US stocks closed in a sea of red, but off of their session lows, as investors digested the possibility that an interest rate cut will come later than hoped.
The Dow Jones Industrial Average (^DJI) closed down about 1%, or nearly 400 points, setting the blue-chip index back from a bid to reach the key 40,000 level. The S&P 500 (^GSPC) shed about 0.7%, while the tech-heavy Nasdaq Composite (^IXIC) also slid nearly 1%.
US bonds continued to struggle, as the yield on the benchmark 10-year Treasury (^TNX) rose to around 4.36%, hovering at its highest levels of 2024. Oil also jumped with crude prices (CL=F) rising to trade above $85 a barrel.
Stocks have made a lackluster start to the second quarter after racking up a string of records in the first months of 2024. Hotter-than-expected manufacturing readings, which came alongside increases in prices paid, have given weight to growing doubts the Federal Reserve will cut rates in the first half of the year as the US economy shows surprising resilience.
In economic news, the new data from the Bureau of Labor Statistics showed job openings were marginally higher in February while hiring ticked up slightly.
A pullback in health insurer stocks came after US regulators surprised the industry by failing to boost payments for private Medicare plans as usual. Humana (HUM) shares fell more than 13%, while CVS (CVS) shed roughly 7%.
In single stock moves, Tesla (TSLA) stock stumbled about 5% after the company delivered fewer cars than expected in the first quarter.
"We think this underperformance could worsen if land acquisition and development costs continue rising and if lumber prices continue appreciating," McCanless wrote.
Higher-for-longer interest rates and a lack of housing supply have allowed builders to focus their attention on an underserved segment — the entry-level buyer. Builders have offered price cuts and incentives to drive up volume. But that strategy has negatively squeezed gross margins.
McCanless anticipates the same storyline will happen in the second quarter of this year as mortgage rates remain near highs of the cycle. The 30-year fixed rate loan inched down to 6.79% from 6.87% a week prior, according to Freddie Mac.
Many housing economists believe mortgage rates are likely to decline in the back half of the year as the Federal Reserve cuts interest rates. But McCanless doesn't think the move will be that mechanical.
"We think that is still the consensus view in the market, but we are taking the opposite view on that front because we believe mortgage originators (bank and nonbank) are unwilling to bear the prepayment risk without being compensated for that risk," he noted.
McCanless also notes the spread between the 30-year mortgage and the 10-year Treasury is "artificially wide" today to account for refinancing risk.
Josh Schafer
Bond yield moves may be a "head fake"
A hotter than expected prices paid index inside the March ISM release appeared to hold weight for investors. Bond yields shot up following the release and while investors inched closer to pricing in one less rate cut for this year, per Bloomberg data.
Prices paid increased in both the S&P Global and ISM readings.
S&P Global noted average selling prices charged by producers increased at their fastest rate in 11 months. The ISM's prices paid sub-index rose to 55.8 in March, the highest since July 2022.
Chris Williamson, S&P Global Market Intelligence chief business economist said this could be a sign of concern given a recent slowdown in the decline of inflation seen in both January and February's readings of popular inflation measures.
"Most notable was an especially steep rise in prices charged for consumer goods, which rose at a pace not seen for 16 months, underscoring the likely bumpy path in bringing inflation down to the Fed's 2% target," Williamson said.
To Renaissance Macro's head of economics Neil Dutta this increase shouldn't be overly concerning for the overall inflation story. He views the move in bond yields as a "head-fake."
"Formal analysis reveals that while the ISM prices paid index helps improve forecasts of PPI inflation, it does not yield improved forecasts of PCE or core PCE inflation," Dutta wrote in a research note on Tuesday. "This is a reminder that the ISM prices paid index is largely a proxy for energy prices and energy price pass-through to consumer prices is low."
Dutta added the recent increases in labor productivity can also help quell inflationary pressures. The ISM production index rose to 54.6 in March, its highest level since June 2022. This came without a jump in the employment index.
"Taken at face value, this implies a pretty solid pick-up in manufacturing sector productivity growth in the coming quarters," Dutta wrote. "You do not have inflation problems when productivity is running this strong."
Josh Schafer
Job openings steady in February as hiring picks up slighltly
New data from the Bureau of Labor Statistics released Tuesday showed there were 8.76 million jobs open at the end of February, a slight increase from the 8.75 million job openings in January, which was revised lower. Economists surveyed by Bloomberg had expected 8.73 million openings in February.
The report also showed the quits rate, a sign of confidence among workers, sat at 2.2% for the fourth consecutive month. Additionally, the Job Openings and Labor Turnover Survey (JOLTS) showed 5.8 million hires were made in the month, a slight increase from the 5.7 million seen in January.
The hiring rate picked up slightly at 3.7% in February, up from the 3.6% rate seen in January.
RBC analyst Ben Hendrix said in a note this morning Humana's profit guidance will have to be reset in the wake of the decision and the stock could stay under pressure. Conversely, Hendrix is recommending to clients to buy Cigna shares on the pullback.
