Stocks Settle Mixed on Fears of Aggressive Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.38%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.50%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.21%. 

Stocks on Tuesday settled mixed, with the S&P 500 falling to a 15-month low and the Dow Jones Industrials dropping to a 16-month low, and the Nasdaq 100 rebounding from a 19-month low and closing slightly higher.

Stock indexes Tuesday erased an early rally as T-note yields continue to climb.  The 10-year T-note yield jumped to a new 11-year high Tuesday at 3.497%.  The markets expect the FOMC to raise the target on the fed funds range by at least 50 bp after its two-day policy meeting that begins today.  However, expectations are building for a 75 bp Fed rate hike Wednesday after a Wall Street Journal report suggested the Fed may raise rates as much as 75 bp.  In addition, JPMorgan Chase said that even a full percentage point (100 bp) increase Wednesday is a possibility.

Stocks Tuesday initially moved higher after U.S. May producer prices rose less than expected and after Oracle rallied more than +10% when it reported better-than-expected quarterly revenue.  Also, FedEx jumped +14% Tuesday after it boosted its dividend. Stocks also garnered support on a decline in inflation expectations after the 10-year breakeven inflation rate Tuesday dropped to a 2-1/2 week low.

The U.S. May final-demand PPI index rose +10.8% y/y, slightly weaker than expectations of +10.9% y/y.  U.S. May PPI ex-food & energy rose +8.3% y/y, weaker than expectations of +8.6% y/y and the smallest rise in 6 months.

Today’s stock movers…

Utility stocks retreated Tuesday and weighed on the S&P 500 after the 10-year T-note yield soared to a new 11-year high.  American Water Works (AWK) closed down more than -5%, and Pinnacle West Capital (PNW) closed down more than -4%.  Also, PPL Corp (PPL), Centerpoint Energy Resources (CNP), Hawaiian Electric Industries (HE), and Eversource Energy (ES) closed down by more than -3%.

Coca-Cola (KO) closed down more than -3% Tuesday to lead losers in the Dow Jones Industrials after it said it is delaying its plan to publicly list its Africa division via an IPO due to “macroeconomic conditions.”

Henry Schein (HSIC) closed down more than -4% Tuesday after Baird cut its recommendation in the stock to neutral from outperform.

FedEx (FDX) closed up more than +14% Tuesday to lead gainers in the S&P 500 after it raised its dividend by +53%, cut capital spending, and appointed two new board members as part of an agreement with investor D.E. Shaw.

Oracle (ORCL) closed up more than +10% Tuesday after reporting Q4 revenue of $11.84 billion, stronger than the consensus of $11.66 billion.

Boeing (BA) closed up more than +5% Tuesday to lead gainers in the Dow Jones Industrials after the Seattle Times reported that Boeing may resume 787 Dreamliner deliveries in the coming weeks, citing a Federal Aviation Administration official.

U.S.-listed Chinese stocks moved higher Tuesday after a rally in the Shanghai Composite to a 2-1/4 month high improved sentiment toward Chinese stocks. Pinduoduo (PDD) closed up more than +11% to lead gainers in the Nasdaq 100.  Also, JD.com (JD), Alibaba Group Holding (BABA), and Baidu (BIDU) closed up more than +6%.  In addition, NetEase (NTES) closed up by more than +3%. 

Monster Beverage (MNST) closed up by more than +3% Tuesday on the outlook for stronger future sales after RBC Capital Markets confirmed that peer Reb Bull had communicated a price increase to its trade partners of about 7% that will go into effect in September.

Across the markets…

Sep 10-year T-notes (ZNU22) on Tuesday closed lower by -28 ticks, and the 10-year T-note yield rose +12.5 bp to 3.485%. T-note prices Tuesday erased an early rally and fell sharply for a third session and posted a new 12-year low, and the 10-year T-note yield climbed to a fresh 11-year high of 3.497%.   T-notes are under pressure ahead of the results of the Tue/Wed FOMC meeting, where expectations have increased for a 75 bp Fed rate hike, up from expectations of a 50 bp rate hike last week.  T-notes Tuesday morning initially moved higher after U.S. May PPI rose less than expected and after inflation expectations declined as the 10-year breakeven inflation rate fell to a 2-1/2 week low at 2.605%.

Soaring European government bond yields are another bearish factor for T-note prices after the 10-year German bund yield Tuesday rose to an 8-year high of 1.771%, and the 10-year UK gilt yield rose to a 7-3/4 year high of 2.612%.