Stocks Climb on the Outlook for the Fed to Pause Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.51%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.42%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.32%.

U.S. stocks this morning are moderately higher, with the S&P 500 at a 13-1/2 month high, Dow Jones Industrials climbing to a 4-month high, and the Nasdaq 100 at a 14-month high.  Stocks are climbing after today’s U.S. consumer price report for May showed moderation in price pressures, which paves the way for the Fed to pause its interest rate hikes.

U.S. May CPI eased to +4.0% y/y from +4.9% y/y in Apr, better than expectations of +4.1% y/y and the smallest increase in over two years. Also, May CPI ex-food and energy eased to +5.3% y/y from +5.5% y/y in Apr, the smallest increase in 1-1/2 years but higher than expectations of +5.2% y/y.

U.S. stocks have carryover support from a rebound in Chinese stocks today after Bloomberg reported the country is considering broad stimulus measures to revive the economy, including interest rate cuts. Also, the PBOC today unexpectedly lowered its seven-day reverse repurchase rate, which bolsters the outlook for a cut in one-year policy loans on Thursday.

The markets are looking ahead to interest rate decisions from the Fed, ECB, and BOJ this week.  Market odds for the Fed to raise the fed funds target range by +25 bp at Wednesday’s FOMC meeting fell to 11% today from 25% Monday. 

Global bond yields are mixed.  The 10-year T-note yield is up +3.9 bp at 3.774%.  The 10-year German bund yield is up +2.8 bp at 2.416%, and the UK 10-year gilt yield rose to an 8-month high of 4.448% and is up +9.1 bp at 4.429%.

On the bullish side of stocks, regional bank stocks are moving higher after the CEO of Comerica said bank deposit trends are now “more normal.” Also, energy stocks are climbing, with the price of WTI crude up more than +3%.  In addition, Oracle is up more than +2% after reporting Q4 adjusted EPS above consensus, and CEO Catz said its cloud-computing business would continue its rapid growth in the coming fiscal year. 

On the bearish side, Biogen is down more than -3% after a group of nine neurologists and researchers familiar with Alzheimer's disease said that Biogen’s and Eisai’s Leqembi drug may not see wide use in Europe over efficacy and brain swelling concerns.   Also, Zions Bancorp is down more than -3% after the bank said its Q2 net interest margin is trending toward 2.85%, weaker than consensus and a downturn from Q1. In addition, Lockheed Martin is down more than -2% after Jeffries said the company might face some cash-timing risk related to troubles in the delivery of its F-35 jets.

Overseas stock markets are higher.  The Euro Stoxx 50 is up +0.69%.  China’s Shanghai Composite closed up +0.15%, and Japan’s Nikkei Stock Index closed up +1.80%. 

Today’s stock movers…

Regional bank stocks are moving higher today after the CEO of Comerica said bank deposit trends are now “more normal.”  As a result, Comerica (CMA) is up more than +5%, and Lincoln National (LNC) is up more than +4%.  Also, Huntington Bancshares (HBAN), Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), and KeyCorp (KEY) are up more than +3%.  In addition, Wells Fargo (WFC), M&T Bank (MTB), Truist Financial (TFC), and U.S. Bancorp (USB) are up more than +2%. 

Energy stocks and energy service providers are climbing, with the price of WTI crude up more than +3%.  Halliburton (HAL) is up more than +5% to lead gainers in the S&P 500.  Also, APA Corp (APA) and Schlumberger (SLB) are up more than +4%.  In addition, Baker Hughes (BKR), Marathon Oil (MRO), and Valero Energy (VLO) are up more than +3%. 

Oracle (ORCL) is up more than +2% after reporting Q4 adjusted EPS of $1.67, better than the consensus of $1.58.  The company reported Q4 cloud sales gained +54% after a +45% jump in Q3, and CEO Catz said its cloud-computing business would continue its rapid growth in the coming fiscal year.

Assurant (AIZ) is up more than +4% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $144.

Devon Energy (DVN) is up more than +3% after Goldman Sachs upgraded the stock to buy from neutral with a price target of $58.

U.S.-listed Chinese stocks are moving higher today after China’s central bank announced a surprise short-term policy interest rate cut to boost the economy.  As a result, Baidu (BIDU) is up more than +6%.  Also, JD.com (JD) is up more than +3%.  In addition, Alibaba Group Holding (BABA), PDD Holdings (PDD), and NetEase (NTES) are up more than 2%. 

Biogen (BIIB) is down more than -3% to lead losers in the S&P 500 and Nasdaq 100 after a group of nine neurologists and researchers familiar with Alzheimer's disease said that Biogen’s and Eisai’s Leqembi drug might not see wide use in Europe over efficacy and brain swelling concerns.   

Zions Bancorp (ZION) is down more than -3% after the bank said its Q2 net interest margin is trending toward 2.85%, weaker than consensus and a downturn from Q1.

Lockheed Martin (LMT) is down more than -2% after Jeffries said the company might face some cash-timing risk related to troubles in the delivery of its F-35 jets.

Methode Electronics (MEI) is down more than -17% after forecasting 2024 net sales of $1.15 billion-$1.20 billion, the midpoint below the consensus of $1.19 billion.

Apple (AAPL) is down -0.5% after UBS downgraded the stock to neutral from buy, citing a softer demand outlook for the iPhone and services growth.

Across the markets…

September 10-year T-notes (ZNU23) today are down -2 ticks, and the 10-year T-note yield is up +3.9 bp at 3.774%.  T-notes this morning gave up an early advance and are slightly lower.  The jump in the 10-year UK gilt yield today to a 4-month high is undercutting T-note prices.  Also, supply pressures are weighing on T-notes as the Treasury will auction $18 billion of 30-year T-bonds later today as part of this week’s $90 billion auctions of T-notes and T-bonds.  T-notes this morning initially moved higher after the U.S. May CPI report showed an easing of price pressures, which bolsters expectations for the Fed to pause its rate hike campaign after the Tue/Wed FOMC meeting.

The dollar index (DXY00) this morning is down -0.45% and posted a 3-week low. Today’s U.S. May CPI report showed an easing of price pressures that knocked T-note yields lower and weighed on the dollar.  Also, the CPI report boosted expectations for the Fed to pause its rate hike campaign after the Tue/Wed FOMC meeting.  In addition, strength in stocks today has curbed liquidity demand for the dollar. 

EUR/USD (^EURUSD) today is up by +0.34% and posted a 3-week high.  A weaker dollar today is supportive of the euro.  Also, an unexpected increase in the German May ZEW business confidence was bullish for the euro.  In addition, central bank divergence is positive for EUR/USD the prospects for the Fed to pause raising interest rates this week while the ECB continues to raise interest rates.

The German May ZEW expectations of economic growth index unexpectedly rose +2.2 to -8.5, stronger than expectations of a decline to -13.5.

USD/JPY (^USDJPY) today is up by +0.19%.  The yen is moderately lower today as an increase in T-note yields weakened the yen.  Also, a rally in the Nikkei Stock Index today to a nearly 33-year high curbed safe-haven demand for the yen.  Today’s Japanese economic news was positive for the yen after Q2 BSI large manufacturing business conditions increased. 

The Japan Q2 BSI large manufacturing business conditions index rose to -0.4 from -10.5 in Q1.

August gold (GCQ3) this morning is down -3.8 (-0.19%), and July silver (SIN23) is down -0.079 (-0.33%).  Precious metals prices this morning gave up an early advance and are slightly lower. Higher T-note yields today are weighing on metals prices.  Also, today’s rally in stocks has curbed the safe-haven demand for precious metals.  Precious metals this morning initially moved higher after the dollar index fell to a 3-week low.  Precious metals also have support as the easing of price pressures in today’s U.S. May CPI report bolsters the chance that the Fed will pause its rake hike campaign.  In addition, gold prices found support on today’s action by the Chinese central bank to cut the seven-day reverse repurchase rate by -10 basis points to 1.9%, the first reduction in the rate since August 2022. 

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.