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Stocks Sink as the Rout in Government Bonds Deepens

Barchart - Tue Oct 3, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -1.37%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.29%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.83%.

Stocks on Tuesday sold off sharply, with the S&P 500 and Dow Jones Industrials falling to 4-month lows.  Soaring bond yields Tuesday hammered stocks as the 10-year T-note yield jumped to a 16-year high.  Hawkish comments from Cleveland Fed President Mester and Atlanta Fed President Bostic pushed the 10-year T-note yield to a 16-year high when they signaled their support to keep interest rates higher for longer. 

T-note yields pushed to their highs, and stocks extended their losses after Tuesday’s Aug JOLTS job openings unexpectedly rose +690,000 to 9.610 million, showing a stronger labor market than expectations for a decline to 8.815 million.

Cleveland Fed President Mester said, "I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that have already occurred."

Atlanta Fed President Bostic said the Fed still "has a ways to go" on inflation, and he wants to hold interest rates at elevated levels "for a long time."

JPMorgan Asset Management warned that there’s a risk of further stock market declines due to rising interest rates, saying, “We have not anticipated such an increase in rates.  This is something which will at least slow down, or even reverse, the progress of equity markets.”

The markets are discounting a 31% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 52% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields Tuesday moved higher.  The 10-year T-note yield climbed to a 16-year high of 4.808% and finished up +12.3 bp at 4.802%.  The 10-year German bund yield rose +4.6 bp to 2.968%.  The 10-year UK gilt yield rose to a 1-1/4 month high of 4.600% and finished up +3.4 bp at 4.597%. 

ECB Governing Council member Simkus said inflation still faces many "lines of resistance" and that "maintaining interest rates sufficiently high is very important and critically important on the path to returning inflation to the target."

ECB Chief Economist Lane said, "Price increases are still well above 2%, we are not at the inflation target yet, and therefore there is still work to be done in terms of bringing inflation down." He added that ECB borrowing costs have now "reached a level that will make a substantial contribution to get inflation to target" and that the "base case is to maintain this level for as long as needed."

Overseas stock markets on Tuesday settled lower.  The Euro Stoxx 50 closed down -1.02%. China’s Shanghai Composite Index was closed for the Golden Week holidays.  Japan’s Nikkei 225 today closed -1.64%.

Today’s stock movers…

McCormick (MCK) closed down more than -8% after reporting Q3 net sales of $1.68 billion, weaker than the consensus of $1.70 billion. 

Airbnb (ABNB) closed down more than -6% to lead losers in the Nasdaq 100 after KeyBanc Capital Markets downgraded the stock to sector weight from overweight.

Goldman Sachs (GS) closed down more than -3% to lead losers in the Dow Jones Industrials after Morgan Stanley cut its price target on the stock to $329 from $347.

Earnings concerns weighing on cruise line stocks after analysts cut their price targets for Carnival by an average of 7.3% since it reported earnings last Friday.  As a result, Carnival (CCL) closed down more than -6%.  Also, Royal Caribbean Cruises (RCL) closed down more than -5%, and Norwegian Cruise Line Holdings (NCLH) closed down more than -3%.  

Sealed Air (SEE) closed down more than -4% after Truist Securities cut its price target on the stock to $38 from $43. 

Tuesday’s jump in the 10-year T-note yield to a 16-year high hammered home building stocks.  As a result, PulteGroup (PHM), DR Horton (DHI), and Toll Brothers (TOL) closed down more than -3%. Also, Lennar (LEN) closed down more than -2%. 

Mega-cap technology stocks retreated and weighed on the overall market. (AMZN) closed down more than -3%.  Also, Nvidia (NVDA), Microsoft (MSFT), and Tesla (TSLA) closed down more than -2%.  In addition, Meta Platforms (META) closed down more than -1%. 

HP Inc (HPQ) closed up more than +1% after Bank of America double-upgraded the stock to buy from underperform with a price target of $33. 

Brown-Forman (BF/B) closed up more than +1% after announcing a $400 million share buyback plan.

Intel (INTC) closed up +0.65% after MSCI ESG Research raised its credit rating on the stock to AAA from AA.

Boeing (BA) closed up +0.58% after Reuters reported the company plans to raise production of its 737 jets to a record 57 planes per month by July 2025.

Across the markets…

December 10 year T-notes (ZNZ23) Tuesday closed down -22 ticks.  The 10-year T-note yield rose +12.3 bp to 4.8027%.  Dec T-notes Tuesday plunged to a new 16-year nearest-futures low, and the 10-year T-note yield soared to a new 16-year high of 4.808%.  T-notes retreated Tuesday on hawkish comments from Atlanta Fed President Bostic and Cleveland Fed President Mester, who signaled their support for higher interest rates for longer.  T-notes extended their losses after Tuesday’s Aug JOLTS job openings report unexpectedly increased, a sign of labor market strength that is hawkish for Fed policy. 

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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.

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