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Stocks Fall and Bond Yields Climb as Fed Remains Hawkish

Barchart - Wed Aug 16, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.76%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.07%.

Stocks on Wednesday gave up early gains and retreated, with the S&P 500 falling to a 5-week low, the Dow Jones Industrials falling to a 4-week low, and the Nasdaq 100 dropping to a 1-1/2 month low.  Stock indexes came under pressure Wednesday afternoon when bond yields jumped after the minutes of the July 25-26 FOMC meeting stated that policymakers saw “significant” inflation risks that may merit more rate hikes.   

Wednesday’s U.S. economic news was mixed as July housing starts and Jul manufacturing production rose more than expected, but July building permits rose less than expected.

China’s economic woes continue to weigh on global markets. The yuan fell to a 9-1/4 month low Wednesday, and the Shanghai Composite closed down -0.82% after China’s July home sales fell for the second month by the most in 7 months.  Also, liquidity concerns in China’s shadow banking system have intensified after Zhongrong International Trust missed payments on dozens of its investment products. 

Zhongrong International Trust, China's ninth-biggest trust with about 600 billion yuan in assets, missed payments on 30 investment products and halted redemptions on some short-term instruments.  The firm said liquidity has dried up "unexpectedly," making it hard to meet short-term debt obligations as most of the underlying assets are long-term and illiquid.  The firm has 270 high-yield products totaling 39.5 billion yuan ($5.4 billion) due this year.

JPMorgan Chase cut its China 2023 GDP forecast to 4.8% from a 6.4% estimate in May.  Barclays cut its China 2023 GDP forecast to 4.5% from a prior forecast of 4.9%.

Weekly data from the Mortgage Bankers Association showed mortgage applications fell -0.8% w/w, the fifth straight week of declines.  The U.S. 30-year mortgage rate rose to 7.16% last week, matching the highest since 2001.

U.S. Jul housing starts rose +3.9% m/m to 1.452 million, stronger than expectations of 1.450 million.  However, Jul building permits, a proxy for future construction, rose +0.1% m/m to 1.442 million, weaker than expectations of 1.463 million.

U.S. Jul manufacturing production unexpectedly rose +0.5% m/m, stronger than expectations of no change.

The minutes of the July 25-26 FOMC meeting were hawkish for Fed policy and bearish for stocks as they stated, "most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.  "

The markets are discounting the odds at 11% for a +25 bp rate hike at the September 20 FOMC meeting and 43% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields Wednesday were mixed.  The 10-year T-note yield rose to a 9-1/2 month high of 4.276% and finished up +5.5 bp to 4.266%.  The 10-year German bund yield fell -2.2 bp to 2.650%.  The 10-year UK gilt yield rose +5.7 bp to 4.646%. 

Overseas stock markets on Wednesday settled lower.  The Euro Stoxx 50 closed down -0.103%. China’s Shanghai Composite Index today closed down -0.82%.  Japan’s Nikkei Stock Index closed down -1.46%.

Today’s stock movers…

Jack Henry & Associates (JKHY) closed down more than -6% to lead losers in the S&P 500 after forecasting 2024 EPS of $4.92-$4.99, weaker than the consensus of $5.34.

Chip stocks retreated Wednesday after the 10-year T-note yield rose to a 9-1/2 month high.  As a result, Advanced Micro Devices (AMD) closed down more than -3% to lead losers in the Nasdaq 100.  Also, Marvell Technology (MRVL), NXP Semiconductors NV (NXPI), Analog Devices (ADI), Globalfoundries (GFS), and ON Semiconductor (ON) closed down more than -2%.  In addition, KLA Corp (KLAC), Micron Technology (MU), and Lam Research (LRCX) closed down more than -1%.

Trucking stocks are under pressure on signs of weakness in freight demand after data from the Cass Freight Shipment Index showed U.S. July freight volume fell -8.9% y/y, the sixth consecutive monthly decline. As a result, JB Hunt Transport Services (JBHT) closed down more than -3%.  Also, Knight-Swift Transportation Holdings (KNX), Werner Enterprises (WERN), and Marten Transport Ltd (MRTN) closed down more than -2%.  In addition, Schneider National (SNDR) closed down more than -1%.

Agilent Technologies (A) closed down more than -3% after cutting its full-year revenue forecast to $6.80 billion-$6.85 billion from a previous forecast of $6.93 billion-$7.03 billion.

Intel (INTC) closed down more than -3% to lead losers in the Down Jones Industrial after it agreed to terminate its previously disclosed agreement to buy Tower Semiconductor for $5.4 billion. 

Coherent (COHR) closed down more than -29% after forecasting 2024 revenue of $4.5 billion-$4.7 billion, weaker than the consensus of $4.88 billion. 

Tesla (TSLA) closed down more than -3% after it cut its vehicle prices in China for the second time in three days. 

Insurance stocks rallied Wednesday after Progressive Corp reported net premiums written for July rose +21% y/y to $5.95 billion. As a result, Progressive Corp (PGR) closed up more than +8% to lead gainers in the S&P 500.  Also, Allstate (ALL) closed up more than +4%, and Brown & Brown (BRO) closed up more than +2%.  In addition, Travelers Cos (TRV) closed up more than +1% to lead gainers in the Dow Jones Industrials. 

MarketAxcess Holdings (MKTX) closed up more than +5% on signs of insider buying after an SEC filing showed CEO Concannon purchased $1.02 million of shares on Monday.

TJX Cos (TJX) closed up more than +4% after reporting Q2 net sales of $12.80 billion, stronger than the consensus of $12.44 billion, and raising its full-year comparable sales estimate to +3% to +4% from a prior view of +2% to +3%, better than the consensus of +3.01%. 

Target (TGT) closed up more than +2% after reporting Q2 Ebitda of $1.90 billion, better than the consensus of $1.58 billion.

H&R Block (HRB) closed up more than +9% after reporting Q4 adjusted EPS from continuing operations of $2.05, better than the consensus of $1.88. 

AES Corp (AES) closed up more than +2% on signs of inside buying after an SEC filing showed director Monie bought $500,598 of shares on Wednesday. 

Keurig Dr Pepper (KDP) closed up more than +1% after UBS upgraded the stock to buy from neutral with a price target of $42.

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed down -6.5 ticks, and the 10-year T-note yield rose +5.5 bp to 4.266%.  Sep T-notes Wednesday gave up an early advance and turned lower, and the 10-year T-note yield Wednesday climbed to a 9-1/2 month high of 4.276%.  Stronger-than-expected U.S. economic reports on July housing starts Wednesday, and Jul manufacturing production weighed on T-notes.  Losses in T-notes accelerated Wednesday afternoon after the hawkish minutes of the July 25-26 FOMC meeting stated that policymakers saw “significant” inflation risks that may merit more rate hikes.   

T-note prices Wednesday morning initially rose after inflation expectations declined when the 10-year breakeven inflation rate fell to a 3-1/2 week low of 2.308%.  Also, weakness in stocks sparked some safe-haven demand for T-notes. 



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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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