Stocks Settle Lower on Concern Fed Policy Will Remain Restrictive

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.60%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.86%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.06%. 

US stock indexes Thursday posted moderate losses, with the S&P 500 falling to a 2-week low, the Dow Jones Industrials sliding to a 4-week low, and the Nasdaq 100 dropping to a 1-1/2 week low.  Stocks were under pressure Thursday because of concern that the Fed will keep interest rates higher for longer, causing a risk-off sentiment in asset markets.  Stock indexes found some support after bond yields declined on Thursday’s dovish US economic reports.

US weekly initial unemployment claims rose +3,000 to 219,000, showing a slightly weaker labor market than expectations of 217,000.

US Q1 GDP was revised downward to +1.3% (q/q annualized) from +1.6%, right on expectations.  The Q1 core PCE price index was unexpectedly revised lower to +3.6% (q/q annualized), weaker than expectations of no change at +3.7%.

US Apr pending home sales fell -7.7% m/m, weaker than expectations of -1.0% m/m and the biggest decline in over three years.

The markets are awaiting Friday’s April PCE core deflator, the Fed’s preferred inflation gauge, for clues as to when the Fed might begin cutting interest rates.  Expectations are for the Apr PCE core deflator to remain unchanged from March at +2.8% y/y. 

Generally positive Q1 earnings results are supportive of stocks.  Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

Fed comments Thursday were mixed for stocks.  On the dovish side, New York Fed President Williams said, "With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year."  Conversely, Atlanta Fed President Bostic said the Fed needs to stay in a restrictive stance, and he's watching service inflation for signs of improvement.

The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting and 12% for the following meeting on July 30-31.

Overseas stock markets Thursday settled mixed.  The Euro Stoxx 50 recovered from a 3-1/2 week low and closed up +0.38%.  China's Shanghai Composite fell to a 1-month low and closed down -0.62%.  Japan's Nikkei Stock Index fell to a 1-month low and closed down -1.30%. 

Interest Rates

June 10-year T-notes (ZNM24) Thursday closed up +15 ticks.  The 10-year T-note yield fell -6.0 bp to 4.552%.  June T-notes moved higher Thursday on Fed-friendly US economic reports that included weekly jobless claims, the Q1 core PCE price index, and Apr pending home sales.  Also, bond dealer short covering lifted T-note prices as dealers unwound short hedges put on this week ahead of the now-completed $183 billion slate of T-note auctions. 

European government bond yields Thursday moved lower.  The 10-year German bund yield fell back from a 6-1/2 month high of 2.704% and finished down -3.8 bp at 2.652%.  The 10-year UK gilt yield fell -5.3 bp to 4.347%.

Eurozone May economic confidence rose +0.4 to 96.0, slightly weaker than expectations of 96.1.

The Eurozone Apr unemployment rate unexpectedly fell -0.1 to a record low 6.4%, showing a stronger labor market than expectations of no change at 6.5%.   

Spain's May CPI (EU harmonized) rose +3.8% y/y, stronger than expectations of +3.7% y/y, and the largest increase in 13 months.

US Stock Movers

Salesforce (CRM) closed down more than -19% to lead losers in the S&P 500 and Dow Jones Industrials after reporting Q1 revenue of $9.13 billion, below the consensus of $9.15 billion, and forecasting 2025 revenue of $37.7 billion-$38.0 billion, weaker than the consensus of $38.01 billion. Other stocks across the software sector are also falling on the news, with ServiceNow (NOW) closing down more than -12% and MongoDB (MDB) closing down more than -7%.  Also, Intuit (INTU), Adobe (ADBE), and Oracle (ORCL) closed down more than -5%.  In addition, Workday (WDAY) and Microsoft (MSFT) closed down more than -2%.

Nvidia (NVDA) closed down more than -3% after Bloomberg reported the US is slowing the issuing of licenses to chipmakers for large-scale AI accelerator shipments to the Middle East while officials conduct a national security review of AI development in the region. 

Kohl’s (KSS) closed down more than -23% after reporting Q1 net sales of $3.18 billion, weaker than the consensus of $3.34 billion, and cutting its full-year net sales forecast to -2% to -4% from a previous forecast of -1% to +1%. 

UiPath (PATH) closed down more than -34% after forecasting 2025 revenue of $1.405 billion-$1.410 billion, well below the consensus of $1.56 billion.

Hormel Foods (HRL) closed down more than -9% after reporting Q2 net sales of $2.89 billion, weaker than the consensus of $2.97 billion.

Agilent (A) closed down more than -9% after reporting Q2 net revenue of $1.57 billion, weaker than the consensus of $1.58 billion, and cutting its full-year revenue estimate to $6.42 billion-$6.50 billion from a previous forecast of $6.71 billion-$6.81 billion, well below the consensus of $6.76 billion. 

Nutanix (NTNX) closed down more than -22% after forecasting Q4 revenue of $530 million-$540 million, below the consensus of $546.1 million.

American Eagle Outfitters (AEO) closed down more than -8% after reporting Q1 net revenue of $1.14 billion, below the consensus of $1.15 billion. 

HP Inc (HPQ) closed up more than +16% to lead gainers in the S&P 500 after reporting Q2 net revenue of $12.80 billion, stronger than the consensus of $12.60 billion. 

Best Buy (BBY) closed up more than +13% after reporting Q1 adjusted EPS of $1.20, stronger than the consensus of $1.08. 

Foot Locker (FL) closed up more than +14% after reporting Q1 net sales fell -1.80%, a smaller decline than expectations of -1.93%, and forecasting full-year comparable sales to climb +1% to +3%, the midpoint above the consensus of +1.51%.

Verizon Communications (VZ) closed up more than +2% to lead gainers in the Dow Jones Industrials after being awarded a contract from the US Navy valued at $2.67 billion over ten years to provide wireless devices and services through the Wireless and Telecommunications Services contract vehicle.

PayPal Holdings (PYPL) closed up more than +2% to lead gainers in the Nasdaq 100 after Mizuho Securities upgraded the stock to buy from neutral with a price target of $90.

Corning (GLW) closed up more than +3% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $43.

HCA Healthcare (HCA) closed up more than +2% after Baird initiated coverage of the stock with a recommendation of outperform and a price target of $396..

Insulet (PODD) closed up more than +1% after Redburn initiated coverage of the stock with a buy recommendation and a price target of $235.

Earnings Reports (5/31/2024)

Genesco Inc (GCO), Mesa Laboratories Inc (MLAB).

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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.