Stocks Rally on China Optimism and Strength in Chip Stocks

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed +1.36%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.26%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.56%.  U.S. stock indexes rallied mainly on carry-over support from a +2.43% jump in China’s Shanghai Composite on speculation China is poised to exit its strict Covid Zero policy.

Stocks were also supported by the stronger-than-expected U.S. payroll report, which reduced fears of a near-term recession, although the report also meant the likelihood of a continued hawkish Fed policy.  The 10-year T-note yield rose slightly by +1 bp to 4.16%.

Chip stocks led technology stocks higher Friday after Microchip Technology reported better-than-expected Q2 EPS and forecasted stronger-than-expected Q3 EPS. 

Stock investors were also encouraged as Fed officials on Friday eased their talking points to allow for a smaller rate hike in December, in line with Fed Chair Powell’s mixed comments on Wednesday at the conclusion of the 2-day FOMC meeting.  Mr. Powell said the peak rate for the federal funds rate would likely be higher than the Fed earlier thought.  However, he also said the Fed could probably slow its rate hike regime as soon as its next meeting in December.  The current market consensus is for the FOMC to downshift to a +50 bp rate hike at the next meeting in December after four straight +75 bp rate hikes.

Comments by several Fed officials on Friday echoed Mr. Powell’s mixed message.  Boston Fed President Susan Collins said monetary policy is entering a new phase where it makes sense for the FOMC to move interest rates more slowly to balance risks.  She would not rule out another +75 bp rate hike, but she seemed to be leaning towards a +50 bp rate hike at the next meeting since she noted that “a 50 bp move was considered a large move in the past.”

Chicago Fed President Charles Evans on Friday said he expects the Fed to raise rates “slightly higher” than the dot plot projections of September, which are for the funds rate to top out at 4.6% at the end of 2023. However, he said that stepping back from +75 bp rate hikes makes sense to him.

Minneapolis Fed President Neel Kashkari said Friday’s payroll report showed that the U.S. labor market is “quite healthy.”  He said, “That tells me we have more work to do to try to cool down the economy and bring demand and supply into balance.”  He added, “I had interest rates in September peaking at around 4.9% in the March-April kind of time frame.  Given what I know right now, I would expect to go higher than that.  How much higher than that, I don’t know.”

Richmond Fed President Thomas Barkin on Friday said, “It is entirely conceivable to me we would end up over 5%.”  However, he noted that the Fed might slow the pace of its rate hikes.

Oct nonfarm payrolls rose +261,000, stronger than expectations of +193,000.  Also, Sep nonfarm payrolls were revised upward to +315,000 from the previously reported +263,000.

The U.S. Oct unemployment rate rose +0.2 to 3.7%, higher than expectations of 3.6%, as the Oct labor force participation rate edged down to 62.2% from 62.3% in Sep.

U.S. Oct average hourly earnings rose +0.4% m/m and +4.7% y/y, close to expectations.

Today’s stock movers…

Chip stocks rallied sharply Friday after Microchip Technology reported Q2 adjusted EPS of $1.46, better than the consensus of $1.44, and forecasted Q3 adjusted EPS of $1.54-$1.56, stronger than the consensus of $1.46.  Microchip Technology (MCHP) closed +5.66%.  Other chip stocks closed higher as ASML Holding NV (ASML) closed +6.56%, Applied Materials (AMAT) closed +4.53%, Nvidia (NVDA) closed +3.76%, Micron Technology (MU) closed +3.31%, Broadcom (AVGO) closed +3.07%, Marvell Technology (MRVL) closed +3.00%, Analog Devices (ADI) closed +2.85%, NXP Semiconductors NV (NXPI) closed +2.59%, and Advanced Micro Devices (AMD) closed +1.78%.

U.S.-listed Chinese stocks rallied sharply Friday amid more reopening speculation and after Bloomberg reported progress on implementing a tentative U.S.-China agreement that would prevent the delisting of hundreds of Chinese stocks from U.S. exchanges.  JD.com (JD) closed +9.74%, Baidu (BIDU) closed +9.02%, Pinduoduo (PDD) closed +8.64%, Alibaba Group Holding (BABA) closed +7.05%, and NetEase (NTES) closed +5.70%.

Freeport-McMoRan (FCX) rallied +9.69% as copper prices jumped to a 1-1/2 month high and silver prices climbed to a 4-week high on optimism China was close to ending its Covid Zero policy. 

Starbucks (SBUX) rallied +8.48% after reporting Q4 comparable same-store sales were up +7%, stronger than the consensus of +4.09%. 

Expedia Group (EXPE) rallied +3.99% after reporting Q3 revenue of $3.62 billion, better than the consensus of $3.61 billion.

Arista Networks (ANET) jumped +5.47% after Piper Sandler upgraded the stock to overweight from neutral. 

Warner Bros Discovery (WBD) fell -14.28% to lead losers in the S&P 500 after reporting Q3 revenue of $9.82 billion, weaker than the consensus of $10.37 billion. 

Atlassian Corp (TEAM) plunged -30.11% to lead losers in the Nasdaq 100 after forecasting Q2 revenue of $835 million-$855 million, well below the consensus of $882.6 million.  Piper Sandler then downgraded the stock to neutral from overweight.  Other software stocks fell on the news, with Okta (OKTA) down more than -11%, Datadog (DDOG) down more than -8%, and Splunk (SPLK) down more than -5%.

PayPal Holdings (PYPL) fell -3.38% after reporting Q3 total payment volume of $336.07 billion, weaker than the consensus of $343.25 billion, and cutting its full-year revenue forecast to $27.50 billion from a previous forecast of $27.85 billion, below the consensus of $27.86 billion. 

Across the markets…

Dec 10-year T-notes (ZNZ22) on Friday closed +0.5 tick, and the 10-year T-note yield rose +1.2 bp to 4.158%.  T-note prices were undercut Friday by the stronger-than-expected U.S. payroll report and a +8 bp rise in the 10-year breakeven inflation expectations rate to 2.48% driven by the +5% rally in Dec crude oil prices.  However, T-note prices saw support as several Fed officials on Friday indicated that the Fed could likely move to smaller rate hikes in the near future. 

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