Stocks Slightly Lower as U.S. Manufacturing Activity Unexpectedly Contracts

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.05%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.109%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.03%.

Stocks this morning gave up an early advance and are slightly lower on economic concerns after the Jun ISM manufacturing index unexpectedly contracted by the most in three years.  Also, an increase in inflation expectations is weighing on stocks after the 10-year breakeven inflation rate rose to a 5-week high.

Stocks this morning initially opened higher on a +7% jump in Tesla after the company reported record quarterly sales.  U.S. stocks also have carry-over support from a rally in Chinese stocks today on better-than-expected Chinese manufacturing news and a rally in the Euro Stoxx 50 to a 15-year high.  Today's market activity may be below average as stock and bond markets close early before Tuesday’s July 4th holiday, when U.S. markets will be closed. 

The U.S. Jun ISM manufacturing index unexpectedly fell -0.9 to 46.0, weaker than expectations of an increase to 47.1 and the steepest pace of contraction in more than three years.  The Jun ISM prices paid sub-index fell to -2.4 to a 6-month low of 41.8, a bigger decline than expectations of 44.0.

U.S. May construction spending rose +0.9% m/m, stronger than expectations of +0.6% m/m.

The markets are discounting the odds at 85% for a +25 bp rate hike at the next FOMC meeting on July 25-26. The markets are anticipating a peak funds rate of 5.42% by November, which is +35 bp higher than the current effective federal funds rate of 5.07%.

Global bond yields are mixed.  The 10-year T-note yield is down -0.6 bp at 3.831%. The 10-year German bund yield is up +3.2 bp at 2.424%, and the 10-year UK Gilt yield is up +3.8 bp at 4.427%.  

Overseas stock markets are higher.  The Euro Stoxx 50 is up +0.08%.  China’s Shanghai Composite Index today closed up +1.31%. Japan’s Nikkei Stock Index today closed up +1.70%.

Today’s stock movers…

Tesla (TSLA) is up more than +7% to lead gainers in the S&P 500 and Nasdaq 100 after reporting it delivered a record 466,140 cars worldwide in Q2, better than the consensus of 448,350.  Other electric vehicle makers are also higher on the news.  Rivian Automotive (RIVN) is up more than +13%, and Lucid Group (LCID) is up more than +5%. 

Fidelity National Information Services (FIS) is up more than +4% after the Financial Times reports that private equity firms are considering buying a majority stake in Wordpay at a valuation exceeding $15 billion, a move analysts said is positive for the share price of FIS. 

Regional bank stocks are climbing today.  KeyCorp (KEY), Zions Bancorp (ZION), Comerica (CMA), and Truist Financial (TFC) are up more than +2%.  Also, Huntington Bancshares (HBAN), Fifth Third Bancorp (FITB), Regions Financial (RF), Lincoln National (LNC), and Northern Trust (NTRS) are up more than +1%.

AstraZeneca (AZN) is down more than -7% to lead losers in the Nasdaq 100 after Barclays said the lack of the phrase “clinically meaningful” and the presence of deaths related to the trial of its lung cancer drug candidate datapotamab are key concerns for the drug. 

Medical device companies are under pressure today. Align Technology (ALGN), Baxter International (BAX), Steris Plc (STE), Edwards Lifesciences (EW), Idexx Laboratories (IDXX), Insulet Corp (PODD), and Stryker (SYK) are down more than -2%. 

Across the markets…

September 10-year T-notes (ZNU23) today are up two ticks, and the 10-year T-note yield is down -0.6 bp at 3.831%.  Sep T-notes today recovered from early losses and are modestly higher, and the 10-year T-note yield fell after the Jun ISM manufacturing index unexpectedly contracted by the most in 3 years.  Also, a decline in the Jun ISM prices paid sub-index to a 6-month low was supportive for T-notes.  On the negative side is an increase in inflation expectations after the 10-year breakeven inflation rate today climbed to a 5-week high of 2.263%. 

The dollar index (DXY00) today is up slightly by +0.06%.  The dollar is slightly higher on the view the Fed will keep raising interest rates with the odds at 85% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The dollar fell back from its best levels today after the Jun ISM manufacturing index unexpectedly fell to a 3-year low.

EUR/USD (^EURUSD) is down slightly by -0.02% after the Eurozone Jun S&P manufacturing PMI was revised downward to a 3-year low.  USD/JPY (^USDJPY) is up +0.08%.  The yen is slightly lower and just above last Friday’s 7-1/2 month low on central bank divergence as the Fed and ECB continue to raise interest rates while the BOJ maintains QE and record-low interest rates.  Losses in the yen are limited due to lower T-note yields and an improvement in Japanese business confidence after the Q2 Tankan large manufacturing business conditions increased for the first time in the last seven quarters. 

August gold (GCQ3) today is up +6.0 (+0.31%), and Sep silver (SIU23) is up +0.165 (+0.72%). Precious metals prices are moderately higher.  Today's decline in T-note yields is bullish for gold along with an unexpected decline in the June ISM manufacturing index, which may prompt the Fed to slow its interest rate increases.  Silver prices also found support after the China Jun Caixin manufacturing PMI fell less than expected, a positive sign for industrial metals demand.  A stronger dollar today is limiting the upside in metals prices.

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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.