Stocks Rally on Expectations the Fed Will Pause Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed up +0.69%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.43%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.79%.

Stock indexes on Tuesday finished moderately higher, with the S&P 500 posting a 13-1/2 month high, the Dow Jones Industrials posting a 4-month high, and the Nasdaq 100 posting a 14-month high.  Stocks rallied after Tuesday’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 had carryover support from a rebound in Chinese stocks Tuesday after Bloomberg reported the country is considering broad stimulus measures to revive the economy, including interest rate cuts.  Also, the PBOC Tuesday 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 10% Tuesday from 25% Monday. 

Global bond yields Tuesday moved higher.  The 10-year T-note yield rose to a 2-week high of 3.843% and finished up +10.5 bp at 3.841%.  The 10-year German bund yield rose +3.5 bp to 2.423%, and the UK 10-year gilt yield rose to an 8-month high of 4.448% and finished up +9.6 bp at 4.434%.

On the bullish side of stocks, semiconductor stocks rallied to lead the tech sector higher.  Also, regional bank stocks moved higher after the CEO of Comerica said bank deposit trends are now “more normal.”  In addition, cruise-line operators rose after Bank of America and JPMorgan Chase highlighted a continued uptick in demand.

On the bearish side, Advanced Micro Devices closed down more than -3% after the company unveiled a new line of artificial intelligence processors meant to challenge Nvidia that failed to impress analysts.  Also, Biogen closed down more than -2% 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.   In addition, Lockheed Martin closed down more than -1% 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 Tuesday settled higher.  The Euro Stoxx 50 closed up +0.72%.  China’s Shanghai Composite closed up +0.15%, and Japan’s Nikkei Stock Index closed up +1.80%. 

Today’s stock movers…

Semiconductor stocks rallied Tuesday to lead technology stocks higher.  Nvidia (NVDA), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) closed up more than +3%. Also, Intel (INTC) and Analog Devices (ADI) closed up more than +2%. In addition, Qualcomm (QCOM), Texas Instruments (TXN), Applied Materials (AMAT), ON Semiconductor (ON), and Marvell Technology (MRVL) closed up more than +1%.

Regional bank stocks moved higher Tuesday after the CEO of Comerica said bank deposit trends are now “more normal.”  As a result, Comerica (CMA) closed up more than +6% to lead gainers in the S&P 500.  Also, Lincoln National (LNC) closed up more than +5%.  In addition, Huntington Bancshares (HBAN), Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), and KeyCorp (KEY) closed up more than +2%.

Electric vehicle stocks rallied on hopes that cooling inflation will prompt the Fed to pause its interest rate hikes.  Rivian Automotive (RIVN) closed up more than +8% to lead gainers in the Nasdaq 100.  Also, Lucid Group (LCID) closed up more than +4%, and Tesla (TSLA) closed up more than +3%. 

Cruise-line operators rose after Bank of America and JPMorgan Chase highlighted a continued uptick in demand, even with consumers mindful of their discretionary spending. Norwegian Cruise Line Holdings (NCLH) closed up more than +5%, and Carnival (CCL) closed up more than +4%.  Also, Royal Caribbean Cruises (RCL) closed up more than +2%.

Albemarle (ALB) closed up more than +4% after Citigroup initiated coverage on the stock with a buy recommendation and a price target of $260.

Ulta Beauty (ULTA) closed up more than +4% after Loop Capital Markets upgraded the stock from buy to hold with a price target of $520.

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

Advanced Micro Devices (AMD) closed down more than -3% to lead losers in the S&P 500 and Nasdaq 100 after the company unveiled a new line of artificial intelligence processors meant to challenge Nvidia and failed to impress analysts.

Biogen (BIIB) closed down more than -2% 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) closed down more than -1% 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) closed down more than -1% 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) closed down more than -18% after forecasting 2024 net sales of $1.15 billion-$1.20 billion, the midpoint below the consensus of $1.19 billion.

Across the markets…

September 10-year T-notes (ZNU23) on Tuesday closed down -22 ticks, and the 10-year T-note yield rose by +10.5 bp to 3.841%.  Sep T-notes Tuesday gave up an early advance and tumbled to a 3-month low, and the 10-year T-note yield jumped to a 2-week high of 3.843%.  A surge in the 10-year UK gilt yield Tuesday to a 4-month high undercut T-note prices.  Also, Tuesday’s rally in the S&P 500 to a 13-1/2 month high reduced safe-haven demand for T-notes. 

T-notes on Tuesday 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.  T-notes maintained moderate losses Tuesday despite strong demand for the Treasury’s $18 billion auction of 30-year T-bonds with a bid-to-cover ratio of 2.52, well above the 10-auction average of 2.36 and the highest in 3-1/4 years. 

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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.