Stocks Pressured as Bond Yields Continue to Climb

Rich Asplund - Barchart - Thu Oct 19, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.26%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.42%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.13%.

Stocks this morning are mixed. The broader market is under pressure as the 10-year T-note yield rose to a 16-year high today after an unexpected decline in weekly U.S. jobless claims to an 8-3/4 month low showed labor market strength that may keep the Fed raising interest rates higher for longer. The markets are awaiting comments from Fed Chair Power at the Economic Club of New York later this morning.

Corporate quarterly earnings results are mixed for the market. On the positive side, Netflix is up more than +15% after it reported a larger-than-expected increase in Q3 streaming paid memberships. Also, AT&T and American Airlines Group are up more than +4% after reporting better-than-expected Q3 EPS. On the negative side, Tesla is down more than -8% after reporting weaker-than-expected Q3 EPS.

In the Middle East, United Nations Secretary-General Guterres is traveling to Egypt today, and UK Prime Minister Sunak is in Israel today to meet Israeli leaders before heading to a “number of other regional capitals” as global leaders attempt to keep the Israeli-Hamas war from widening.

U.S. weekly initial unemployment claims unexpectedly fell -13,000 to an 8-3/4 month low of 198,000, showing a stronger labor market than expectations of an increase to 210,000.

The U.S. Oct Philadelphia Fed business outlook survey rose +4.5 to -9.0, weaker than expectations of -7.0.

U.S. Sep existing home sales fell -2.0% m/m to a 13-year low of 3.96 million, although above expectations of 3.89 million.

U.S. Sep leading indicators fell -0.7% m/m, weaker than expectations of -0.4% m/m and the biggest decline in 4 months.

The markets are discounting an 8% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 39% chance for that +25 bp rate hike at the following meeting that ends on December 13. The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields are mixed. The 10-year T-note yield rose to a 16-year high of 4.981% and is up +2.4 bp at 4.939%. The 10-year German bund yield rose to a 2-week high of 2.961% and is up +1.2 bp at 2.937%. The 10-year UK gilt yield rose to a 1-3/4 month high of 4.722% and is up +2.8 bp at 4.685%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -0.43%. China’s Shanghai Composite Index closed down -1.74%. Japan’s Nikkei 225 today closed down -1.91%.

Today’s stock movers…

Netflix (NFLX) is up more than +14% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q3 streaming paid memberships of +247.15 million, well above the consensus of +244.41 million.

AT&T (T) is up more than +6% in pre-market trading after reporting Q3 free cash flow of $5.2 billion, above the consensus of $4.6 billion.

Union Pacific (UNP) is up more than +5% after reporting Q3 EPS of $2.51, stronger than the consensus of $2.41.

Las Vegas Sands (LVS) climbed more than +5% in pre-market trading after reporting Q3 adjusted property Ebitda of $1.12 billion, above the consensus of $1.06 billion, and its board of directors authorized a $2 billion stock buyback program.

American Airlines Group (AAL) is up more than +3% after reporting Q3 adjusted EPS of 38 cents, stronger than the consensus of 25 cents.

Truist Financial (TFC) is up more than +3% after reporting Q3 net interest margin of 2.95%, better than the consensus of 2.82%.

Fifth Third Bancorp (FITB) is up more than +2% after reporting Q3 net interest income of $1.45 billion, above the consensus of $1.43 billion.

Best Buy (BBY) is up more than +1% after Goldman Sachs upgraded the stock to buy from neutral with a price target of $85.

Tesla (TSLA) is down more than -8% to lead losers in the Nasdaq 100 after reporting Q3 EPS of 66 cents, below the consensus of 74 cents, with gross margins of 17.9%, weaker than the consensus of 18%.

Genuine Parts (GPC) is down more than -8% after reporting Q3 net sales of $5.80 billion, weaker than the consensus of $5.94 billion.

Discover Financial Services (DFS) is down more than -8% after reporting Q3 EPS of $2.59, well below the consensus of $3.17.

Rollins Inc (ROL) is down more than -9% to lead losers in the S&P 500 after peer Rentokil Initial reported weaker consumer demand for its pest control business in the U.S.

Lam Research (LRCX) is down more than -5% after reporting Q1 customer support-related revenue of $1.43 billion, weaker than the consensus of $1.51 billion.

Zions Bancorp (ZION) is down more than -4% after reporting Q3 total deposits of $75.40 billion, below the consensus of $76.51 billion.

Blackstone (BX) is down more than -4% after reporting Q3 distributable income/share of 94 cents, weaker than the consensus of $1.01.

Crown Castle (CCI) is down more than -3% after reporting Q3 net revenue of $1.67 billion, weaker than the consensus of $1.69 billion.

Across the markets…

December 10-year T-notes (ZNZ23) this morning are down -9 ticks, and the 10-year T-note yield is up +2.4 bp at 4.939%. Dec T-notes today fell to a 16-year nearest-futures low, and the 10-year T-note yield climbed to a 16-year high of 4.981%. T-notes are under pressure today after weekly U.S. jobless claims unexpectedly fell to an 8-3/4 month low, which signals labor market strength that is hawkish for Fed policy. Also, an increase in inflation expectations is bearish for T-notes after the 10-year breakeven inflation rate today climbed to a 2-3/4 month high of 2.454%. T-notes recovered from their worst levels after U.S. Sep leading indicators fell more than expected and Sep existing home sales fell to a 13-year low.

The dollar index (DXY00) today is down by -0.21%. The dollar is falling today as a steady stock market has reduced the liquidity demand for the dollar. The dollar was also undercut by today’s weak economic reports that included Sep leading indicators and existing home sales. Losses in the dollar are limited after the 10-year T-note yield climbed to a 16-year high, which strengthened the dollar’s interest rate differentials.

EUR/USD (^EURUSD) today is up by +0.35%. The euro today is moving higher on weakness in the dollar. Gains were limited after today’s economic news showed French Oct business confidence fell more than expected to a 2-1/2 year low.

French Oct business confidence fell -2 to a 2-1/2 year low of 98, weaker than expectations of 99.

USD/JPY (^USDJPY) today is down by -0.07%. The yen today is moving higher after the BOJ upgraded its economic assessments for the most regions in Japan in more than a year, a sign of growing confidence in Japan’s recovery. Also, higher Japanese government bond yields strengthened the yen after the 10-year JGB bond yield today rose to a 10-year high of 0.851%. Gains in the yen were contained by higher T-note yields after the 10-year T-note yield climbed to a 16-year high.

In a quarterly report today, the BOJ upgraded its economic assessments for the most regions in more than a year, a sign of growing confidence in Japan’s recovery. The BOJ raised its economic view for six of nine areas in Japan and kept the other three regions unchanged.

December gold (GCZ3) today is down -5.0 (-0.25%), and Dec silver (SIZ23) is down -0.219 (-0.95%). Precious metals prices this morning are moderately lower. Higher global bond yields today are weighing on precious metals. Also, the unexpected decline in U.S. weekly jobless claims to an 8-3/4 moth low pressured metals prices on concern that labor market strength could keep the Fed raising interest rates higher for longer. Losses in precious metals are limited by today’s weakness in the dollar. Also, gold found support after the 10-year U.S. breakeven inflation rate today rose to a 2-3/4 month high, which boosted demand for gold as an inflation hedge. In addition, concerns about the escalation of the Israeli-Hamas conflict have boosted the safe-haven demand for precious.

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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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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Stocks Pressured as Bond Yields Continue to Climb