Stock Rally Fizzles on Hawkish Fed Comments

What you need to know…

The S&P 500 Index ($SPX) (SPY) Monday closed down -0.08%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.34%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.62%.

Stocks on Monday settled mixed after the Nasdaq 100 earlier posted a 3-week high.  Stocks gave up most of their gains Monday after San Francisco Fed President Daly said it is too early to "declare victory" over inflation, and she expects the Fed to raise interest rates to somewhere above 5% before pausing.

Also weighing on the overall market Monday was weakness in defense contractors on concern the election of Kevin McCarthy as Speaker of the House will pose risks for U.S. defense spending since part of the agreement to elect McCarthy reportedly includes a cap to fiscal year 2024 discretionary spending across government at 2022 levels.

Morgan Stanley warns that the S&P 500 could fall by -22% from current levels in the event of a mild recession, as corporate profit estimates are still too high and the equity risk premium is at its lowest level since 2008.

Stock indexes Monday initially rallied sharply, with the S&P 500 and Dow Jones Industrials posting 3-week highs on optimism about China’s reopening and expectations of slower Fed interest rate hikes.  Stock indexes initially had carryover support from Monday’s rally in China’s Shanghai Composite to a 3-1/2 week high on signs the government will offer more support to help China’s economy recover from the end of its Covid-Zero policy. 

Stocks also had support on expectations the Fed will slow its pace of tightening monetary policy after last Friday’s economic news showed the Dec ISM services index contracted at its steepest pace in 2-1/2 years.  The 10-year T-note yield dropped to a 3-week low Monday at 3.506%.

Comments Monday from Atlanta Fed President Bostic were dovish for Fed policy and supportive for stocks when he said a cooler U.S. CPI report this week could put a +25 bp interest rate hike on the table for February's FOMC meeting.

Monday’s U.S. economic news was bullish for stocks after Nov consumer credit rose +$27.962 million, above expectations of +$25.0 billion.

Overseas markets on Monday settled higher.  The Euro Stoxx 50 index closed up +1.26%.  The Shanghai Composite Stock index closed up by +0.58%, and Hong Kong’s Hang Seng Stock Index closed up +1.89%.  Japan was closed for the Coming of Age Day holiday.

Today’s stock movers…

A fall in the 10-year T-note yield Monday to a 3-week low sparked a rally in technology stocks.  Nvidia (NVDA) and Advanced Micro Devices (AMD) closed up more than +5%. Also, Salesforce (CRM) closed up more than +4% to lead gainers in the Dow Jones Industrials.  In addition, Intel (INTC), Marvell Technology (MRVL), Applied Materials (AMAT), and Crowdstrike Holdings (CRWD) closed up more than +2%. 

Tesla (TSLA) closed up more than +5% to lead gainers in the S&P 500 on hopes that demand for electric vehicles will improve as China ramps up the pace of its reopening.  Other electric vehicle makers also gained, as Lucid Group (LCID) closed up more than +6% to lead gainers in the Nasdaq 100, and Rivian Automotive (RIVN) closed up more than +1%. 

Airline stocks rallied Monday after Delta Air Lines CEO Bastian said he sees a “very, very strong” year for travel in the U.S. during 2023.  American Airlines Group (AAL) closed up more than +3%. Also, United Airlines Holdings (UAL) and Delta Air Lines (DAL) closed up more than +2%.

Norwegian Cruise Line Holdings (NCLH) closed up more than +5% after Melius Research LLC initiated coverage of the stock with a buy recommendation and a price target of $17.  Other cruise line stocks also gained as Royal Caribbean Cruises (RCL) closed up more than +4%, and Carnival (CCL) closed up more than +3%. 

Baxter International (BAX) closed down more than -7% to lead losers in the S&P 500 and added to last Friday’s -7% plunge after announcing plans to spin off its industry-leading kidney-care business into an independent publicly traded company within the next 12 to 18 months. 

Lululemon Athletica (LULU) closed down more than -9% to lead losers in the Nasdaq 100 after lowering its guidance for gross margin to shrink as much as 1.1% in the quarter ending in January versus a previous forecast for an increase of 0.2%. 

Regeneron Pharmaceuticals (REGN) closed down more than -7% after it reported preliminary Eylea U.S. net product sales in Q4 of $1.50 billion, below the consensus of $1.64 billion.

Pfizer (PFE) closed down more than -4% after it lost a bid for a Supreme Court review of a copay ruling for its tafamidis heart disease drug and a deadlock with China in talks to negotiate a price for its paxlovid Covid-19 treatment.

Defense contractors were under pressure Monday on concern the election of Kevin McCarthy as Speaker of the House will pose risks for U.S. defense spending since part of the agreement to elect McCarthy reportedly includes a cap to fiscal year 2024 discretionary spending across government at 2022 levels.  As a result, Northrop Grumman (NOC) closed down more than -4%.  Also, Lockheed Martin (LMT) and Huntington Ingalls Industries (HII) closed down more than -3%. In addition, L3Harris Technologies (LHX), and Raytheon Technologies (RTX) closed down more than -2%. 

Across the markets…

March 10-year T-notes (ZNH23) on Monday closed up +13 ticks, and the 10-year T-note yield fell by -3.3 bp to 3.525%.  Mar T-notes Monday extended last Friday’s rally up to a 3-week high, and the 10-year T-note yield fell to a 3-week low of 3.506%.  T-note prices moved higher on positive carryover from last Friday after weaker-than-expected U.S. reports on hourly earnings and contraction in the services sector bolstered expectations for the Fed to dial down its aggressive rate hike campaign.  Also, comments from Atlanta Fed President Bostic gave T-notes a boost when he said a cooler U.S. CPI report on Thursday could put a smaller +25 bp interest rate hike on the table for February's FOMC meeting. 

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