The S&P 500 Index ($SPX) (SPY) Wednesday closed down -0.74%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.06%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.70%.
US stock indexes Wednesday settled moderately lower, with the Dow Jones Industrials falling to a 3-1/2 week low. Stocks retreated on rising bond yields and concern that the Fed will keep interest rates higher for longer. The 10-year T-note yield rose to a 4-week high Wednesday on the heels of Tuesday’s unexpected increase in US May consumer confidence and weak demand for the Treasury’s 2-year and 5-year T-note auctions. Stock indexes fell to their lows Wednesday afternoon after T-note yields rose even higher on weak demand for the Treasury’s $44 billion auction of 7-year T-notes.
M&A activity Wednesday was supportive for stocks after ConocoPhillips agreed to acquire Marathon Oil in an all-stock deal valued at about $17 billion. Also, Merck & Co. agreed to buy Eyebiotech Ltd for as much as $3 billion.
The markets are awaiting this Friday’s April PCE core deflator, the Fed’s preferred inflation gauge, for clues as to when the Fed might begin cutting interest rates. Expectations are for the Apr PCE core deflator to remain unchanged from March at +2.8% y/y.
Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%. According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates.
US MBA weekly mortgage applications fell -5.7% in the week ended May 24. The purchase mortgage sub-index fell -1.1%, and the refinancing mortgage sub-index fell -13.6%. The average 30-year fixed rate mortgage rose +0.04 bp to 7.05% from 7.01% in the prior week.
The US May Richmond Fed manufacturing outlook survey rose +7 to a 7-month high of 0, stronger than expectations of no change at -7.
The Fed Beige Book was neutral for stocks, stating that the US economy expanded at a "slight or modest" pace across most regions since early April. Also, "retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers." Employment rose at a slight pace, with eight of twelve districts reporting "negligible to modest job gains," and prices increased at a "modest pace," with business contacts noting consumers pushed back against additional price increases.
The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting and 10% for the following meeting on July 30-31.
Overseas stock markets Wednesday settled mixed. The Euro Stoxx 50 fell to a 3-week low and closed down -1.33%. China's Shanghai Composite closed up +0.05%. Japan's Nikkei Stock Index closed down -0.77%.
Interest Rates
June 10-year T-notes (ZNM24) Wednesday closed down -17 ticks. The 10-year T-note yield rose +7.0 bp to 4.620%. June T-notes today extended Tuesday’s losses to a 4-week low, and the 10-year T-note yield rose to a 4-week high of 4.636%. Wednesday’s slump in 10-year German bunds to a 6-month low weighed on T-note prices. Also, an increase in inflation expectations was negative for T-notes after the 10-year breakeven inflation rate Wednesday rose to a 3-1/2 week high of 2.374%. T-notes fell to their lows Wednesday afternoon on weak demand for the Treasury’s $44 billion 7-year T-note auction with a bid-to-cover ratio of 2.43, below the 10-auction average of 2.55 and the lowest in 13 months.
European government bond yields Wednesday moved higher. The 10-year German bund yield rose to a 6-1/2 month high of 2.693% and finished up +9.8 bp at 2.690%. The 10-year UK gilt yield rose to a 6-1/2 month high of 4.403% and finished up +11.9 bp at 4.400%.
German May CPI (EU harmonized) rose +2.8% y/y, stronger than expectations of +2.7% y/y and the largest increase in 4 months.
The German Jun GfK consumer confidence index rose +3.1 to a 2-year high of -20.9, stronger than expectations of -22.5.
ECB Governing Council member Kazaks said the ECB shouldn't switch to "autopilot" in cutting interest rates following an expected rate cut next week.
US Stock Movers
Airline stocks were under pressure Wednesday after American Airlines Group cut its Q2 adjusted EPS forecast to $1.00-$1.5 from a previous estimate of $1.15-$1.45, well below the consensus of $1.30. As a result, American Airlines Group (AAL) closed down more than -13% to lead losers in the S&P 500. Also, Southwest Airlines (LUV) closed down more than -3%, and Alaska Air Group (ALK) closed down more than -2%.
Managed healthcare stocks retreated Wednesday after UnitedHealth Group said it sees a “disturbance” coming as states pare enrollees in their Medicaid health programs after the end of the pandemic. As a result, Centene (CNC) and Molina Healthcare (MOH) closed down more than -3%. Also, UnitedHealth Group (UNH) closed down more than -3% to lead losers in the Dow Jones Industrials. In addition, Elevance Health (ELV) closed down more than -1%, and Humana (HUM) closed down -0.60%.
Regional bank stocks moved lower after Citigroup downgraded Banof OZK to sell from buy with a price target of $37, citing loan worries. As a result, Bank OZK (OZK) closed down more than -13%. Also, Regions Financial (RF), Comerica (CMA), KeyCorp (KEY), Citizens Financial Group (CFG), M&T Bank (MTB), and US Bancorp (USB) closed down more than -1%.
Walgreens Boots Alliance (WBA) closed down more than -3% after announcing it will lower prices on over 1,300 products in its stores throughout the summer season and beyond.
Sage Therapeutics (SAGE) closed down more than -8% after Citigroup downgraded the stock to sell from neutral with a price target of $8.
Columbus McKinnon (CMCO) closed down more than -6% after reporting Q4 adjusted EPS of 75 cents, weaker than the consensus of 84 cents.
Bruker Corp (BRKR) closed down more than -3% after Nephron Research LLOC downgraded the stock to sell from hold with a price target of $65.
Marathon Oil (MRO) closed up more than +8% to lead gainers in the S&P 500 after ConocoPhillips agreed to acquire the company in an all-stock deal valued at about $17 billion.
Dick’s Sporting Goods (DKS) closed up more than +16% after reporting Q1 net sales of $3.02 billion, stronger than the consensus of $2.94 billion, and raising its full-year comparable sales forecast to +2% to +3% from a previous forecast of +1% to +2%, above the consensus of +2%.
Chewy (CHWY) closed up more than +27% after reporting Q1 net sales of $2.88 billion, above the consensus of $2.85 billion.
Abercrombie & Fitch (ANF) closed up more than +24% after reporting Q1 net sales of $1.0 billion, better than the consensus of $958.7 million, and raising its full-year net sales forecast to +10% from a previous estimate of +4% to +6%.
United Airlines (UAL) closed up more than +2% after Jeffries upgraded the stock to buy from hold with a price target of $65.
Earnings Reports (5/30/2024)
Best Buy Co Inc (BBY), Birkenstock Holding Plc (BIRK), Burlington Stores Inc (BURL), Cooper Cos Inc/The (COO), Costco Wholesale Corp (COST), Dollar General Corp (DG), Elastic NV (ESTC), Gap Inc/The (GPS), HashiCorp Inc (HCP), Hormel Foods Corp (HRL), Kohl's Corp (KSS), Marvell Technology Inc (MRVL), MongoDB Inc (MDB), NetApp Inc (NTAP), Nordstrom Inc (JWN), Roivant Sciences Ltd (ROIV), SentinelOne Inc (S), Ulta Beauty Inc (ULTA), Veeva Systems Inc (VEEV), Zscaler Inc (ZS).
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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.