Stocks Finish Higher as Inflation Concerns Ebb with Soft PPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed up +0.87%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.17%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.45%. 

Stock indexes on Tuesday rallied moderately, with the S&P 500 climbing to a 2-month high, the Dow Jones Industrials climbing to a 2-3/4 month high, and the Nasdaq 100 rising to a 1-3/4 month high. 

A slowdown in PPI inflation knocked T-note yields lower and lifted stock prices.   The 10-year T-note yield Tuesday fell to a 5-week low of 3.755% after U.S. Oct producer prices rose less than expected. T-notes also rose on carry-over support from a rally in 10-year German bunds after ECB Council member Villeroy de Galhau said a slower pace of ECB rate hikes is likely after next month’s policy meeting.

Strength in chip stocks Tuesday was a bullish factor for the overall market after an SEC filing showed Warren Buffett’s Berkshire Hathaway took a $5 billion stake in Taiwan Semiconductor Manufacturing.  Also, a +6% jump in Walmart underpinned stocks after it reported better-than-expected Q3 EPS and raised its full-year net sales forecast.

Stock indexes fell back from their best levels Tuesday on ramped-up geopolitical risks after the AP reported that two Russian missiles landed in NATO-member Poland, killing two people.

The U.S. Oct PPI final-demand index rose +8.0% y/y, weaker than expectations of +8.3% y/y and the weakest report in 15 months.  Oct PPI ex-food & energy rose +6.7% y/y, weaker than expectations of +7.2% y/y and the weakest report in 15 months. 

The U.S. Nov Empire manufacturing survey general business conditions index rose +13.6 to a 4-month high of 4.5, stronger than expectations of -6.0.

Comments today from Philadelphia Fed President Harker were dovish for Fed policy and bullish for stocks when he said, "in the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance." 

Today’s stock movers…

Chipmakers rallied Tuesday after an SEC filing showed Warren Buffett’s Berkshire Hathaway acquired about 60 million American depository receipts (ADRs), about a $5 billion stake, in Taiwan Semiconductor Manufacturing.  As a result, Qualcomm (QCOM), Advanced Micro Devices (AMD), ASML Holding NV (ASML), NXP Semiconductors (NXPI), and Marvell Technology (MRVL) closed up more than +3%.  Also, 

Nvidia (NVDA),  Broadcom (AVGO), Microchip Technology (MCHP), and Micron Technology (MU) closed up more than +2%.

A decline in the 10-year T-note yield to a 5-week low Tuesday gave technology stocks a boost.  Datadog (DDOG) closed up more than +10% to lead gainers in the Nasdaq 100.  Also, Atlassian Corp (TEAM) and Crowdstrike Holdings (CRWD) closed up more than +4%.  In addition, Netflix (NFLX) and Autodesk (ADSK) closed up more than +3%, and Alphabet (GOOGL) and Meta Platforms (META) closed up more than +2%.

Walmart (WMT) closed up more than +6% to lead gainers in the Dow Jones Industrials after reporting Q3 adjusted EPS of $1.50, well above the consensus of $1.32, and then raising its full-year net sales forecast to +5.5% from a previous estimate of +4.5%. 

Paramount Global (PARA) closed up more than +5% after an SEC filing showed Berkshire Hathaway now owns 15% of the company’s Class B stock. 

U.S.-listed Chinese stocks moved higher Tuesday as market sentiment in Chinese stocks has been boosted by signs of improving U.S.-China relations, China’s new property sector support plan, and some easing of Chinese Covid restrictions.  Alibaba Group Holding (BABA) closed up more than +11%.  Also, NetEase (NTES) and Baidu (BIDU) closed up more than +9%.  In addition, Pinduoduo (PDD) closed up more than +8%, and JD.com (JD) closed up more than +7%.

Cruise line operators rallied moderately Tuesday after Japan’s transport ministry said cruise ships would be allowed to return to Japan for the first time since the early days of the pandemic in 2020.  More than 2 million people visited Japan on cruise ships in 2019. Carnival (CCL) closed up more than +5%.  Royal Caribbean Cruises Ltd (RCL) closed up more than +4%, and Norwegian Cruise Line Holdings (NCLH) closed up more than +2%.

Capital One Financial (COF) closed down more than -7% Tuesday to lead losers in the S&P 500 after Bank of America downgraded the stock to neutral from buy, citing October charge-offs and loan delinquencies that worsened from the year-ago period.

Albemarle (ALB) closed down more than -6% on concerns about weaker lithium demand in China.

Defensive healthcare stocks fell Tuesday as an easing of inflation concerns improved sentiment for tech and growth stocks and led to some rotation selling of defensive stocks.  Humana (HUM) closed down more than -3%.  Also, UnitedHealth Group (UNH) closed down more than -2% to lead losers in the Dow Jones Industrials.  In addition, Elevance Health (ELV) and Centene Corp (CNC) closed down more than -2%. 

Across the markets…

Dec 10-year T-notes (ZNZ22) on Tuesday closed up +14 ticks, and the 10-year T-note yield fell -6.0 bp to 3.794%.  Dec T-notes Tuesday rallied to a 1-1/4 month high, and the 10-year T-note yield fell to a 5-week low of 2.755%.  T-notes garnered support from a rally in 10-year German bunds after ECB Council member Villeroy de Galhau said a slower pace of ECB rate hikes is likely after next month’s policy meeting. 

Gains in T-notes accelerated Tuesday on an easing of inflation pressures after U.S. Oct PPI rose less than expected.  Also, comments from Philadelphia Fed President Harker gave T-notes a boost when he said he expects a slower pace of interest rate hikes in the coming months. In addition, an easing of inflation expectations was supportive for T-notes after the 10-year breakeven inflation rate Tuesday fell to a 1-month low of 2.332%.

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