Interest Rate Fears Turn Markets Downward

Will market participants wait for Friday's PCE numbers to start shopping for value stocks? Read More...

Wednesday, May 29th, 2024

Bond yields kept moving precariously higher today. This is a major reason for today’s big selloff in the equities markets, just a day removed from the Nasdaq notching another all-time closing high. But it was the Dow that took it on the chin for this session, down -411 points or -1.06%, bringing levels down to where they were a month ago. The S&P 500 was down -0.74% on the day, while the Nasdaq shed -99 points, -0.58%. The small-cap Russell 2000 was down an even more precarious -1.48% today.

None of these major indices spent any time in the green today. Yet only the Russell closed at session lows. As we know, higher bond yield rates are a reflection of interest rates going forward, and with Fed members now openly discussing whether raising the Fed funds rate further is indeed off the table, these rates are remaining high. In fact, they headed back toward April highs today: +4.62% on the 10-year and +4.98% on the 2-year. Recall that these high rates came with a subsequent down-patch — albeit temporary — in the equities markets.

The Beige Book that came out today wasn’t part of the problem. With auto sales flat and labor up only slightly (with turnover in the labor market notably decreasing), we continue our overall trajectory for the domestic economy as still on a “soft landing” path. Housing demand remained elevated, but commercial real estate demand was down. On the 12 districts in the Beige Book for May, only Boston, Dallas and San Francisco were flat; the others were all modestly positive.

We tried to chalk this up to profit-taking this morning. This may yet be the case, but until we see some direct results somewhere that confirm the economy is not heating up again, which might require still more rate hikes, this trepidation in the market may be sticking with us. And because we’re only down a half-point to a point-and-a-half today, depending on the index, we can’t really call this a correction, especially off a new record close on the Nasdaq 24 hours ago.

Lucky, the remedy may soon be at hand. Friday morning’s Personal Consumption Expenditures (PCE) for April will chart our inflationary course on a wide set of metrics, many of which we’ve seen revealed through other data previously this month. We expect Personal Spending to come in half of what it was the previous month, with year-over-year PCE steady at +2.7% on headline, +2.8% core. Any surprises to the downside will probably be met with a sigh of relief from the markets.

In fact, perhaps market participants may want to get an early start. If you recall a couple weeks back, the markets determined they were about to get a Consumer Price Index (CPI) to come in lower than expectations, so bid up the market bid in anticipation. It paid off, as their hunch was right; perhaps we’ll see a similar dynamic in play for the final two trading days of this week? Too early to tell, but keep your eyes peeled.

Salesforce.com CRM shares have fallen off a table in the late session. The customer relationship management giant reported Q1 earnings this afternoon which were mixed — earnings of $2.44 per share outpaced the $2.38 in the Zacks consensus, on $9.13 billion in revenues which was a smidge below the $9.14 billion estimate — but next-quarter guidance disappointed on both top and bottom lines. As a result, shares of CRM are down -17% in after-market trading.

C3.ai AI, on the other hand, is up nicely after today’s close. Its fiscal Q4 report showed a shallower-than-expected bottom-line loss of -11 cents (versus -31 cents in the consensus) on $86.6 million in quarterly sales, above the $84.45 million analysts were looking for. Subscriber revenue jumped +41% year over year to $79.9 million — a sign of strength in the growth A.I. play. The software provider counts Federal, Defense and Aerospace as its biggest market, taking up +49.5% of its business. Shares are up almost +8% in the late session, basically cutting in half its losses year to date.

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