LIVE MARKETS-U.S. stocks log mixed October start as Treasury yields jump

Nasdaq advances, S&P 500 ends ~flat, DJI dips

Utilities notch biggest their daily loss since April 2020

Comm svcs leads S&P 500 sector gainers

Dollar rallies; bitcoin up ~3.5%; gold down >1%, crude falls >2%

U.S. 10-Year Treasury yield surges to ~4.69%

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U.S. STOCKS LOG MIXED OCTOBER START AS TREASURY YIELDS JUMP (1605 EDT/2005 GMT)

Wall Street got the final quarter of 2023 off to an uneven start as spiking U.S. Treasury yields offered investors an alternative to equities, but interest rate sensitive megacaps rallied.

While the NY FANG+ group of momentum stocks (.NYFANG) advanced 1.4%, for once it didn’t dictate the direction of the broader market - economically sensitive stocks dragged the Dow into negative territory and held the S&P 500 essentially unchanged on the day.

Benchmark Treasury yields spiked to their highest level in 16 years after Capitol Hill passed a stopgap spending bill which postponed a looming governmental shutdown and reduced demand for the debt.

Utilities (.SPLRCU) , considered a bond proxy, fell 4.7%, logging its biggest one-day percentage drop since April Fools Day, 2020.

Fed Governor Michelle Bowman said she’d support another rate hike if data shows inflation isn’t cooling quickly enough, while

Michael Barr, the Fed’s vice chair for supervision said the target rate is where it likely needs to remain for “some time,” for inflation to be brought down to the central bank’s 2% target.

Economic data surprised to the upside, with the ISM manufacturing PMI notching its highest reading since November, but marking its 11th month in contraction, sharpening that double edged sword: the economy is resilient, but that could merely result in the Fed funds target rate staying higher for longer.

As the week plays out, market participants can look forward to a parade of reports including JOLTS, services PMI, factory orders, trade balance, and finishing the week with the much anticipated September employment report.

In company news, Nvidia (NVDA.O) rose 2.9% after Goldman Sachs added the chipmaker to its ‘conviction list.’

Here’s your closing snapshot:

(Stephen Culp)

BOFA’S SELL SIDE INDICATOR SAYS BUY STOCKS, SELL BONDS (1357 EDT/1757 GMT)

BofA’s Sell Side Indicator (SSI), a contrarian sentiment measure tracking sell side strategists’ average recommended equity allocation, flat-lined at 53.5% in September.

In a BofA Securities research note, equity and quant strategist Savita Subramanian says that the latest reading is well below benchmark allocations of 60% and unchanged since July.

However, she notes that despite the recent sell off, the S&P 500 is still up ~20% since last September, but sentiment has barely budged, with the SSI sitting 11 bps below where it was 12 months ago.

BofA says that Wall Street’s consensus stock allocation has been a reliable contrary indicator. In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa.

“Current levels indicate +15% price return over the next 12 months (S&P 500 at ~4900). This is not our target, but historically, when the indicator has been here or lower, 12m forward S&P 500 returns were positive 95% of the time (vs. 81% overall) with a median return of 21%,” writes Subramanian in the note.

Meanwhile, she says that the most recent tenor of bearish stock market narratives surrounds rate risks. However, she argues that stocks have done well during periods of even higher real rates.

According to Subramanian, “From 1985 to 2005, labor efficiency improved, real rates averaged 3.5% (vs. ~2% today), the S&P 500 returned 15% per year (total return) and the equity risk premium settled lower.”

She says that labor efficiency has stalled since the mid-2000s, but a pickup in automation/AI spending, plus near-shoring, are bullish tailwinds for stocks over bonds.

Therefore, Subramanian expects the S&P 500 (.SPX) to rally into year-end, with more upside in the equal-weighted index (.SPXEW) .

(Terence Gabriel)

AFTER ROUGH SEPTEMBER, ROUGH Q3, BULLS LOOK FOR RELIEF (1215 EDT/1615 GMT)

September may live up to its reputation for being the worst month of the year for the S&P 500 index (.SPX) . The benchmark index fell 4.9% in September, its biggest monthly decline since December of last year.

The SPX also logged its worst quarterly performance since July-September 2022. The benchmark index lost 3.6% in Q3, cutting its year-to-date rise to 11.7%.

The weak Q3 performance may also fit with historical patterns in that, on average, the S&P 500 has posted its smallest quarterly rise of the year, during this period:

Using LSEG data back to mid-1928, on average, the SPX has gained just 1.3% in Q3.

However, the good news for bulls is that on average, Q4 has been the best quarter of the year, with a 2.8% rise.

Meanwhile, although the SPX posted an 11.7% year-to-date rise through the end of September, the equal-weighted S&P 500 (.SPXEW) rose just 0.3% over this period, underscoring that gains were driven by a small number of megacaps.

The equal-weighted NYFANG (.NYFANG) , which includes the “Magnificent Seven” among its 10 members, was up about 66% through the first three quarters of 2023.

The S&P 400 Mid Cap index (.IDX) gained 3% over this period, while the S&P 600 Small Cap index (.SPCY) lost 0.5%.

Thus, market players will be watching to see if the S&P 500 can get back on track to the upside in Q4, and if so, whether the advance broadens.

(Terence Gabriel)

U.S. CONSUMER SPENDING TO RETREAT, SAYS RAYMOND JAMES IN ITS CALL TO EXERCISE CAUTION (1148 EDT/1548 GMT)

U.S. consumers’ financial health looks poised to deteriorate heading into the last quarter of the year as student loan repayments resume and fuel costs rise, according to a note from analysts at Raymond James.

The brokerage called for investors to perform “enhanced due diligence” when mulling investments in banks that have a high exposure to consumer credit, as loan losses could rise in the coming months.

Ally Financial (ALLY.N) , Northwest Bancshares (NWBI.O) and Huntington Bancshares (HBAN.O) are among the lenders with the biggest exposure to consumer loans, the analysts said. Preferred Bank (PFBC.O) and Flushing Financial (FFIC.O) are best placed, with minimal exposure to such loans.

Student loan repayments resumed on Oct. 1 after a three-year pause, increasing fears of a strain on consumers’ expenses. A surge in oil prices due to tight global supply has also increased fuel costs.

Since last year, banks have cautioned that a jump in borrowing costs could increase loan losses. The possibility of higher for longer interest rates has only worsened that fear.

(Niket Nishant)

OCTOBER SURPRISE: ISM PMI HITS HIGHEST SINCE NOVEMBER, CONSTRUCTION SPENDING STICKS THE LANDING (1107 EDT/1507 GMT)

And then it was October.

Investors awoke to a new week, month and quarter, pumpkin spice lattes in-hand, eager for any indication that the Federal Reserve might yet pull off the soft landing trick - cooling down inflation while avoiding recession.

Monday’s indicators supported the possibility, while also potentially emboldening Powell & Co to keep its restrictive policy rates in place for longer than many might prefer.

First, U.S. factory activity decreased at a shallower-than-expected pace in September, according to the Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) (USPMI=ECI) .

The index gained a hearty 1.4 points to 49 - the highest it’s been since November - just one point south of the magical level of 50, the border between contraction and expansion.

Even so, the upside surprise “wasn’t enough to snap the 11 consecutive months below the neutral threshold, and we expect continued headwinds will keep this from occurring,” writes Matthew Martin, U.S. economist at Oxford Economics. “However, the improvement in the index over the prior three months improves the odds of a soft landing.”

Digging into the data, employment and production returned to expansion territory and the new orders component improved but stayed below 50.

The prices paid index - a closely watched inflation predictor - plunged deeper into contraction, falling 4.6 points to 43.8.

The “i” word made frequent appearances in the survey participants’ commentary.

Remarks along the lines of “continued inflation and wage adjustments continue to drive prices up, although we should get some relief from the markets stabilizing,” “Everyone is holding off on increasing inventories, hoping they can buy at lower costs,” and “Cost increases are now generally isolated to specific commodities” a peppered throughout.

Not to be outdone, S&P Global released its final take on September manufacturing PMI (USMPMF=ECI) , which landed at 49.8, an improvement over the 48.9 originally reported last month and missing the expansion barrier by the skin of its teeth.

“Manufacturers’ expectations of future output have jumped to their highest for nearly one and a half years,” says Chris Williamson, S&P Global’s chief business economist, who added that “producers’ costs rose at the fastest rate for five months, largely on the back of higher oil prices.”

“These increased costs are already feeding through to higher prices to customers, which will inevitably result in some renewed upward pressure on inflation.”

This graphic shows how closely (or not) the dueling PMIs agree:

Finally, expenditures on U.S. construction projects (USTCNS=ECI) increased in August by 0.5%, sticking the consensus landing, but standing on the shoulders of July’s upwardly revised 0.9% monthly growth.

On a granular level, spending on homebuilding, accounting for the lion’s share of private sector construction, rose by a healthy 0.6% as builders scrambled to make up for the dearth of existing homes on the market due to climbing mortgage rates.

And circling back to the stronger-than-expected PMI readings, a 1.2% jump in manufacturing facilities bodes well for the factory sector.

“The latest data show solid gains in the residential and ex-improvement components quarter-to-date, but slower momentum in nonresidential and public spending,” says Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

(Stephen Culp)

U.S. STOCKS MIXED AHEAD OF DATA, POWELL (0945 EDT/1345 GMT)

Wall Street’s main indexes are mixed early on Monday as investors await more data to gauge the Federal Reserve’s interest-rate path, as well as remarks from Fed officials including Chairman Powell.

At 10 a.m. EDT, August construction spending, expected at 0.5% vs 0.7% last month, is due to be released.

Also at 10 a.m. EDT, September ISM manufacturing PMI is expected to come in at 47.8 vs 47.6 last month. The Reuters Poll for ISM prices paid is at 48.6 vs 48.4 last month.

Fed-Chair Powell and Philadelphia Fed President Patrick Harker will speak at a roundtable discussion, due 11 a.m. EDT, with local employers and small business owners on efforts to grow the economy.

And later in the day, Cleveland Fed President Loretta Mester will speak on the outlook for the U.S. economy.

Here is an early market snapshot:

(Terence Gabriel)

U.S. 10-YEAR TREASURY YIELD ON THE MARCH (0910 EDT/1310 GMT)

The U.S. 10-Year Treasury yield (US10YT=RR) continued its ascent in September, rising for a fifth straight month.

Last week, the yield nearly tagged a wave-equality projection, before backing away.

Traders will be focused on whether that marked a significant high, especially amid lagging momentum, and whether the monthly win streak suggests the market may be stretched to the upside:

Last Thursday, the yield hit a high of 4.6880%, putting it just shy of a wave-equality projection at 4.71% (Elliott Wave basis).

The yield quickly reversed, hitting a low of 4.5080% on Friday before mounting a recovery to end the month at 4.5710%. On Monday, the yield is now back up to around 4.65%.

With this, the weekly relative strength index (RSI) has risen to around 81.00, or its highest level since the yield peaked at lower levels in October 2023. Lagging momentum on both a short and longer-term basis suggests the yield may be vulnerable to a reversal.

The RSI also faces a resistance line from its early 2021 high which now comes in around 82.0.

The next levels above 4.71% are the upper monthly Bollinger Band (BB), which now resides at 4.78%, and the upper yearly BB which is around 5.13%. The 1993 low at 5.1514% also presents a hurdle.

A weekly and a monthly Gann Line provide support in the 4.42%-4.35% area. A reversal below this zone, as well as the October 2022 high at 4.3380%, can suggest potential for a much deeper retreat.

Meanwhile, the yield’s current five-month win streak is its longest run of monthly gains since another five month stretch from December 2021 to April 2022.

The yield last rose six straight months from August 2016 to January 2017.

(Terence Gabriel)