The US stock market closed mixed on Tuesday, as investors weighed the impact of rising Treasury yields on the economic recovery and corporate earnings. The Nasdaq Composite (^IXIC) was the only major index to end the day in positive territory, while the Dow Jones Industrial Average (^DJI) and the S&P 500 (^GSPC) fell modestly.
Treasury yields surge to highest level since 2007
One of the main drivers of the market action on Tuesday was the surge in Treasury yields, which reflect the cost of borrowing for the US government and influence interest rates across the economy. The 10-year Treasury yield, which moves inversely to its price, rose as high as 4.36% on Tuesday, the highest level since July 2007. The yield later settled at 4.33%, still up about 2 basis points from Monday’s close.
The rise in yields was partly driven by expectations of higher inflation, as consumer prices rose 5.4% year-over-year in July, the fastest pace since 2008. Higher inflation erodes the value of future cash flows, making bonds less attractive to investors. Some analysts also attributed the spike in yields to technical factors, such as a lack of liquidity in the bond market and a squeeze on short sellers.
Higher yields can also pose a challenge for the stock market, especially for growth-oriented sectors that rely on low interest rates to fuel their expansion. Technology stocks, which have been among the best performers during the pandemic, tend to be more sensitive to changes in yields than other sectors. On Tuesday, however, tech stocks outperformed the broader market, as some investors saw the recent pullback as a buying opportunity.
Retailers report mixed earnings amid supply chain woes
Another factor that influenced the market mood on Tuesday was the earnings reports from several major retailers, which showed mixed results amid supply chain disruptions and rising costs. Dick’s Sporting Goods (DKS), which sells sporting goods and apparel, saw its shares plunge 24% after it reported lower-than-expected earnings and revenue for the second quarter. The company also cut its full-year guidance, citing increased theft in its stores and higher freight expenses.
Macy’s (M), which operates department stores and e-commerce platforms, also disappointed investors with its quarterly results. The company reported higher-than-expected sales and earnings, but warned of more pressure on its credit card business and lower gross margins due to increased discounts. Macy’s shares fell 13% on Tuesday.
On the other hand, Lowe’s (LOW), which sells home improvement products and services, beat analysts’ estimates for both revenue and earnings in the second quarter. The company also maintained its full-year outlook for $87 billion to $89 billion in sales, despite facing some headwinds from lower lumber prices and softer demand from do-it-yourself customers. Lowe’s shares rose 3.5% on Tuesday.
Outlook for the rest of the week
The market will continue to monitor the developments in the bond market and the economic data for clues on the direction of interest rates and inflation. On Wednesday, investors will get a glimpse of the minutes from the Federal Reserve’s latest policy meeting in July, which could offer some hints on when and how the central bank plans to taper its bond-buying program. The Fed has been purchasing $120 billion worth of Treasuries and mortgage-backed securities per month since March 2020 to support the economy during the pandemic.
On Thursday, investors will pay attention to the weekly jobless claims report, which measures the number of people who filed for unemployment benefits for the first time. The report is seen as a proxy for layoffs and a gauge of the health of the labor market. Last week, jobless claims fell to 348,000, the lowest level since March 2020.
On Friday, investors will focus on the personal income and spending report for July, which includes a key measure of inflation that is closely watched by the Fed. The personal consumption expenditures (PCE) price index rose 4% year-over-year in June, well above the Fed’s target of 2%. The core PCE index, which excludes food and energy prices, rose 3.5%, also above the Fed’s goal.