US close: Stocks drop as bond yields rise; eyes on payrolls
US stocks ended Thursday’s session in the red as Treasury yields continued to rise.
The Dow Jones Industrial Average and the S&P 500 closed down 0.8% at 26,627.48 and 2,901.61, respectively, and the Nasdaq fell 1.8% to 7,879.51. Both the S&P and the Nasdaq suffered their worst losses since June.
Meanwhile, the yield on the benchmark 10-year Treasury note rose to a seven-year high of 3.232%, marking its biggest daily increase since 2016 following the release of more solid economic data, this time in the form of factory orders and jobless claims.
On Wednesday, the 10-year yield hit its highest level since July 2011 following the release of strong ADP data, a good reading on the services sector and hawkish comments from Federal Reserve chairman Jerome Powell.
Fiona Cincotta, senior market analyst at City Index, said: "Suddenly the US stocks trading at all time high levels are looking potentially slightly overpriced and more of a risky asset than the relatively risk-free government papers.
"Although some market watchers argue that the US indices had been pulled higher over the last months by a few good stocks the overall domestic economic data underpins the case for a strong market. Tomorrow’s non-farm payrolls and unemployment data is expected to provide more evidence of a strong economy."
Figures from the Labor Department showed the number of Americans filing for unemployment benefits fell more than expected last week.
US initial jobless claims fell by 8,000 to 207,000 from the previous week's level, which was revised up by 1,000 from 214,000. Economists had been expecting a smaller drop to 213,000.
The Labor Department said claims for South and North Carolina were affected by Hurricane Florence, which hit the region in mid-September.
Meanwhile, the four-week moving average rose by 500 to 207,000 from the previous week's average, which was revised up by 250 from 206,250. The four-week average is considered more reliable as it smooths out sharp fluctuations in the more volatile weekly figures, giving a more accurate picture of the health of the labour market.
Pantheon Macroeconomics said the Florence hit was very small and is unwinding
"The increase in jobless claims triggered by Hurricane Florence was very modest, and smaller than we expected. It is now fading, and claims likely will soon hit new cycle lows, breaching the 200k mark for the first time since 1969," said economist Ian Shepherdson.
"The labour force is more than twice as big as in 1969, and claims as a share of employment are at a record low. With strong growth likely to persist for some time, fuelled by fiscal easing, claims likely will hit further lows over the next few months as the number of businesses in trouble declines."
Meanwhile, data from the Department of Commerce showed that factory goods orders shot higher in August, buoyed by a large increase in those made to last for more than three years.
Total orders from the manufacturing sector grew by 2.3% month-on-month to reach $510.5bn That was more than twice the 1.0% advance that economists had pencilled in. Versus a year ago, factory goods orders were 8.6% higher.
Orders for durable goods, or those made to last more than three years, jumped by 4.4% versus July to reach $259.55bn, powered by a 69.1% gain in those for non-defence aircraft and parts. A preliminary reading had revealed a 4.5% rise in durable goods orders.
Those for non-durable goods meanwhile increased by 0.2% month-on-month to reach $250.9bn.
Given the recent strong run of data, all eyes will be on Friday’s non-farm payrolls report and unemployment rate. Analysts are expecting payrolls to come in at 185,000 for September, down from August’s reading of 201,000.
In corporate news, drug company Eli Lilly rose after the company said that data from a mid-stage trial of its experimental diabetes drug showed promise and Constellation Brands advanced after lifting its earnings outlook for 2019.
Cloudera and Hortonworks both rallied after announcing an agreement to merge, while bookstore chain Barnes & Noble surged after saying that its board of directors has decided to enter a formal review process to evaluate "strategic alternatives".
Elsewhere, retailer Pier 1 Imports declined after posting a wider loss for the second quarter, and Arrowhead Pharmaceuticals tumbled after entering a $3.7bn license and cooperation agreement with Janssen Pharmaceuticals.