Stocks Retreat as Bond Yields Surge on US Price Pressures

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.95%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.87%. 

Stock indexes Wednesday sold off, with the S&P 500 posting a 3-week low and the Dow Jones Industrials posting a 1-3/4 month low.  A surge in T-note yields Wednesday weighed on stocks after US March CPI came in hotter than expected for a third straight month, bolstering expectations the Fed will be in no hurry to cut interest rates.  Fed swaps prices have now priced in only 50 bp of rate cuts this year, less than the Fed’s recent dot-plot for 75 bp. 

Heightened geopolitical risks in the Middle East also undercut stocks after US intelligence said it believes a major missile or drone strike by Iran or its proxies against military and government targets in Israel is imminent.  Iran has said it will launch some type of attack on Israeli assets as revenge for the recent Israel airstrike on Iran's consulate in Syria that killed some top Iranian military commanders. 

US Mar CPI rose +0.4% m/m and +3.5% y/y, stronger than expectations of +0.3% m/m and +3.4% y/y.  Also, Mar CPI ex-food and energy rose +0.4% m/m and +3.8% y/y, stronger than expectations of +0.3% m/m and +3.7% y/y.

The minutes of the March 19-20 FOMC meeting said that almost all officials supported cutting interest rates "at some point this year," although the committee discussed "the possibility of maintaining the current restrictive policy stance for longer should the disinflation process slow."  On the Fed's balance sheet, policymakers "generally favored" reducing by "roughly half" the current pace of asset reduction as existing bond holdings mature.

Richmond Fed President Barkin said, "I think we're making a lot of progress on inflation, but we need to be humble about how easy it is to get there," and that Wednesday's figures suggest it may just take some time to get inflation back down.

Q1 corporate earnings season begins in earnest this Friday with results from big banks, including JPMorgan Chase, Citigroup, and Wells Fargo.  The consensus is that S&P 500 companies will post an average of +3.9% y/y profit growth in Q1, the smallest year-over-year profit growth since 2019.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 19% for the following meeting on June 11-12.

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.20%.  China's Shanghai Composite fell to a 1-1/2 week low and closed down -0.70%.  Japan's Nikkei Stock Index closed down -0.48%.

Interest Rates

June 10-year T-notes (ZNM24) on Wednesday fell sharply by -1-10/32 points. The 10-year T-note yield jumped +19.2 bp to 4.554%.  June T-notes tumbled to a 4-1/2 month low Wednesday, and the 10-year T-note yield soared to a 4-3/4 month high of 4.566%.  Wednesday’s stronger-than-expected US Mar CPI report hammered T-note prices and reduced Fed rate cut expectations.  A jump in inflation expectations also undercut T-note prices as the 10-year breakeven inflation rate Wednesday climbed to a 5-1/4 month high of 2.424%. T-note prices dropped to their lows Wednesday afternoon on weak demand for the Treasury’s $39 billion auction of reopened 10-year T-notes that had a bid-to-cover ratio of 2.34, well below the 10-auction average of 2.51. 

European government bond yields Wednesday moved higher.  The 10-year German bund yield rose +6.4 bp to 2.435%.  The 10-year UK gilt yield rose to a 5-week high of 4.150% and finished up +11.9 bp at 4.148%.

US Stock Movers

Deckers Outdoor Group (DECK) closed down more than -6% to lead losers in the S&P 500 after Truist Securities downgraded the stock to hold from buy.

Homebuilding stocks were under pressure Wednesday after the 10-year T-note yields rose to a 4-3/4 month high, a bearish factor for housing demand. DR Horton (DHI) and Builders FirstSource (BLDR) closed down more than -6%.  Also, Lennar (LEN) and PulteGroup (PHM) closed down more than -5%.  In addition, Toll Brothers (TOL) closed down more than -3%.

Property management stocks and REITs sold off Wednesday with the surge in bond yields.  As a result, Boston Properties (BXP) closed down more than -6%.  Also, VICI Properties (VICI), Alexandria Real Estate Equities (ARE), American Tower (AMT), and Kimco Realty (KIM) closed down more than -5%.  In addition, Crown Castle (CCI) and Realty Income Corp (O) closed down more than -4%.  Finally, Healthpeak Properties (DOC), Digital Realty Trust (DLR), and Simon Property Group (SPG) closed down more than -3%.

Chip stocks retreated Wednesday with the jump in bond yields. GlobalFoundries (GFS) and NXP Semiconductors (NXPI) closed down more than -4%.  Also, Microchip Technology (MCHP) and Analog Devices (ADI) closed down more than -3%.  In addition, ON Semiconductors (ON), In addition, Advanced Micro Devices (AMD), Intel (INTC), Marvel Technology (MRVL), and Texas Instruments (TXN) closed down more than -2%. 

Hexel Corp (HXL) is down more than -11% after Northcoast Research downgraded the stock to neutral from buy.

Monday.com Ltd (MNDY) closed down more than -6% after Citigroup downgraded the stock to neutral from buy.   

America’s Car-Mart (CRMT) closed down more than -5% after Bank of America Global Research maintained its underperform rating on the stock and cut its price target to $50 from $55.

Adient Plc (ADNT) closed down more than -4% after Barclays downgraded the stock to equal weight from overweight.

Axon Enterprise (AXON) closed up more than +2% after Needham & Co. raised its price target on the stock to $400 from $315.

Nvidia (NVDA) closed up more than +1% to lead gainers in the Nasdaq 100 after Bank of America affirmed a buy rating and a price target of $1,100 for the stock and said, “Fundamentals are solidly on track, and periods of consolidation tend to set the stock up for strong moves later.”

Coterra Energy (CTRA) closed up more than +1% after Barclays initiated coverage on the stock with a recommendation of overweight and a price target of $36.

McKesson (MCK) closed up more than +1% after Argus Research raised its price target on the stock to $570 from $510.

Revolution Medicines (RVMD) closed up more than +11% after Raymond James upgraded the stock to strong buy from outperform with a price target of $48. 

Earnings Reports (4/11/2024)

Applied Digital Corp (APLD), Argan Inc (AGX), CarMax Inc (KMX), Constellation Brands Inc (STZ), Eagle Pharmaceuticals Inc/DE (EGRX), Fastenal Co (FAST), Hooker Furnishings Corp (HOFT), Lovesac Co/The (LOVE).

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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.