Stocks Decline and Bond Yields Surge as U.S. Payrolls Soar

Morning Market Recap

On this trading day, December E-Mini S&P 500 futures (ESZ23) are down by -0.81%, while the Dec Nasdaq 100 E-Mini futures (NQZ23) have dropped by -1.03%.

Stock index futures have experienced a sharp selloff this morning, reversing overnight gains. The catalyst for this shift was a significant jump in bond yields following the release of the monthly U.S. payroll report. The report showed that nonfarm payrolls for September surged by a remarkable +336,000, far exceeding expectations of +170,000, marking the highest increase in eight months. This robust performance in the U.S. labor market has heightened expectations that the Federal Reserve may decide to raise interest rates at its upcoming meeting in November.

Notably, not only did September nonfarm payrolls outperform, but there was also a positive revision to August’s figures. August nonfarm payrolls were revised upward by 40,000, now standing at +227,000, compared to the initially reported +187,000. However, the September unemployment rate remained unchanged at 3.8%, falling short of expectations for a decline to 3.7%.

In terms of wage growth, U.S. September average hourly earnings increased by +0.2% on a monthly basis and +4.2% year-on-year, slightly below expectations of +0.3% monthly growth and +4.3% annually.

Market sentiment currently reflects a 32% probability of the Federal Open Market Committee (FOMC) implementing a +25 basis points rate hike in the next FOMC meeting ending on November 1. Moreover, there’s a 50% chance of such a rate hike in the subsequent meeting ending on December 13. Investors are also anticipating the possibility of the FOMC beginning to cut rates in the latter half of 2024, responding to an anticipated slowdown in the U.S. economy.

Both U.S. and European bond yields have experienced upward movements. The 10-year U.S. T-note yield has risen by +11.8 basis points to 4.837%, while the 10-year German bund yield has increased by +6.1 basis points to 2.939%. The 10-year UK gilt yield is up by +7.7 basis points at 4.619%.

Moving on to overseas markets, there is a mix of performances. The Euro Stoxx 50 is showing a modest increase, mainly led by the strength in insurance stocks due to signs of takeover interest. Aviva Plc has surged by more than 10% after reports surfaced that the insurer is drawing attention from at least two potential bidders. Additionally, positive economic news from Germany has boosted stocks following a stronger-than-expected rise in August factory orders. However, European government bond yields have risen as ECB Executive Board member Schnabel made hawkish comments, suggesting the possibility of further interest rate hikes if inflation risks materialize.

In Germany, August factory orders witnessed a significant +3.9% month-on-month increase, surpassing expectations of +1.5% growth.

Regarding the economic outlook, ECB Executive Board member Schnabel expressed, “I still see upside risks to inflation, and if they materialize, further interest rate hikes could be necessary.”

It’s worth noting that China’s Shanghai Composite Index remained closed for the week-long Golden Week holidays and is set to reopen for trading on Monday. Meanwhile, Japan’s Nikkei 225 closed today with a moderate decline of -0.26%. Japanese stocks were impacted by economic concerns stemming from weaker-than-expected August household spending and August labor cash earnings data. Initially, Japanese stocks saw gains influenced by a rally in Hong Kong stocks, with the Hang Seng Index climbing over +1% due to positive Golden Week holiday spending in China. The Shanghai Securities News reported that spending on China’s online platforms during the Golden Week holiday exceeded pre-pandemic levels. Chinese markets are expected to resume trading on Monday after their week-long holiday.

Furthermore, the Japan August leading index CI rose by +1.3, reaching a 9-month high of 109.5, surpassing expectations of 109.1. However, August household spending in Japan saw a decline of -2.5% year-on-year, a smaller decrease than anticipated (-3.9% year-on-year). Additionally, August labor cash earnings in Japan rose by +1.1% year-on-year, slightly weaker than the expectation of +1.5% year-on-year growth.

In pre-market U.S. trading, several stocks have witnessed significant movements:

Pioneer Natural Resources (PXD) surged by more than +12% after reports of talks with Exxon Mobil regarding a potential acquisition.
Elf Beauty (ELF) climbed by over +2% following an upgrade from Jeffries to “buy” from “hold,” along with a price target of $115.
Shoals Technologies Group (SHLS) rose by more than +3% after receiving an upgrade from Piper Sandler to “overweight” from “neutral,” along with a price target of $28.
Trane Technologies Plc (TT) gained nearly +1% after JPMorgan Chase upgraded the stock to “neutral” from “underweight.”
Eaton Corp Plc (ETN) saw an increase of almost +1% after JPMorgan Chase upgraded the stock to “overweight” from “neutral,” along with a price target of $230.
ResMed (RMD) climbed by more than +3% following the FDA’s request for additional tests on rival device maker Phillips’ sleep apnea machines amid a product recall.
Wesco International (WCC) gained nearly +1% after JPMorgan Chase upgraded the stock to “overweight” from “neutral,” along with a price target of $180.
Tesla (NASDAQ:TSLA) slid by more than -1% after reducing prices on its most popular cars in the U.S.
Levi Strauss (LEVI) fell by more than -1% after reporting Q3 revenue of $1.51 billion, which fell below the consensus estimate of $1.54 billion. The company also revised its full-year revenue forecast to 0% to +1%, down from the previous view of +1.5% to +2.5%.
Aehr Test Systems (AEHR) sank by more than -14% after reporting Q1 bookings of $18.4 million. William Blair expressed concerns about the company’s book-to-bill ratio.
Carrier Global (CARR) fell by more than -1% after JPMorgan Chase downgraded the stock to “underweight” from “neutral.”
Exxon Mobil (NYSE:XOM) slid by more than -1% following reports of talks to acquire Pioneer Natural Resources.
LCI Industries (LCII) fell by more than -1% after DA Davidson downgraded the stock to “underperform” from “neutral.”