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August Set To Start On Soft Note As 10-yr Note Yield Tops 4.00%

Posted August 1, 2023 at 9:45 am
Patrick J. O’Hare

It looked as if the major indices were headed for a loss yesterday, albeit a modest one, but in emblematic fashion, there was a surge of buying interest in the closing minutes that left them all with a modest gain for the day. To be sure, it was a fitting end to another month that defied the expectations of short sellers and anyone sticking to the sidelines.

The month of August is now straight ahead and it looks poised to start on a soft note.

Currently, the S&P 500 futures are down 22 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 97 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 116 points and are trading 0.3% below fair value.

The party line coming into the month is much the same: the stock market looks overbought on a short-term basis and is due for a pullback.

That’s the party line. It doesn’t mean the stock market will get in line with that line, but that’s the prevailing driver of the weakness in the equity futures market this morning. Another driver that will be monitored carefully is the behavior of the 10-yr note. At the moment, it is a little unruly.

The 10-yr note yield has moved back above 4.00%, currently up five basis points to 4.01%. The move above 4.00% is stirring some angst about lofty equity valuations and competitive headwinds for stocks, which in turn is providing a rationale to curtail buying efforts for the time being.

Better-than-expected results from Dow components Caterpillar (CAT) and Merck (MRK), though, along with Uber (UBER), which reported the first GAAP profit in company history, have kept some buyers in the mix.

There has been a rush of earnings reporting since yesterday’s close. That will be a familiar refrain over the remainder of the week, as we are in the thick of the earnings reporting period that will include results from Apple (AAPL) and (AMZN) after Thursday’s close.

The earnings results since yesterday’s close have been largely better than expected, yet the reactions have been tempered in the case of companies topping estimates and more punishing for companies that have disappointed with guidance. JetBlue (JBLU), Norwegian Cruise Line Holdings (NCLH), ZoomInfo Technologies (ZI), and Zebra Technologies (ZBRA) are a sampling of the punished.

In other developments, the Reserve Bank of Australia surprised market participants by keeping its key policy rate unchanged at 4.10%. The consensus view was that there would be a 25-basis points rate increase. That news hit overnight along with word that China’s Caixin Manufacturing PMI for July fell back into contraction territory with a reading of 49.2 versus the prior month’s reading of 50.5.

The final July Manufacturing PMI reading for the eurozone was similarly in contraction territory, but not surprising — or changed much — in relation to the flash estimate.

The July ISM Manufacturing Index is the featured report on today’s economic calendar along with the June JOLTS Job Openings Report, both of which will be released at 10:00 a.m. ET along with the June Construction Spending Report.

Originally Posted August 1, 2023 – August set to start on soft note as 10-yr note yield tops 4.00%

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