Stocks Slump Before the Open as Inflation and Interest Rate Worries Return

Oleksandr Pylypenko - Barchart - Thu Sep 7, 2023

September S&P 500 futures (ESU23) are down -0.58%, and September Nasdaq 100 E-Mini futures (NQU23) are down -0.88% this morning after three major U.S. benchmark indices ended the regular session lower as an unexpected rise in a key U.S. services activity gauge bolstered speculation that the Federal Reserve would have to keep interest rates higher for longer.

In Wednesday’s trading session, the benchmark S&P 500 and tech-heavy Nasdaq 100 notched 1-week lows, and the blue-chip Dow posted a 1-1/2 week low. Apple Inc (AAPL) plunged over -3% and was among the top percentage losers on the Nasdaq 100 following a Wall Street Journal report stating that China had instructed government agencies to cease using the tech giant’s iPhone and other foreign electronic devices at work. Also, Lockheed Martin Corporation (LMT) slid more than -4% after the company cut the delivery outlook for its F-35 jets and delayed deliveries of its updated Technology Refresh 3 jets. In addition, Johnson & Johnson (JNJ) fell over -1% after HSBC initiated coverage of the stock with a Hold rating. On the bullish side,AeroVironment Inc (AVAV) surged more than +20% after the maker of combat drones and other unmanned systems reported upbeat Q1 results and raised its FY24 revenue guidance.

Economic data on Wednesday showed that the U.S. ISM services index unexpectedly rose to a 6-month high of 54.5 in August, stronger than expectations of 52.5. Also, the U.S. Trade Balance stood at -$65.00B in July, stronger than expectations of -$68.00B. At the same time, the U.S. August S&P Global composite PMI came in at 50.2, weaker than expectations of 50.4.

“The ISM Services Sector report underscores the resilience of the largest portion of the economy. Unfortunately, the prices-paid component moved in the wrong direction — similar to the higher prices paid in the manufacturing report — edging markedly higher. This is certainly not good news for a data-dependent Fed,” said Quincy Krosby, chief global strategist at LPL Financial.

Boston Fed President Susan Collins said Wednesday that policymakers will need to exercise patience as they assess economic data to determine their next course of action. “This phase of our policy cycle requires patience and holistic data assessment while we stay the course,” she said. However, she pointed out that if the improvement in inflation data is fleeting, “further tightening could be warranted.”

Meanwhile, U.S. rate futures have priced in a 7.0% probability of a 25 basis point rate increase at September’s monetary policy meeting and a 43.4% chance of a 25 basis point rate hike at November’s monetary policy meeting.

In other news, the Federal Reserve’s Beige Book report, released on Wednesday, indicated that economic activity was modest in July and August, with subdued job growth across the United States and a slowdown in price growth in most districts.

Today, all eyes are focused on U.S. Initial Jobless Claims data in a couple of hours. Economists, on average, forecast that Initial Jobless Claims will come in at 234K, compared to last week’s value of 228K.

Also, investors are likely to focus on U.S. Unit Labor Costs data, which came in at +3.3% q/q in the first quarter. Economists foresee the second-quarter figure to be +1.6% q/q.

U.S. Nonfarm Productivity data will come in today. Economists foresee this figure to stand at +3.7% q/q in the second quarter, compared to the first-quarter number of -1.2% q/q.

U.S. Crude Oil Inventories data will be reported today as well. Economists estimate this figure to be -2.064M, compared to last week’s value of -10.584M.

In addition, market participants will be looking toward speeches from New York Fed President John Williams and Atlanta Fed President Raphael Bostic.

In the bond markets, United States 10-year rates are at 4.281%, down -0.28%.

The Euro Stoxx 50 futures are up +0.09% this morning, clawing back early losses from weak German data. Gains in utility and construction stocks are leading the overall market higher. Eurostat’s final data showed Thursday that the Eurozone economy experienced meager growth in the second quarter, falling short of earlier projections due to stagnant domestic consumption and weakened exports. Separately, German industrial production fell again in July, offering fresh evidence of a slowdown in Europe’s largest economy. In corporate news, Direct Line Insurance Group Plc (DLG.LN) climbed over +17% after the British motor and home insurer projected better operating profit in 2024.

U.K.’s Halifax House Price Index, Germany’s Industrial Production, Eurozone’s GDP, and Eurozone’s Employment Change data were released today.

U.K. August Halifax House Price Index stood at -1.9% m/m and -4.6% y/y, weaker than expectations of -0.3% m/m and -3.5% y/y.

The German July Industrial Production came in at -0.8% m/m, weaker than expectations of -0.5% m/m.

Eurozone Employment Change arrived at +0.2% q/q and +1.3% y/y in the second quarter, compared to expectations of +0.2% q/q and +1.5% y/y.

Eurozone GDP has been reported at +0.1% q/q and +0.5% y/y in the second quarter, weaker than expectations of +0.3% q/q and +0.6% y/y.

Asian stock markets today settled in the red. China’s Shanghai Composite Index (SHCOMP) closed down -1.13%, and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.75%.

China’s Shanghai Composite today closed lower after trade data indicated continued economic weakness in the country, while the prospect of renewed Sino-U.S. tensions also weighed on sentiment. Customs data showed on Thursday that China’s imports and exports contracted at a rate slower than anticipated in August, but they remained near historic lows due to sluggish demand both domestically and abroad. Meanwhile, the chair of the House of Representatives committee on China stated on Wednesday that the U.S. Commerce Department should end all technology exports to Huawei and SMIC in light of the discovery of new chips in Huawei phones that could violate trade restrictions. On the ground of this, semiconductor stocks retreated on Thursday, with China’s top chipmaker Semiconductor Manufacturing International Corp slumping over -7%. Mainland property developers traded in Hong Kong also lost ground. In other news, four major state banks in China said Thursday they would start to lower interest rates on existing mortgages for first-home loans, bringing them down to the levels applicable at the time of home purchase.

“While the better-than-expected data came as a relief, more stimulus measures are needed to drive economic growth and lift market confidence,” UBS analysts wrote in a note.

The Chinese August Trade Balance has been reported at $68.36B, weaker than expectations of $73.90B.

The Chinese August Exports stood at -8.8% y/y, stronger than expectations of -9.2% y/y.

The Chinese August Imports came in at -7.3% y/y, stronger than expectations of -9.0% y/y.

Japan’s Nikkei 225 Stock Index closed lower today, snapping an eight-day winning streak as rising U.S. yields and concerns over a decelerating Chinese economy weighed on investor sentiment. Meanwhile, Bank of Japan Board Member Junko Nakagawa said that maintaining monetary easing is appropriate for the time being, especially given that the inflation target has not yet been met. In corporate news, computer-chip testing equipment maker Advantest plunged over -6% on Thursday, tracking an overnight drop in customer Nvidia. Also, NTN Corp dropped more than -5% after the ball-bearings manufacturer issued a zero-coupon convertible bond. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed up +4.38% to 17.89.

Pre-Market U.S. Stock Movers

Apple Inc (AAPL) fell over -2% in pre-market trading following reports that China aimed to extend the prohibition of Apple’s iPhones in sensitive government departments to government-backed agencies and state-owned enterprises.

WestRock Co (WRK) climbed more than +8% in pre-market trading following a report by the Wall Street Journal indicating that the company is engaged in talks regarding a potential merger with Europe’s Smurfit Kappa.

GameStop Corp (GME) soared over +6% in pre-market trading after the company reported better-than-expected Q2 results.

UiPath Inc (PATH) gained over +4% in pre-market trading after the company posted upbeat Q2 results and provided solid FY24 revenue guidance.

C3.ai Inc (AI) plunged over -9% in pre-market trading after the enterprise software company said it would not be profitable by the end of fiscal year 2024.

Sportsmans (SPWH) tumbled more than -14% in pre-market trading after reporting downbeat Q2 results.

Dell Technologies Inc (DELL) fell about -3% in pre-market trading after Barclays downgraded the stock to Underweight from Equal Weight.

You can see more pre-market stock movershere

Today’s U.S. Earnings Spotlight: Thursday - September 7th

DocuSign (DOCU), Toro (TTC), Guidewire (GWRE), Science Applications (SAIC), BRP Inc (DOOO), Smartsheet (SMAR), Braze (BRZE), ABM Industries (ABM), Korn Ferry (KFY), John Wiley&Sons (WLY), Semtech (SMTC), Methode Electronics (MEI), Planet Labs PBC (PL), G-III Apparel (GIII), Avid Bioservices (CDMO), Tsakos Energy (TNP), Secureworks (SCWX), Smith & Wesson (SWBI), Concrete Pumping A (BBCP), Zumiez (ZUMZ), Limoneira (LMNR).

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On the date of publication, Oleksandr Pylypenko 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.