Stocks Retreat as Bond Yields Jump on Reduced Rate-Cut Expectations

The S&P 500 Index ($SPX) (SPY) Monday closed down by -0.96%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down by -0.94%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down by -1.17%.

Stocks on Monday retreated, with the Dow Jones Industrials falling to a 2-1/2 week low.  Reduced expectations of Fed rate cuts pushed bond yields higher Monday and undercut stocks. The 10-year T-note yield climbed to a 2-month high Monday on bearish carryover from last Friday when the stronger-than-expected US Sep payroll report eliminated the market odds for a -50 bp rate cut by the Fed at next month’s FOMC meeting. 

Middle East tensions pushed up WTI crude oil (CLX24) by more than +3% Monday to a 7-week high and dampened the appetite for risk assets.  In addition to Gaza, Israel is waging a ground and air offensive in Lebanon to combat Hezbollah.  The Israel Defense Force (IDF) said Monday that it deployed a third division of troops in southern Lebanon while maintaining airstrikes in Beirut’s southern suburbs.  The markets are also awaiting Israel’s response to last Tuesday’s missile barrage from Iran after Israeli Prime Minister Netanyahu vowed to retaliate, saying Iran “made a big mistake” and “will pay.” 

US Sep consumer credit rose +$8.929 billion, weaker than expectations of +$12.0 billion.

Hawkish comments Monday from Minneapolis Fed President Kashkari were bearish for stocks when he said the Fed still has a ways to go on reducing the size of its balance sheet, but it won't get back to per-Covid levels.

The markets are awaiting US consumer price news on Thursday to see if the trend toward easing prices will continue.  The consensus is for Sep CPI to ease to +2.3% y/y from +2.5% y/y in Aug.  Sep CPI ex-food and energy is expected to remain unchanged from Aug at +3.2% y/y. 

The markets are discounting the chances at 85% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.

Overseas stock markets on Monday settled higher.  The Euro Stoxx 50 closed up by +0.30%.  China's Shanghai Composite is closed for the week-long National Day holiday.   Japan's Nikkei Stock 225 rose to a 1-week high and closed up by +1.8-%.

Interest Rates

December 10-year T-notes (ZNZ24) Monday closed down by -11.5 ticks.  The 10-year T-note yield rose +5.7 bp to 4.024%.  Dec T-notes Monday dropped to a 2-1/4 month low, and the 10-year T-note yield rose to a 2-month high of 4.031%.  T-notes on Monday were under pressure due to negative carryover from last Friday’s stronger-than-expected September payroll report, which eliminated the market odds of a -50 bp Fed rate cut at next month’s FOMC meeting.  Also, an increase in inflation expectations weighed on T-note prices after the 10-year breakeven inflation rate rose to a 2-1/4 month high Monday of 2.272%.  In addition, supply pressures are undercutting T-notes as the Treasury will auction $119 billion of T-notes and T-bonds this week, beginning with Tuesday’s auction of $58 billion of 3-year T-notes.

European government bond yields Monday moved higher.  The 10-year German bund yield rose to a 1-month high of 2.260% and finished up +4.6 bp to 2.256%.  The 10-year UK gilt yield climbed to a 3-month high of 4.211% and finished up +7.8 bp to 4.208%.

The Eurozone Oct Sentix investor confidence index rose +1.6 to -13.8, stronger than expectations of no change at -15.4.

Eurozone Aug retail sales rose +0.2% m/m, right on expectations.

German Aug factory order fell -5.8% m/m, weaker than expectations of -2.0% m/m and the largest decline in 7 months.

ECB Governing Council member Villeroy de Galhau said the ECB will "quite probably" cut interest rates at its meeting later this month.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 92% for the October 17 meeting.

US Stock Movers

Insurance companies that provide property and casualty insurance in Florida sold off Monday as Hurricane Milton strengthened to a Category 5 storm and will make landfall on Florida’s west coast on Wednesday, potentially causing millions of dollars of damage.  Heritage Insurance Holdings (HRTG) closed down more than -23%, and HCI Group (HCI) closed down more than -17%.  Also, Everest Group (EG) closed down more than -8% to lead losers in the S&P 500.  In addition, Renaissance Holdings (RNR) closed down more than -9%, and Arch Capital Group (ACGL) closed down more than -6%.  Finally, Travelers (TRV) closed down more than -4% to lead losers in the Dow Jones Industrials.

Amazon.com (AMZN) closed down more than -3% after Wells Fargo Securities downgraded the stock to equal weight from overweight. 

Apple (AAPL) closed down more than -2% after Jeffries said high expectations for the company’s iPhone 16 and iPhone 17 sales are premature due to a lack of material new features and limited AI coverage. 

Deckers Outdoor (DECK) closed down more than -4% after Seaport Global Securities downgraded the stock to neutral from buy. 

Garmin Ltd (GRMN) closed down more than -4% to lead losers in the S&P 500 after Morgan Stanley downgraded the stock to underweight from equal weight with a price target of $139. 

Ciena Corp (CIEN) closed down more than -4% after JPMorgan Chase downgraded the stock to neutral from overweight. 

Domino’s Pizza (DPZ) closed down more than -3% after Evercore ISI initiated a tactical underperform on the stock ahead of its Q3 earnings results on Thursday. 

Netflix (NFLX) closed down more than -2% after Barclays downgraded the stock to underweight from equal weight with a price target of $550.

Super Micro Computer (SMCI) closed up more than +15% to lead gainers in the S&P 500 and Nasdaq 100 after Bloomberg Intelligence said recent company data suggest customer demand “is robust and hasn’t been dented by its internal stumbles, such as 10-K filing delay and reported US probe.”

Air Products and Chemicals (APD) closed up more than +9% after the Wall Street Journal reported activist investor Mantle Ridge has a more than $1 billion stake in the company. 

Generac Holdings (GNRC) closed up more than +8% on expectations that Hurricane Milton, now a major Category 5 storm,  will hit Florida and knock out power and boost generator sales for the company. 

Pfizer (PFE) closed up more than +2% after activist investor Starboard Value is said to have taken a stake of about $1 billion in the company. 

Casino stocks with exposure to Macau moved higher Monday after gross gaming revenue for Macau during China’s Golden Week holiday was up +30% y/y to the highest in five years.  As a result, Wynn Resorts Ltd (WYNN), Las Vegas Sands (LVS), and MGM Resorts International (MGM) closed up more than +1%.   

Coupang (CPNG) closed up more than +5% after Bernstein upgraded the stock to outperform from underperform with a price target of $30.

Frontline Plc (FRO) closed up +5% after BTIG LLC upgraded the stock buy from neutral with a price target of $30. 

Earnings Reports (10/8/2024)

Accolade Inc (ACCD), Critical Metals Corp (CRML), IDT Corp (IDT), PepsiCo Inc (PEP).

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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.