Markets retreat with selling pressured by higher Treasury yields

Dow dropped 178, decliners over advancers better than 5-2 & NAZ sank 375.  The MLP index dipped 1+ to the 298s & the REIT index fell 2+ to the 391s.  Junk bond funds continued to be weak & Treasuries saw more selling which raised yields (more below).  Oil finished higher to the 74s after late day buying & gold rose 15 to 2663 (more on both below).

Dow Jones Industrials 

Activity in the US services industry accelerated in Dec but brought with it a sharp rise in expectations for price increases as businesses grew concerned about the impact tariffs would have on inflation.  The Institute for Supply Management's (ISM) services index posted a reading of 54.1%, representing the share of businesses expecting growth.  That was up 2 percentage points from Nov & better than the survey showing forecast of 53.4%.  Along with the better overall reading, the prices index jumped to 64.4%, an increase of 6.2 points or more than 10%.  It was the first time the index had eclipsed 60% since Jan 2024, said Steve Miller, chair of ISM's Business Survey Committee.  The prices index hit its highest level since Feb 2023.  “There was general optimism expressed across many industries, but tariff concerns elicited the most panelist comments,” Miller said.  Pres-elect Trump has vowed to enact sweeping tariffs after he takes office later this month.  Trump denied a report that he was considering a narrower, more targeted approach.  The ISM manufacturing survey for the month also reflected higher prices, with the index rising to 52.5%, up 2.2 points on the month.  Treasury yields, particularly at the longer-dated end of the curve, moved higher following the release.  The benchmark 10-year note most recently yielded 4.68%, up 0.065 percentage point, or 6.5 basis points, on the session.

Services index shows big jump in prices for December as companies fear tariffs

Johnson & Johnson (JNJ), a Dow stock & Dividend Aristocrat, said its lung cancer regimen keeps people alive for at least a year longer than AstraZeneca's (AZN) Tagrisso, the go-to drug for a certain type of lung cancer.  JNJ said its drugs, Rybrevant & Lazcluze, showed a statistically significant & clinically meaningful improvement to survival relative to Tagrisso in a pivotal trial.  The company expects the benefit to be at least a year & possibly longer, JNJ execs added.  The company plans to present the full results at a medical meeting later this year.  “This is an absolute igniter,” said Biljana Naumovic, pres of US Oncology Solid Tumor at JNJ Innovative Medicine.  “People were looking for an overall survival difference.”  JNJ is trying to supplant AstraZeneca's (AZN)'s blockbuster Tagrisso, a once-daily pill that has transformed the treatment of non-small cell lung cancer with EGFR mutations & extended the median survival to about 3 years.  These genetic errors cause cancer cells to proliferate.  They're responsible for 10-15% of lung cancer cases in the US, according to the American Lung Association.  JNJ execs hailed the result as a game-changer that should change the treatment of this type of lung cancer.  But there's no guarantee doctors & patients will all switch to using Rybrevant & Lazcluze since the regimen comes with more side effects & requires infusions every few weeks, said Dr Stephen Liu, director of thoracic oncology & head of developmental therapeutics at Georgetown University's Lombardi Comprehensive Cancer Center.  “I think the announcement that this leads to people living longer will force a harder look,” Liu said.  He wants to see who benefited the most so he can treat those patients more aggressively while sparing those who are less likely to respond.  Rybrevant & Lazcluze can cause people to develop a rash & lead their fingernails to split.  Like Tagrisso, JNJ's regimen blocks the EGFR protein to prevent cancer cells from growing.  It also targets MET, a common pathway cancer uses to develop resistance to drugs.  JNJ forecasts Rybrevant & Lazcluze's annual sales could top $5B.  Tagrisso brought in about $6B for AZN in 2023.  JNJ stock went up 2.56 & AZN stock slid back 20¢.   

J&J says its lung cancer drug combination keeps people alive longer

The US gov's monthly auction of 10-year notes drew the highest yield since 2007 after the latest economic data suggesting that the Federal Reserve is less likely to cut interest-rates again before mid-year.  The $39B auction was awarded at 4.68%, slightly higher than indicated by its level at the bidding deadline.  Yields across maturities had risen by several basis points after gauges of service-sector activity & job openings were stronger than expected.  The data “reinforced the market's view on a strong US economy & rates are not restrictive,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management.  Traders, who as recently as late Sep were fully pricing in another Fed rate cut by Mah, scrapped wagers there will be one until the 2nd ½ of the year.  “There’s still concern about elevated inflation risks that has created more of a term premium, there’s concern about these budget deficits needing to be financed, and there’s been a shift from last year that’s leading to more of a focus now on a soft landing — or no landing — as opposed to a hard landing,” said Michael Cloherty, head of US rates strategy at UBS Securities.

Treasury auction draws highest yield since 2007 in bond sell-off

Gold prices trimmed earlier gains, trading below $2650 per ounce after a 1% rise earlier in the session.  The strengthening $ & rising Treasury yields pressured gold as US job openings indicated lower chances of significant rate cuts by the Federal Reserve.  Stronger-than-expected job openings & solid services sector data pointed to a resilient economy, likely keeping the Fed cautious about easing rates.  The $ rebounded from a 1-week low, further weighing on gold, which typically benefits from lower interest rates.  Investor concerns that proposed US tariffs could fuel inflation & restrict the Fed's rate-cutting ability have also impacted gold's appeal as a non-yielding asset.  Traders now await key US jobs data & the Fed's meeting minutes for more policy guidance.  Meanwhile, China's central bank boosted its gold reserves for the 2nd consecutive month, lending support to gold prices.

Gold Prices Trim Gains, Dip Below $2,650 as Dollar Strengthens

Oil prices edged lower as optimism over demand faded, although tighter Russian & Iranian supplies driven by expanded Western sanctions curbed losses.  Brent crude futures were down 25¢ at $76.05 a barrel while US West Texas Intermediate (WTI) crude was down 44¢ (0.6%) at $73.12.  Both benchmarks fell yesterday, after rising for 5 straight days last week & ending at their highest levels since Oct on Fri amid expectations of more fiscal stimulus to revitalize China's faltering economy.  This week's weakness is likely a technical correction, as traders react to weaker global economic data that dented the optimism seen earlier.  That referred to weak economic news from the US & Germany.  Higher inflation in Germany has raised concerns that the ECB may not be able to cut rates as quickly as expected across the eurozone, while US manufacturing orders fell in Nov.  Market participants are looking to more data this week, such as the Dec non-farm payrolls report on Fri, for clues on US interest rate policy & the outlook for oil demand.  Meanwhile, cold weather in the US & Europe has boosted demand for heating oil, supporting prices.  Meteorologists expect the weather in the lower 48 US states to remain colder than usual thru Jan 21, with the coldest days expected later this week.

Oil prices rise on supply disruption concerns

Stocks reversed early gains as cautious investors weighed new economic data.  At the same time the 10-year Treasury yield added roughly 7 basis points to hover just below 4.7%.  Bets on when the Federal Reserve will next cut interest rates were pushed back too.  Earlier today, the Institute for Supply Management's manufacturing PMI indicated the manufacturing sector continued to expand last month, although the prices paid index jumped to a nearly 2-year high.  The surge in prices for the Fed is a worry for investors.