 bp at 2.344%, and the UK 10-year gilt yield is down -8.4 bp at 4.250%.

On the bullish side for stocks, Broadcom is up more than +5% after UBS raised its price target on the stock to $925 from $695. Also, Nvidia (NVDA) is up more than +4% after it unveiled a new batch of products and services tied to artificial intelligence (AI). In addition, Tesla is up more than +3% after CEO Musk said the company opposes “decoupling” and is willing to expand business in China.

On the bearish side, energy stocks and energy service providers are retreating, with the price of WTI crude down more than -4% at a 2-week low. Also, fertilizer stocks are under pressure today after Morgan Stanley cut its price targets across the sector. U.S.-listed Chinese stocks are weaker today on concern’s that China’s economic recovery is faltering.

Overseas stock markets are mixed. The Euro Stoxx 50 is up +1.62%. China’s Shanghai Composite closed up +0.35%, and Japan’s Nikkei Stock Index closed up +0.37%.

Today’s stock movers…

Broadcom (AVGO) is up more than +5% to lead gainers in the S&P 500 and Nasdaq 100 after UBS raised its price target on the stock to $925 from $695.

Nvidia (NVDA) is up more than +4% after it unveiled a new batch of products and services tied to artificial intelligence (AI). Other mega-cap stocks involved with AI also rose, with Intel (INTC) up more than +3% to lead gainers in the Dow Jones Industrials.

Tesla (TSLA) is up more than +3% after CEO Musk said the company opposes “decoupling” and is willing to expand business in China.

Ford Motor (F) is up more than +3% after Jeffries upgraded the stock to buy from hold with a price target of $16.

Universal Health Services (UHS) is up more than +3% after SVB upgraded the stock to outperform from market perform with a price target of $170.

Qualcomm (QCOM) is up more than +2% after senior vice president Katouzian said the company is benefitting from a spike in demand for its “AI-capable” products, and the company has shipped 2 billion AI-capable products year to date.

Energy stocks and energy service providers are falling in pre-market trading, with the price of WTI crude down more than -4% to a 2-week low. APA Corp (APA), Devon Energy (DVN), and Marathon Oil (MRO) are down more than -3%. Also, Haliburton (HAL), Schlumberger (SLB), and Phillips 66 (PSX) are down more than -2%. In addition, ConocoPhillips (COP) and Marathon Petroleum (MPC) are down -1% or more.

Fertilizer stocks are under pressure today after Morgan Stanley cut its price targets across the sector. As a result, Mosaic (MOS) and CF Industries (CF) are down more than -3%.

U.S.-listed Chinese stocks are weaker today on concern’s that China’s economic recovery is faltering. PDD Holdings (PDD) is down more than -6% to lead losers in the Nasdaq 100. Also, JD.com (JD) is down more than -3%, and Baba Group Holding (BABA) and Baidu (BIDU) are down more than -2%.

Across the markets…

June 10-year T-notes (ZNM23) today are up +23 ticks, and the 10-year T-note yield is down -5.8 bp at 3.740%. Jun T-notes are climbing this morning after negotiators agreed to a tentative agreement to raise the debt ceiling, which also puts a cap on federal spending that could slow economic growth. Also, a decline in inflation expectations is supportive for T-notes as the 10-year breakeven inflation rate fell to a 1-week low today of 2.231%.

The dollar index (DXY00) today is down by -0.16%. The dollar index today fell back from a 2-1/2 month high and is moderately lower. A rally in stocks today has reduced the liquidity demand for the dollar. Also, lower T-note yields today are weighing on the dollar. Losses in the dollar were limited after today’s economic news showed U.S. May consumer confidence fell less than expected.

EUR/USD (^EURUSD) today is up by +0.17%. The euro today recovered from a 2-1/4 month low and is moderately higher as a weaker dollar sparked short covering in the euro. EUR/USD today initially fell to a 2-1/4 month low after Spain's May CPI rose less than expected, which is dovish for ECB policy. Also, Eurozone May economic confidence index fell more than expected to a 6-month low, a bearish factor for the euro.

Spain May CPI (EU harmonised) eased to +2.9% y/y from 3.8% y/y in Apr, slower than expectations of +3.3% y/y and the smallest increase in 1-3/4 years.

The Eurozone May economic confidence index fell -2.5 to a 6-month low of 96.5, weaker than expectations of 98.8.

Eurozone Apr M3 money supply rose +1.9% y/y, weaker than expectations of +2.0% y/y and the smallest increase in 8-3/4 years.

USD/JPY (^USDJPY) today is down by -0.38%. The yen today recovered from a 6-1/4 month low against the dollar and is moderately higher. The yen moved higher after an unscheduled meeting today between Japan’s Ministry of Finance, the BOJ, and the Financial Services Agency sparked short covering in the yen. Also, Japan’s top currency official, Kanda, said the government would take action if needed if the yen continues to decline. The unscheduled meeting came after the yen softened beyond 140 per dollar.

Today’s Japanese economic news was supportive for the yen after the Japan Apr jobless rate fell -0.2 to 2.6%, showing a stronger labor market than expectations of 2.7%.

June gold (GCM3) this morning is up +9.9 (+0.51%), and July silver (SIN23) is down -0.130 (-0.56%). Precious metals prices this morning are mixed. A weaker dollar and lower T-note yields today are bullish for metals prices. However, gains in metals were limited after U.S. lawmakers reached a tentative agreement to raise the debt ceiling, which sparked a rally in stocks and reduced the safe-haven demand for precious metals. Funds have been adding to their long gold positions as a safe-haven from the political turmoil as long positions in gold-backed ETFs rose to a 6-1/4 month high Monday. Silver prices were also under pressure on concern China’s economic recovery was faltering, a bearish factor for industrial metals demand.

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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.