Stocks Climb as Bond Yields Fall on Optimism for a Fed Pause

Rich Asplund - Barchart - Wed Aug 23, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.84%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.34%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.42%.

Stocks this morning are moderately higher, with the Nasdaq 100 climbing to a 1-week high. A fall in global bond yields today is boosting technology stocks and leading the overall market higher after weaker-than-expected U.S. and European economic news bolstered speculation that the Fed and ECB may pause their interest rate hikes. Also, Nvidia is up more than +1% on optimism ahead of its Q2 earnings results later today. U.S. economic news today is mixed for stocks as July new home sales rose more than expected to a 1-1/2 year high, but the Aug S&P manufacturing PMI contracted more than expected.

Limiting gains in the overall market is weakness in activewear apparel makers after Foot Locker plunged more than -30% to lead the sector lower when it cut its 2023 earnings forecast. Also, energy stocks are under pressure today as WTI crude is down more than -1% at a 4-week low.

The Mortgage Bankers Association reported that weekly U.S. mortgage applications fell -4.2% w/w in the week ended Aug 18 and that home-purchase applications dropped -5.0% w/w to their lowest since 1995. The 30-year fixed mortgage rate jumped +15 bp to 7.31%, the highest since 2000.

The U.S. Aug S&P manufacturing PMI fell -2.0 to 47.0, weaker than expectations of no change at 49.0.

U.S. Jul new home sales rose +4.4% m/m to a 1-1/2 year high of 714,000, stronger than expectations of +703,000.

The markets are discounting the odds at 11% for a +25 bp rate hike at the September 20 FOMC meeting and 41% for that +25 bp rate hike at the November 1 FOMC meeting.

Global bond yields are lower. The 10-year T-note yield is down -9.9 bp at 4.225%. The 10-year German bund yield fell to a 1-1/2 week low of 2.519% and is down -12.3 bp at 2.521%. The 10-year UK gilt yield fell to a 1-1/2 week low of 4.462% and is down -17.4 bp at 4.471%.

Overseas stock markets are mixed. The Euro Stoxx 50 is up +0.17%. China’s Shanghai Composite Index closed down -1.34%. Japan’s Nikkei Stock Index closed up +0.48%.

Today’s stock movers…

Netflix (NFLX) is up more than +4% to lead gainers in the S&P 500 after researcher Antenna said the company signed up about 2.6 million new subscribers in July.

Advanced Auto Parts (AAP) is up more than +3% after it announced Shane O’Kelly will become CEO effective Sep 11.

Zoom Video Communications (ZM) is up more than +5% to lead gainers in the Nasdaq 100 after daily trading data compiled by Bloomberg showed two funds run by Cathie Wood’s ARK Investment Management bought a total of 122,831 shares of Zoom on Tuesday, raising its stake in the company to 4%.

Avery Dennison (AVY) is up more than +3% after UBS upgraded the stock to buy from neutral with a price target of $222.

Thermo Fisher Scientific (TMO) is up more than +2% after Reuters reported that Novo Nordisk has hired the company as its second contract manufacturer to make its weight-loss drug Wegovy.

Alphabet (GOOGL) is up more than +2% after Wedbush initiated coverage of the stock with an outperform rating and a price target of $160.

Brown-Forman (BF/B) is up more than +2% after Morgan Stanley double-upgraded the stock to overweight from underweight with a price target of $75.

Homebuilders are climbing today after U.S. Jul new home sales rose more than expected to a 1-1/2 year high and after Toll Brothers reported Q3 revenue of $2.69 billion, stronger than the consensus of $2.41 billion, and raised its full-year delivery forecast to 9,500-9,600 from a previous estimate of 8,900-9,500, above the consensus of 9,317. As a result, Toll Brothers (TOL) is up more than +3%. Also, PulteGroup (PHM) is up more than +2%, and DR Horton (DHI) and Lennar (LEN) are up more than +1%.

Nvidia (NVDA) is up more than +1% amid optimism about its Q2 earnings results that will be released after today’s close.

Activewear apparel makers are falling today after Foot Locker reported Q2 sales of $1.86 billion, below the consensus of $1.88 billion, and lowered its 2024 sales guidance to a decline of -9% to -10% from a prior view of -7.5% to -9%, weaker than the consensus of -8.02%. As a result, Foot Locker (FL) is down more than -34%. Also, Nike (NKE) is down more than -4% to lead loser in the S&P 500 and Dow Jones Industrials. In addition, Lululemon Athletica (LULU) is down more than -2% to lead losers in the Nasdaq 100.

Energy stocks and energy service providers are under pressure as the price of WTI crude is down more than -1% to a 4-week low. As a result, Occidental Petroleum (OXY) is down more than -2%. Also, Valero Energy (VLO), Marathon Oil (MRO), Exxon Mobil (XOM), Phillips 66 (PSX), Devon Energy (DVN), APA Corp (APA), and ConocoPhillips (COP) are down more than -1%.

La-Z-Boy (LZB) is down more than -3% after forecasting Q2 sales of $490 million-$510 million, the midpoint below the consensus of $510.5 million.

Across the markets…

September 10-year T-notes (ZNU23) today are up +21 ticks, and the 10-year T-note yield is down -9.9 bp at 4.225%. Sep T-notes today are moving higher on carryover support from a rally in European government bonds as 10-year German bunds and 10-year UK gilts climbed to 1-1/2 week highs. T-notes extended their gains after the U.S. Aug S&P manufacturing PMI fell more than expected. A bearish factor is supply pressures as the Treasury will auction $16 billion of 20-year T-bonds later today.

The dollar index (DXY00) today is up by +0.07% and posted a 2-1/2 month high. The dollar found support on weakness in the euro and British pound, which sank against the dollar today on signs of economic weakness after the Eurozone Aug S&P composite PMI contracted by the most in 2-3/4 years and the UK Aug S&P manufacturing PMI contracted by the most in 3 years. The dollar fell back from its best levels after the U.S. Aug S&P manufacturing PMI fell more than expected.

EUR/USD (^EURUSD) today is down by -0.04% and fell to a 2-1/4 month low. The euro retreated today on signs of weakness in the Eurozone economy after the Eurozone Aug S&P composite PMI contracted by the most in 2-3/4 years. Also, a decline in the 10-year German bund yield today to a 1-1/2 week low today has weakened the euro’s interest rate differentials. Losses in EUR/USD were contained after the Eurozone Aug S&P manufacturing PMI rose more than expected.

The Eurozone Aug S&P manufacturing PMI rose +1.0 to 43.7, stronger than expectations of no change at 42.7. However, the Aug S&P composite PMI fell -1.6 to 47.0, weaker than expectations of -0.1 to 48.5 and the steepest pace of contraction in 2-3/4 years.

USD/JPY (^USDJPY) is down by -0.48%. The yen today climbed to a 3-session high against the dollar. Lower T-note yields today are supportive for the yeni. Also, a jump in the 10-year JGB government bond yield today to a 9-1/2 year high of 0.680% has strengthened the yen’s interest rate differentials.

Today’s Japanese economic news is bullish for the yen after the Japan Aug Jibun Bank manufacturing PMI rose +0.1 to 49.7.

October gold (GCV3) today is up +19.2 (+1.01%), and Sep silver (SIU23) is up +0.765 (+3.26%). Precious metals prices this morning are sharply higher, with gold climbing to a 1-1/2 week high and silver jumping to a 3-week high. Metals are rallying today as weakness in U.S. and Eurozone economic news knocked bond yields lower and may keep the Fed and ECB from further tightening monetary policy. Silver prices also found support on a jump in U.S. Jul new home sales to a 1-1/2 year high, signaling strong demand for industrial metals. On the negative side is today’s rally in the dollar index to a 2-1/2 month high.

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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.