Stocks Rally on Expectations for a Dovish U.S. CPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +1.28%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.80%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.76%.

Stocks on Wednesday extended Tuesday’s gains, with the S&P 500 and Dow Jones Industrials posting 4-week highs and the Nasdaq 100 posting a 3-1/2 week high.  Stocks rallied Wednesday on expectations that Thursday’s U.S. Dec CPI report will show a further softening in price pressures.  Also, lower bond yields Wednesday sparked a rally in technology stocks that lifted the overall market.

An easing of inflation would bolster the case for less-aggressive Fed rate hikes.  The market consensus is for Thursday’s U.S. Dec CPI to ease to 6.5% y/y from 7.1% y/y in Nov and for Dec CPI ex-food and energy to ease to 5.7% y/y from 6.0% y/y in Nov. Those reports would be down from the 40-year highs of +9.1% y/y (headline) and +6.6% y/y (core) seen in mid-2022.

Comments Wednesday from Boston Fed President Collins were dovish for Fed policy and bullish for stocks when she said she's leaning toward supporting only a +25 bp rate hike at the February FOMC meeting, saying, "adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we're going to hold.  Smaller changes give us more flexibility."

Lower global bond yields are bullish for stocks.  The 10-year UK gilt yield Wednesday dropped to a 3-week low of 3.366%.  Also, the 10-year German bund yield dropped -10.3 bp at 2.204%, and the 10-year T-note yield fell -6.5 bp to 3.554%. 

Overseas markets Wednesday settled mixed.  The Euro Stoxx 50 index closed up +1.04%.  The Shanghai Composite Stock index closed down by -0.24%, and Japan’s Nikkei Stock index closed up +1.03%.

Today’s stock movers…

Lower T-note yields Wednesday boosted technology stocks and the overall market.  Amazon.com (AMZN) closed up more than +5%.  Also, Alphabet (GOOGL), Marvell Technology (MRVL), and Datadog (DDOG) closed up more than +3%.  Microsoft (MSFT) closed up more than +3% to lead gainers in the Dow Jones Industrials, and Apple (AAPL) closed up more than +2%.

GE HealthCare Technologies (GEHC) closed up more than +8% to lead gainers in the S&P 500 after it said its preliminary Q4 revenue was $4.9 billion and forecasted 2023 organic revenue growth in the range of 5% to 7% year-over-year and adjusted margin on earnings before interest and taxes of 15% to 15.5%. 

Laboratory stocks Wednesday rose for a second day on earnings optimism for the sector after Danaher Tuesday announced that preliminary Q4 adjusted core revenue growth was in the high-single-digit percent range, stronger than previous guidance of flat to low-single-digit percent decline.  As a result, Bio-Rad Laboratories (BIO) closed up more than +6%. Also, Charles River Laboratories (CRL) closed up more than +5%.  In addition, Thermo Fisher Scientific (TMO), Danaher (DHR), and Laboratory Corp of America Holdings (LH) closed up more than +2%. 

Illumina (ILMN) closed up more than +5% after HSBC initiated coverage on the stock with a buy rating and a price target of $300.

Atlassian Corp (TEAM) closed up more than +7% after Mizuho Securities said the company “significantly” raised prices for some products.

Extra Space Storage (EXR) closed up more than +5% after Raymond James upgraded the stock to outperform from market perform.

Expedia Group (EXPE) closed up more than +4% after Oppenheimer upgraded the stock to outperform from perform.

Autodesk (ADSK) closed up more than +3% after Berenberg initiated coverage on the stock with a buy rating and a price target of $230.

Medical technology product providers were under pressure Wednesday after Intuitive Surgical reported preliminary Q4 revenue of $1.66 billion, below the consensus of $1.69 billion.  As a result, Teleflex (TFX) closed down more than -7% to lead losers in the S&P 500.  Also, Dexcom (DXM) closed down more than -4% to lead losers in the Nasdaq 100.  In addition, Intuitive Surgical (ISRG) closed down more than -4%, and Stryker (SYK) closed down more than -1%.

Verizon Communications (VZ) closed down more than -1% to lead losers in the Dow Jones Industrials after Bloomberg data showed the Eaton Vance Tax-Managed Value Fund exited its position in Verizon.

Salesforce (CRM) closed down more than -1% after Bernstein downgraded the stock to underperform from market perform.

Across the markets…

March 10-year T-notes (ZNH23) on Wednesday closed up +14 ticks, and the 10-year T-note yield fell by -6.5 bp to 3.554%.  Strength in European government bonds Wednesday underpinned T-notes prices.  The 10-year UK gilt yield fell to a 3-week low Wednesday of 3.366%, and the 10-year German bund yield fell -10.3 bp to 2.204%.  Also, dovish comments Wednesday from Boston Fed President Collins gave T-notes a boost when she said she's leaning toward supporting only a +25 bp rate hike at the February FOMC meeting.

T-note prices extended their gains Wednesday afternoon on solid demand for the Treasury’s $32 billion auction of re-opened 10-year T-notes.  The auction had a bid-to-cover ratio of 2.53, above the 10-auction average of 2.42. 

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