Strength in U.S. Economic News Boosts Bond Yields and Weighs on Stocks

Rich Asplund - Barchart - Wed Sep 6, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.83%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.03%.

Stock indexes this morning are moderately lower, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 indexes falling to one-week lows. Stocks opened lower this morning on negative carryover from a fall in the Euro Stoxx 50 to a 1-1/2 week low on weaker-than-expected Eurozone economic news. Losses in stocks accelerated as bond yields jumped after today’s Aug ISM services report expanded more than expected, bolstering speculation the Fed will keep interest rates higher for longer.

The U.S. Aug ISM services index unexpectedly rose +1.8 to a 6-month high of 54.5, stronger than expectations of a decline to 52.5.

The U.S. Jul trade deficit widened to -$65.0 billion from -$63.7 billion in June, a smaller deficit than expectations of -$68.0 billion.

Boston Fed President Collins said it's "too early" to say if inflation is on a sustained path to 2%, and further tightening may be warranted depending on the data. She added that the Fed will "need to hold rates at restrictive levels for some time" as while demand is moderating, it continues to outpace supply, adding to price pressures.

The markets are discounting the odds at 8% for a +25 bp rate hike at the September 20 FOMC meeting and 54% for that +25 bp rate hike at the November 1 FOMC meeting.

Global bond yields are higher. The 10-year T-note yield rose to a 2-week high of 4.296% and is up +2.6 bp at 4.286%. The 10-year German bund yield rose to a 2-week high of 2.654% and is up +4.1 bp at 2.653%. The 10-year UK gilt yield rose to a 2-week high of 4.559% and is up +1.1 bp at 4.536%.

Overseas stock markets are mixed. The Euro Stoxx 50 is down -0.74%. China’s Shanghai Composite Index closed up +0.12%. Japan’s Nikkei Stock Index closed up +0.62%.

Today’s stock movers…

Nvidia (NVDA) is down more than -3% after Research Affiliates said the stock is “a textbook story of a Big Market Delusion,” and with shares trading around 110 times earnings, the stock is priced beyond perfection.

Apple (AAPL) is down more than -3%, leading losers in the Dow Jones Industrials as higher T-note yields weigh on tech stocks. Losses in Apple accelerated on technical selling after the stock fell below its 50-day moving average.

Warner Bros Discovery (WBD) is down more than -3% after it forecasted full-year Ebitda of $10.5 billion-$11.0 billion, down about $500 million from a previous estimate due to the impact of strikes from actors and writers.

Tesla (TSLA) is down more than -3% to lead losers in the Nasdaq 100 after Indonesian Coordinating Maritime Affairs and Investment Minister Panjaitan said CEO Musk is concerned about the state of the global economy and possible overcapacity in the EV market and shelved expansion plans in Indonesia.

Gilead Sciences (GILD) is down more than -2% after HSBC initiated coverage of the stock with a recommendation of reduce and a price target of $71.

Olin Corp (OLN) is down more than -2% after Goldman Sachs downgraded the stock to neutral from buy.

Southwest Airlines (LUV) is down more than -1% after Airlines it said that due to surging jet fuel costs, revenue for each seat flown mile would fall -5% to -7% from a year earlier compared with an earlier outlook for a drop of -3% to -7%.

Dexcom (DXCM) is up more than +5% to lead gainers in the S&P 500 and Nasdaq 100 after Jeffries said the use of obesity drugs appears to increase the use of type 2 diabetes continuous glucose monitors, which Dexcom manufactures.

Nasdaq Inc (NDAQ) is up more than +2% after reporting August equity options volume rose +8.8% y/y to 298 million contracts.

Salesforce (CRM) is up more than +1% to lead gainers in the Dow Jones Industrials after it said it added new artificial intelligence (AI) capabilities and automation improvements.

American Airlines Group (AAL) is up more than +2% after BNP Paribas Exane upgraded the stock to outperform from neutral with a price target of $20.

AeroVironment (AVAV) is up more than +27% after reporting Q1 revenue of $152.3 million, better than the consensus of $128.5 million, and raising its 2024 revenue forecast to $635 million-$675 million from a previous forecast of $630 million-$660 million, stronger than the consensus of $656 million.

NexGen Healthcare (NXGN) is up more than +14% after Thoma Bravo agreed to acquire the company for $23.95 a share.

Gitlab (GTLB) is up more than +4% after reporting Q2 revenue of $139.6 million, above the consensus of $129.9 million, and raising its 2024 revenue forecast to $555 million-$557 million from a previous forecast of $541 million-$543 million, better than the consensus of $542.9 million.

Trade Desk (TTD) is up more than +1% after William Blair initiated coverage on the stock with an outperform recommendation.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -7 ticks, and the 10-year T-note yield is up +2.6 bp at 4.286%. Dec T-note prices today gave up an early advance and fell to a 1-1/2 week low, and the 10-year T-note yield rose to a 2-week high of 4.296% on stronger-than-expected U.S. economic news after the Aug ISM services index unexpectedly expanded by the most in 6 months. Also, comments today from Boston Fed President Collins weighed on T-note prices when she said it is "too early" to say if inflation is on a sustained path to 2% and further tightening may be warranted depending on the data.

The dollar index (DXY00) today is up +0.06% and posted a 5-1/2 month high. The dollar recovered from overnight losses and moved higher as T-note yields climbed on the stronger-than-expected Aug ISM services report. Also, hawkish comments from Boston Fed President Collins supported the dollar. In addition, Chinese economic concerns weighed on the yuan, which fell to a 10-month low against the dollar today.

EUR/USD (^EURUSD) is down by -0.06% and dropped to a 2-3/4 month low. The euro gave up overnight gains and turned lower after the dollar rebounded from early losses and moved higher. Also, weakness in Eurozone economic news weighed on the euro after Eurozone July retail sales fell for the first time in four months and after German Jul factory orders fell by the most in 3-1/4 years. EUR/USD today initially moved higher on hawkish ECB comments after ECB Governing Council member said the markets are underplaying the risks of an ECB rate hike next week, and Governing Council member Kazimir said a September rate hike is preferable to a later increase.

Eurozone July retail sales fell -0.2% m/m, right on expectations and the first decline in four months.

German July factory orders fell -11.7% m/m, weaker than expectations of -4.3% m/m and the biggest decline in 3-1/4 years.

ECB Governing Council member Kazimir said the ECB needs to raise interest rates one more time to make sure inflation returns to 2%, and a September rate hike is "preferable" to a later increase.

ECB Governing Council member Knot said investors betting against an ECB rate hike next week are "maybe" underestimating the likelihood of it happening.

USD/JPY (^USDJPY) is down -0.10%. The yen today recovered from a 10-month low against the dollar and is slightly higher. Comments from Japan’s top currency official, Masato Kanda, sparked short covering in the yen when he said he wouldn’t rule out any options if forex moves continue. The yen gave up some of its gains after T-note yields rose.

October gold (GCV3) today is down -8.8 (-0.45%), and Dec silver (SIZ23) is down -0.433 (-1.81%). Precious metals prices this morning are moderately lower, with gold dropping to a 1-week low and silver falling to a 2-week low. Today's rally in the dollar index to a 5-1/2 month high is bearish for metals. Also, rising global bond yields are negative for precious metals prices. In addition, hawkish central bank comments undercut precious metals when Boston Fed President Collins said it is "too early" to say if inflation is on a sustained path to 2% and further tightening may be warranted, and ECB Governing Council member Kazimir said the ECB needs to raise interest rates one more time to make sure inflation returns to 2%.

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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.