What you need to know…
The S&P 500 Index ($SPX) (SPY) Thursday fell by -1.11%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.73%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -1.81%.
Stocks Thursday were led lower by tech stocks, which took another hit after Meta Platforms (META) fell -3.80% after warning about ad revenue in an uncertain economic environment. Meanwhile, Alphabet (GOOGL) fell another -2.72% on Thursday, adding to Wednesday’s -9.28% plunge on its disappointing cloud earnings report. Amazon.com fell by -1.11% in sympathy with other tech stocks, but then rallied by more than +2% after Thursday’s close on a positive earnings report.
Stocks Thursday were undercut by Middle East tensions after news that Israel conducted a limited tank incursion into Gaza before withdrawing. The markets are waiting for Israel’s all-out ground invasion, which could spark an expansion of the war that includes Hezbollah and other Iranian-backed proxies.
Thursday’s U.S. economic reports were generally stronger than expected, although the markets mostly ignored the reports due to expectations for economic weakness over the next several quarters. U.S. Q3 GDP rose +4.9% (q/q annualized), stronger than expectations of +4.5%. Q3 GDP was boosted by temporary factors and there is expected to be negative GDP payback in Q4. The Q4 GDP price index rose +3.5%, stronger than expectations of +2.7%, but the core price index rose by +2.4%, slightly weaker than expectations of +2.5%.
Also on the strong side, Sep U.S. durable goods orders rose +4.7%, much stronger than expectations of +1.9%. Sep core (ex-defense and aircraft) capital goods orders, a proxy for capital spending, rose +0.6%, stronger than expectations of unchanged. In addition, the Sep U.S. pending home sales report of +1.1% m/m and -13.1% y/y was stronger than expectations of -2.0% m/m and -14.6% y/y.
On the weaker side, U.S. weekly initial unemployment claims rose by +10,000 to 210,000, which showed a slightly weaker labor market than expectations for an increase to 207,000. Weekly continuing claims rose by +63,000 to 1.790 million, showing a weaker labor market than expectations for an increase to 1.74 million.
The markets are discounting a 2% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and an 18% 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 mid-2024 in response to an expected slowdown in the U.S. economy.
U.S. and European bond yields fell. The 10-year T-note yield fell sharply by -11.3 bp to 4.842%. The 10-year German bund yield fell by -2.8 bp to 2.861%. The 10-year UK gilt yield fell by -1.3 bp to 4.597%.
The European Central Bank (ECB) Thursday left its key rates unchanged, in line with market expectations, with the deposit rate at 4.00% and the main refinancing rate at 4.50%. The markets had expected the ECB to halt its rate-hike regime Thursday, given the weakness in the Eurozone economy and the recent rise in European bond yields. The markets are discounting a small 5% chance for an ECB rate hike at its meeting in December, but the market is then discounting ECB rate cuts for 2024.
Overseas stock markets were mixed. The Euro Stoxx 50 fell by -0.59%. China’s Shanghai Composite Index closed up +0.48%. Japan’s Nikkei 225 closed down -2.14%.
Today’s stock movers…
Meta Platforms (META) fell -3.35% after the company warned about the likelihood of lower ad revenues, with the CFO saying, “We are very subject to volatility in the macro landscape. The revenue outlook is uncertain” for 2024. Analysts were also concerned about Meta’s profitability, given its heavy spending on AI and virtual reality.
Mastercard (MA) fell -5.25%after predicting lower-than-expected revenue growth.
Mattel (MAT) fell -7.24% after the company disappointed investors by citing softness in the toy industry and weaker global economic growth.
Ford (F) fell -1.25% despite news that Ford and the UAW reached a tentative labor agreement.
Merck (MRK) rose +2.26% after boosting its sales guidance for 2023.
IBM (IBM) rose +5.29% after a Q3 earnings beat and affirmation of its guidance.
Flex (FLEX) rose +11.42% after a positive reception for its earnings report.
Across the markets…
December 10-year T-notes (ZNZ23) on Thursday closed +21.5 ticks, and the 10-year T-note yield fell by -11.3 bp to 4.842%. T-note prices Thursday shook off the generally strong U.S. economic reports and rose on reduced expectations for Fed tightening. The market Thursday reduced expectations for a rate hike at the FOMC’s December meeting to 18% from 24% in the previous session.
T-note prices also saw support from a -1.3 bp drop in the 10-year breakeven inflation expectations rate to 2.424%, driven in part by Thursday’s -2.6% decline in crude oil prices. T-note prices were undercut by supply pressure as the Treasury on Thursday sold $38 billion of 7-year T-notes, concluding this week’s $167 billion T-note package.
Treasury Secretary Yellen on Thursday said that the recent surge in T-note yields is due to the strong U.S. economy, not to federal budget deficits. There has been increased market concern about the U.S. federal budget deficit, considering that the post-pandemic rise in interest rates has substantially raised the Treasury’s cost of financing the massive budget deficit.
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.
