U.S. Stocks Turned Lower After Aggressive Rate Hike Worries Resurfaced Following GDP Report

Barry Adams
27 Jul, 2023
New York City

Market averages turned lower after two strong economic reports raised worries that the central bank may continue its rate tightening at the next meeting in September. 

The yield on 10-year Treasuries traded above 4% and investors debated rate path after second quarter GDP accelerated at a faster annual pace. 

Strong business investments bolstered the economic growth and consumer spending slowed but still expanded, resulting in acceleration of economic growth in the second quarter. 

In addition, durable goods rose at the fastest pace in June in nearly three years after transportation orders surged. 

International trade deficit in goods and services was $69 billion in May, a decline of $5.5 billion from the revised $74.4 billion in April, the Bureau of Economic Analysis reported Thursday.  

Exports in May declined 0.8% to$247.1 billion and imports fell 2.3% to $316.1 billion. 

Stocks traded volatile after the latest batch of earnings from more than 300 companies showed mixed picture. 

L3Harris Technologies, Northrop Grumman, Honeywell and Chipotle Mexican Grill declined after weaker-than-expected  quarterly results and Meta Platforms, Royal Caribbean, Southwest Airlines, Morningstar, KLA Corp, Lam Research and McDonald's rose after earnings exceeded market expectations. 

 

Second Quarter GDP Advanced at 2.4% Annual Rate 

The U.S. economy expanded at 2.4% annual pace in the second quarter, faster than 2.0% in the first quarter, the Bureau of Economic Analysis reported Thursday. 

The worries of economic recession were set aside after GDP expanded for the third quarter in a row after shrinking for two quarters in a row in 2022. 

The growth accelerated after nonresidential fixed investment accelerated to 7.7% from 0.6% but consumer spending slowed sharply to 1.6% from 4.2% 

Goods consumption growth slowed sharply to 0.7% from 6.0% but spending on services, remained healthy, slowed to 2.1% from 3.2% in the previous quarter,  

Public spending, which includes spending by government at all levels, rose at a slower pace of 2.6% from 5.0% in the previous quarter. 

International trade deficit weighed on the GDP data and subtracted 0.12  percentage points after exports fell 10.8% but imports declined by a lesser 7.8%.  

GDP report also showed price pressures are easing and the personal consumption expenditures price index slowed to annual rate of 2.6% from 4.2% in the previous quarter. 

 

Transportation Orders Drive Durable Goods Orders Higher In June 

Durable goods orders rose 4.7% in June from the previous month, the fastest pace of increase since July 2020, the U.S. Census Bureau reported Thursday. 

New orders for durable goods for May were revised higher to an increase of 2.0%. 

Orders rose for the fourth month in a row and transportation orders soared 12.1% after non-defense aircraft and parts orders jumped 69.4%.   

Orders excluding transportation rose 0.6%, excluding defense jumped 6.2%. 

Orders for non-defense capital goods excluding aircraft, a closely watched barometer for business spending plans, increased 0.2% after a downwardly revised 0.5% in May.  

Two economic reports provided yet another signal that the U.S economy is resilient, despite multiple rate hikes. 

Rates have risen by 500 basis points and the U.S. economy is still growing at above 2% annual rate, supporting the case that the Fed has more flexibility in pausing rates and may be able to cool inflation further without dipping the economy into a recession. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 0.7% to 4,547.59 and the Nasdaq Composite fell 0.6% to 14,049.18. 

The Dow Jones Industrial Average halted its 13-day winning streak, the longest rally since 1897, 126 years ago. 

The yield on 2-year Treasury notes increased to 4.93%, 10-year Treasury notes inched higher to 4.00% and 30-year Treasury bonds edged down to 4.04%. 

Crude oil decreased $0.79 to $78.80 a barrel and natural gas prices decreased 8 cents to $2.64 a thermal unit. 

 

U.S. Stock Movers 

Meta Platforms Inc jumped 6.8% to $319.08 after the company reported better-than-expected earnings on the back of strong advertising revenue. 

Chipotle Mexican Grill, Inc plunged 9.0% to $1,900 after the fast-casual food chain operator reported mixed quarterly results. 

total revenue increased 13.6% to $2.5 billion and comparable store sales rose 7.4%. 

Net income in the quarter jumped to $341.8 million from $259.9 million and diluted earnings per share jumped to $12.32 from $9.25 a year ago. 

Chipotle guided third quarter comparable restaurant sales to increase in the low to mid-single digit and full-year sales are expected to increase in mid to high-single digit. 

The company plans to open between 255 and 285 stores, including between 10 to 15 relocations to add drive throughs, depending on construction, utility and permit delays.   

McDonald's Corp increased 1.8% to $296.94 after the burger chain reported better-than-expected revenue and adjusted earnings. 

Global same store sales increased 11.7% and the U.S. comparable store sales rose 10.3% compared to 3.7% a year ago because of promotional meals celebrating the 52nd birthday of McDonald's character Grimace. 

 

European Stocks and Bond yields Turn Higher After Rate Hike 

European markets traded higher and the European Central Bank hiked rates for the ninth time in a row. 

The ECB raised main rates by 25 basis points to 4.25%, the highest rate since October 2008 and deposit facility rate by 25 basis points to 3.75%, a 22-year high.  

The rates will be effective from August 2. 

The European Central Bank is also widely anticipated to lift its key lending rate by 25 basis points as inflation still hovers above 5% in the Euro Area. 

The central bank acknowledged in the statement that increases in rates are increasingly "dampening demand" but inflation is still too high and will come down gradually over the remainder of the year. 

"While some measures show signs of easing, underlying inflation remains high overall. 

The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target," the ECB noted in the statement. 

The central bank has tightened rates by 425 basis points since July 2022, the fastest pace of rate increase in its history. 

The central bank cautioned in the statement and said inflation is expected to "remain too high for too long" without further elaborating   

Market participants reacted to the latest batch of earnings after automakers, aviation and financial sector companies released earnings. 

The Federal Reserve hiked its key lending rate range by 25 basis point to between 5.25% and 5.5% and held out for more hikes in the future if the economy demanded. 

Despite the eleven rate hikes over the last sixteen months, inflation is still hovering near 5%, significantly above the Fed's target rate of 2%.  

 

Spain's Jobless Rate at 15-year Low, Retail Sales Edged Higher 

Spain's jobless rate fell to 11.6% in the second quarter of 2023 from 13.3% in the previous three-month period, the lowest since 2008, the National Statistics Institute INE reported Thursday.

The jobless rate in the second quarter was  12.5%.

The number of unemployed people decreased by 365,000 to 2.76 million, while the number of employed rose by 604,000 to 21.1 million. 

The labor force participation rate edged up to 59% in the second quarter from 58.6% in the previous quarter. 

Spain's retail sales edged up slightly in June amid rising demand for non-food products, the INE reported in a separate report Thursday. 

Seasonally adjusted retail sales increased 6.4% in June, after rising 6.1% in May. 

Sales of non-food products soared 14.8% but food items sales rose at a slower pace of 1.5%. 

 

Europe Indexes & Yields

The DAX index increased 1.7% to 16,406.03, the CAC-40 index advanced 2.1% to 7,465.24 and the FTSE 100 index rose 0.2% to 7,692.76.  

The yield on 10-year German bonds decreased to 2.49%, French bonds traded lower to 2.99%, the UK gilts edged down to 4.31% and Italian bonds increased to 4.07%.

The euro edged higher to $1.11, the British pound to $1.29 and the U.S. dollar fetched 85.69 Swiss cents

Brent crude increased $1.15 to $84.06 a barrel and the Dutch TTF natural gas increased €0.84 to €28.43 per MWh.

 

Europe Stock Movers

Barclays Plc declined 3.9% to 157.64 pence and the bank said it expects to earn less interest income in the UK on the higher interest rates and  stubborn inflation. 

BNP Paribas SA jumped 3.5% to €60.16 after the company announced its plan to start stock repurchase starting next month.  

Airbus SE declined 2.3% to €130.0 after the aircraft maker reported a fall in net income for the fist-half. 

Ipsen SA increased 1.5% to €112.10 after the pharmaceutical company lifted its annual outlook. 

Safran SA jumped 1.8% to €147.80 after the jet engine maker revised higher its full-year outlook for the current fiscal year. 

Volkswagen AG declined 2.6% to €145.40 after the automaker lowered its annual estimate and Mercedes Benz Group AG jumped 2.5% to €71.64 after the luxury automaker revised higher its full-year estimate. 

Nestle SA jumped 1.9% to CHF 107.28 after the Swiss food and beverage company increased its organic sales growth estimate.