Stocks Post Modest Losses as Debt Ceiling Talks Hit an Impasse

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed down -0.14%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.33%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.23%.

Stock indexes Friday gave up early gains and posted modest losses after debt-limit negotiations hit a snag.  Republican negotiators abruptly walked out of talks with White House officials, and House Speaker McCarthy said the talks were at a “pause.”

The broader market Friday morning initially moved higher, with the S&P 500 posting a 9-month high and the Nasdaq 100 posting a 1-year high, on optimism that U.S. lawmakers were nearing a deal to raise the debt ceiling. 

Higher bond yields Friday also weighed on stocks, although yields fell back from their highest levels on dovish comments from Fed Chair Powell, who signaled he is inclined to pause raising interest rates at next month’s FOMC meeting.  As a result, the market is showing only a 21% chance of a 25 bp rate hike at the June 13-14 FOMC meeting.

Fed Chair Powell said, "While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring, and inflation.  As a result, interest rates may not need to rise as much as they would have otherwise to achieve our goals."  Powell also signaled he is inclined to pause rate increases at the June FOMC meeting when he said, "Policymakers can afford to look at the data and the evolving outlook to make careful assessments."

Global bond yields Friday were mixed.  The 10-year T-note yield rose to a 2-month high of 3.719% and finished up +4.8 bp at 3.694%.  The 10-year German bund yield rose to a 3-1/2 week high of 2.500% but fell back and finished down -1.8 bp at 2.428%.  The UK 10-year gilt yield climbed to a 6-3/4 month high of 4.093% and finished up +3.8 bp at 3.996%.

On the bearish side for stocks, sneaker makers and athletic retailers moved lower, led by a -27% plunge in Foot Locker after the company cut its full-year sales forecast.  Also, chip makers were under pressure Friday after Applied Materials said Q3 net sales would decline as the memory-chip slump weighs on its business.  In addition, Ulta Beauty closed down more than -4% after Oppenheimer cut its price target on the stock.

On the positive side, Catalent rebounded from a -5% loss in overnight trading and closed up more than +16% after CEO Maselli said the company is “making progress” to reduce costs following its rapid expansion during the pandemic. Also, Globant SA closed up more than +10% after reporting Q1 revenue above consensus and forecasting full-year revenue above consensus.  In addition, DXC Technology closed up more than +2% after forecasting 2024 adjusted EPS above consensus.

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.64%.  China’s Shanghai Composite closed down -0.42%, and Japan’s Nikkei Stock Index closed up +0.77%. 

Today’s stock movers…

Sneaker makers and athletic retailers retreated Friday, led by a -27% plunge in Foot Locker (FL) after cutting its full-year sales forecast to a decline of -6.5% to -8% from a prior view of -3.5% to -5.5%.  Also, VF Corp (VFC) closed down more than -8% to lead losers in the S&P 500.  In addition, Dick’s Sporting Goods (DKS) closed down more than -6%, and Under Armour (UAA) closed down more than -4%. 

Finally, Nike (NKE) closed down more than -3% to lead losers in the Dow Jones Industrials. 

Chip makers were under pressure Friday, with Applied Materials (AMAT) closing down more than -2% after it said Q3 net sales would decline as the memory-chip slump weighs on its business. Also, ON Semiconductor (ON) closed down more than -2%.  In addition, Nvidia (NVDA), Advanced Micro Devices (AMD), KLA Corp (KLAC), and Lam Research (LRCX) closed down more than -1%. 

A jump in the 10-year T-note yield to a 2-month high on Friday weighed on homebuilder stocks.  As a result, DR Horton (DHI) closed down more than -2%.  Also, Lennar (LEN), PulteGroup (PHM), and Toll Brothers (TOL) closed down more than -1%.

Ulta Beauty (ULTA) closed down more than -4% after Oppenheimer cut its price target on the stock to $575 from $600.

Catalent (CTLT) rebounded from a -5% loss in overnight trading and closed up more than +15% to lead gainers in the S&P 500 after CEO Maselli said the company is “making progress” to reduce costs following its rapid expansion during the pandemic.

Globant SA (GLOB) closed up more than +10% after reporting Q1 revenue of $472.4 million, above the consensus of $471.1 million, and forecast full-year revenue of at least $2.07 billion, better than the consensus of $2.06 billion.

DXC Technology (DXC) closed up more than +2% after forecasting 2024 adjusted EPS of $3.80-$4.05, the midpoint above the consensus of $3.87. 

Bloom Energy (BE) closed up more than +2% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $20.

Across the markets…

June 10-year T-notes (ZNM23) on Friday closed down -11.5 ticks, and the 10-year T-note yield rose by +4.8 bp to 3.694%.  June T-notes Friday fell to a 2-month low, and the 10-year T-note yield jumped to a 2-month high of 3.719%.  Rising inflation expectations weighed on T-note prices after the 10-year breakeven inflation rate Friday rose to a 3-week high today at 2.257%.  T-notes pared their losses after debt ceiling negotiations hit a snag, which sparked some safe-haven buying of T-notes as stocks dropped.  Also, dovish comments from Fed Chair Powell sparked short covering in T-notes when he said interest rates might not need to rise as much as banking turmoil has already tightened credit conditions. 

• 3 Ways to Profit From a Government Debt Default
• Chinese Mega-Cap Tech Stocks Stagnate on Waning Confidence in China’s Recovery
• Stocks Slide After Republicans Pause Debt Ceiling Negotiations
• Here’s Why Yelp (YELP) Could Be a Surprising Hit This Year