Stocks Higher as Bond Yields Tumble on Slowing U.S. Inflation

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed up +0.34%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.64%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.50%.

Stocks on Thursday closed moderately higher, with the S&P 500 and Dow Jones Industrials posting 4-week highs and the Nasdaq 100 posting a 3-1/2 week high.  The U.S. Dec CPI report came in as expected, supporting a rally in stock index futures. However, gains were limited after the core services gauge, excluding shelter, mentioned by Fed Chair Powell as a focus of policymakers, rose +0.3% m/m in Dec, higher than the +0.1% m/m increase in Nov.  Also, weekly U.S. jobless claims unexpectedly fell to a 3-1/2 month low, which is hawkish for Fed policy. 

Lower global bond yields Thursday were bullish for stocks. The 10-year UK gilt yield dropped to a 4-week low Thursday of 3.285%.  Also, the 10-year German bund yield fell to a 4-week low of 2.093%. The 10-year T-note yield fell to a 4-week low of 3.420%.

Positive corporate news supported stock gains Thursday as airline stocks soared after American Airlines Group reported preliminary Q4 adjusted EPS above the consensus.  Also, Cognizant Technology Solutions jumped more than +5% after raising its Q4 revenue forecast and naming Infosys veteran Ravi Kumar Singisetti as its new CEO. 

Fed comments Thursday were mixed for Fed policy and stocks. On the bullish side, Philadelphia Fed President Harker said, "In my view, interest rate hikes of 25 bp will be appropriate going forward."  Conversely, St. Louis Fed President Bullard said that "it would be appropriate for the Fed to raise the fed funds rate above 5% as soon as possible" to ensure that price pressures are subdued expeditiously.

U.S. weekly initial unemployment claims unexpectedly fell -1,000 to a 3-1/2 month low of 205,000, showing a stronger labor market than expectations of an increase to 215,000.

The U.S. Dec CPI report of -0.1% m/m and +6.5% y/y, right on market expectations.  The +6.5% y/y gain was the smallest in 14 months. 

U.S. Dec CPI ex-food and energy rose +0.3% m/m and +5.7% y/y, right on expectations.  The +5.7% y/y gain was the smallest in a year.

Overseas markets Thursday settled higher.  The Euro Stoxx 50 index closed up +0.66%.  The Shanghai Composite Stock index closed up by +0.05%, and Japan’s Nikkei Stock index closed up by +0.01%.

Today’s stock movers…

Airline stocks rallied Thursday after American Airlines Group reported preliminary Q4 adjusted EPS of $1.12-$1.17, well above the consensus of 60 cents.  As a result, American Airlines Group (AAL) closed up more than +9% to lead gainers in the S&P 500.  Also, United Airlines Holdings (UAL) closed up more than +7%, and Delta Air Lines (DAL) and Alaska Air Group (ALK) closed up more than +3%. Southwest Airlines (LUV) closed up more than +2%.

Energy stocks and energy service providers moved higher, as the price of WTI crude rose more than +1% to a 1-week high.  Hess (HES) and APA Corp (APA) closed up more than +3%.  Schlumberger (SLB), Haliburton (HAL), Marathon Petroleum (MPC), Baker Hughes (BKR), Occidental Petroleum (OXY), and Diamondback Energy (FANG) closed up more than +2%. 

Cognizant Technology Solutions (CTSH) closed up more than +5% after raising its Q4 revenue forecast to $4.80 billion from a prior forecast of $4.72 billion-$4.77 billion.  The company also named Infosys veteran Ravi Kumar Singisetti as CEO. 

Walt Disney (DIS) closed up more than +3% to lead gainers in the Dow Jones Industrials after Rosenblatt Securities said the push by activist investor Peltz to the board of Disney could help lead to changes in management and cost-cutting that benefit the company.

Warner Bros Discovery (WBD) closed up more than +4% after it said the price of a new ad-free monthly subscription in the U.S. would rise more than +6% to $15.99 effective immediately. 

Cleveland-Cliffs (CLF) closed up more than +8% after Morgan Stanley upgraded the stock to overweight from equal weight.

Lucid Group (LCID) closed up more than +4% after it reported building 7,180 vehicles in 2022, above its target of 6,000 to 7,000.

Charles River Laboratories (CRL) closed down more than -5% to lead losers in the S&P 500 after Jeffries downgraded the stock to hold from buy, citing “heightened uncertainty” around primate supplies for the scientific organization. 

Illumina (ILMN) closed down more than -5% to lead losers in the Nasdaq 100 after Reuters reported that the company is likely to see an EU fine of 10% of its global annual turnover for closing its takeover of Grail without waiting for EU antitrust approval.

Commercial services stocks moved lower Thursday on concerns about a cyclical slowdown.  Republic Services (RSG) and Waste Management (WM) closed down more than -2%, and Cintas (CTAS) closed down more than -1%. 

Zscaler (ZS) closed down more than -3% after Morgan Stanley downgraded the stock to equal weight from overweight.

HP Enterprise (HPE) closed down more than -3% after Evercore ISI downgraded the stock to inline from outperform.

Across the markets…

March 10-year T-notes (ZNH23) on Thursday closed up +25.5 ticks, and the 10-year T-note yield fell by -8.8 bp to 3.451%.  Mar T-notes Thursday rallied to a 4-month nearest-futures high, and the 10-year T-note yield dropped to a 1-month low of 3.420%.  T-notes found support Thursday on a benign U.S. Dec CPI report, which bolstered expectations for the Fed to raise interest rates by only +25 bp at the Jan 31-Feb 1 FOMC meeting. 

Strength in European government bonds Thursday also underpinned T-notes prices.  The 10-year UK gilt yield fell to a 4-week low of 3.285%, and the 10-year German bund yield dropped to a 4-week low of 2.093%.  T-note prices extended their gains Thursday afternoon on solid demand for the Treasury’s $18 billion auction of re-opened 30-year T-bonds. The auction had a bid-to-cover ratio of 2.45, above the 10-auction average of 2.37. 

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