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U.S. stocks fell on Tuesday, starting the holiday-shortened trading week on a sour note, as grim forecasts from retail giants Home Depot (HD) and Walmart (WMT) strengthened the case for more tightening by the Federal Reserve.
The Nasdaq Composite (COMP.IND) dropped 1.9%, while the benchmark S&P 500 (SP500) and the Dow (DJI) slid 1.6% each.
Home Depot (HD) was the top loser on the Dow after the retailer issued cautious outlook. Meanwhile, Walmart (WMT) was largely flat, paring premarket losses, after reporting results.
“It’s pretty clear that the U.S. economy is stronger and inflation is stickier than we (and consensus) expected coming into 2023,” said Wolfe Research analyst Chris Senyek. “Looking ahead, our sense remains that the Fed will hike higher (5.5%+) and/or for longer (mid-2024) than consensus expects, and a relatively deep recession will hit this year.”
Rates ticked up. The 10-year Treasury yield (US10Y) rose 7 bps to 3.92%. The 2-year yield (US2Y) rose 5 bps to 4.70%.
“We highlighted before that risk assets’ interest rates sensitivity this year seems to be much below that of 2022,” ING said. “Despite a loss in momentum in some quarters, more hawkish pricing in rates hasn’t yet derailed the improvement in risk sentiment.”
“The risks to this state of play are twofold. First we may well reach the point where investors judge that interest rates exceed feeble developed market economies’ ability to stomach them. Secondly, geopolitical tensions are rearing their ugly head once again – with flashpoints in Europe, the Middle East and East Asia.”
On the economic data front, S&P Global manufacturing PMI for February strengthened to 47.8, driven by the services sector. However, the factory sector remained in contraction.
January existing home sales unexpectedly faded for the 12th straight month, marking the longest losing streak since 2007 and the slowest pace of sales since October 2010. Existing home sales slipped 0.7% from the previous month to 4M.
“Federal Reserve Chair Powell’s relentless ‘hike, hike, hike’ policy has hit housing much harder than the economy at large,” UBS’ Paul Donovan said.
Among active stocks, Intel (INTC) fell after it reportedly delayed an advanced chip order from Taiwan Semiconductor until 2024.
