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Stocks Close Just Mildly Lower after Fed Comments Spark Short-Covering

Barchart - Thu May 12, 3:47PM CDT
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What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.13%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.33%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.18%.

U.S. stock indexes Thursday again posted losses, with the S&P 500 falling to a 13-1/2 month low, the Dow Jones Industrials dropping to a 14-month low, and the Nasdaq 100 sinking to a 1-1/2 year low.  Persistent price pressures are weighing on stocks after U.S. producer prices rose more than expected in April. 

Also, weakness in technology stocks weighed on the overall market Thursday as investors dumped risk assets on fears of an economic slowdown from inflation and rising interest rates.  Stocks continue to see weakness on concern that extended pandemic lockdowns in China will increase supply-chain turmoil, curb global growth, and boost inflation. 

However, U.S. stock indexes Thursday recovered most of their losses in the last hour of trading.  Comments from San Francisco Fed President Daly sparked some short-covering in stocks when she said a strong U.S. economy could tolerate 50 bp rate hikes and she backs raising interest rates by 50 bp at each of the next two FOMC meetings. She added that a 75 bp rate increase is "not a primary consideration."

A positive for stocks was Thursday’s decline in the 10-year yield to a 2-week low of 2.812%. The lower T-note yield boosted homebuilding stocks Thursday on hopes that some stabilization of mortgage rates will support housing demand.  Also, inflation expectations eased after the 10-year breakeven inflation rate dropped to a 2-1/2 month low Thursday.

U.S. weekly initial unemployment claims unexpectedly rose +1,000 to 203,000, showing a weaker labor market than expectations of a decline to 193,000.

The U.S. Apr final-demand PPI index rose +11.0% y/y, stronger than expectations of +10.7% y/y.  The Apr core PPI rose +8.8% y/y, slightly weaker than expectations of +8.9% y/y.  On the brighter side, both the headline and core PPIs fell back from March’s record highs of +11.5% y/y and +9.6% y/y, respectively.

The Institute of International Finance (IIF) projects global 2022 GDP growth at +2.2%, below the +3.6% estimated by the IMF last month, and said the world economy would essentially flatline this year as Europe falls into recession, China slows sharply, and U.S. financial conditions tighten significantly.

Today’s stock movers…

Weakness in technology stocks Thursday weighed on the overall market.  Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) closed down by more than -2%.  Also, Dexcom (DXCM) and Advanced Micro Devices (AMD) closed down by more than -1%. 

Credit card issuers declined Thursday after Wolfe Research downgraded them to underweight from market weight, saying they will come under pressure as the likelihood of a U.S. recession grows.  Synchrony Financial (SYF) closed down by more than -6%.  Also, Capital One Financial (COF), Discover Financial Services (DFS), and American Express (AXP) closed down by more than -4%.

AmerisourceBergen (ABC) closed down more than -6% Thursday after Walgreens Boots Alliance said it sold 6 million shares of AmerisourceBergen stock. 

General Motors (GM) closed down more than -4% Thursday, and Ford Motor (F) closed down more than -3% after Wells Fargo downgraded the automakers to underweight from overweight.

Edison International (EIX) closed down more than -5% Thursday after Southern California Edison, its largest subsidiary, said it detected “circuit activity” on one of its power lines near the reported start of the Coastal Fire that destroyed at least 20 homes in Orange County, California.

Tapestry (TPR) closed up more than +15% Thursday to lead gainers in the S&P 500 after reporting Q3 net sales of $1.44 billion, better than the consensus of $1.43 billion, and Telsey Advisory Group said the solid Q3 results are an “encouraging sign for the company heading into the fiscal year 2023.”

Homebuilders rallied Thursday after the 10-year T-note yield fell to a 2-week low, which should underpin housing demand.  DR Horton (DHI), Lennar (LEN), and PulteGroup (PHM) closed up more than +3%.

Across the markets…

June 10-year T-notes (ZNM22) on Thursday closed up by +23.5 ticks, and the 10-year T-note yield fell -9.6 bp to 2.825%.  June T-notes Thursday rallied to a 2-week high, and the 10-year T-note yield fell to a 2-week low of 2.812%. 

A slump in global equity markets Thursday sparked safe-haven buying of T-notes. Lower European government bond yields Thursday supported T-notes after the 10-year German bund yield fell to a 2-week low and the 10-year UK gilt yield fell to a 5-week low.  A decline in inflation expectations sparked short-covering in T-notes after the 10-year breakeven inflation rate dropped to a 2-1/2 month low Thursday of 2.591%.

T-notes raced to their highs Thursday afternoon on strong demand for the Treasury’s $22 billion auction of 30-year T-bonds that had a bid-to-cover ratio of 2.38, higher than the 10-auction average of 2.31.  Bond-dealer short-covering Thursday also boosted T-note prices with Thursday’s 30-year T-bond auction concluded this week’s Treasury’s May quarterly refunding operation.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.