Stocks Rally as Fed Chair Powell Is Less Hawkish Than Feared

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed up +1.29%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.78%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.12%.

Stock indexes Tuesday ended the day sharply higher.  Stocks rallied when Fed Chair Powell failed to push back against last week’s rally in stocks and the drop in bond yields.  Instead, Mr. Powell said he expects significant declines in inflation this year.

The results of this quarter’s earnings season have been better than expected and are also a bullish factor for stocks.  With more than half of the S&P 500 companies already reporting, earnings per share have fallen by only -2.8% from a year earlier, according to data from Bloomberg Intelligence.  That’s less than the -3.3% drop expected before earnings season began, lending support to share-price valuations.

Positive corporate news Tuesday was supportive for stocks.  Skyworks Solutions closed up more than +12% after reporting better-than-expected Q1 adjusted operating income.  Also, Cincinnati Financial Corp closed up more than +10% after reporting higher-than-expected Q4 investment income.  In addition, Fiserv closed up more than +8% after forecasting stronger-than-expected 2023 adjusted EPS.

Higher global bond yields are bearish for stocks.  The 10-year T-note yield Tuesday climbed to a 1-month high of 3.689%, and the 10-year German bund yield rose to a 1-month high of 2.352%.

Fed Chair Powell said the labor market is "extraordinarily strong" and "we are going to need to do further interest-rate increases" as we haven't achieved a sufficiently restrictive stance yet. He added that if strong labor data persist and inflation climbs more, the Fed may need to raise rates to higher than previously thought.

Minneapolis Fed President Kashkari said January's strong labor-market report shows that the Fed needs to keep raising interest rates and "right now he's still around 5.4%," referring to his forecast for how high interest rates need to go to curb inflation.  FOMC members, in their December dot-plot, forecasted a median expectation of a peak funds rate of 5.1% at the end of this year.

The U.S. Dec trade deficit of -$67.4 billion was slightly narrower than the consensus of -$68.5 billion, which had a mildly positive implication for Q4 GDP.  In 2022, the U.S. trade deficit widened to a record high of -$106.4 billion in March 2022 but then narrowed to a 2-year low of -$61.0 billion in November 2022.

U.S. Dec consumer credit rose +$11.565 billion, weaker than expectations of +$25.0 billion and the smallest increase in nearly two years.

Overseas markets Tuesday settled mixed.  The Euro Stoxx 50 index closed up +0.09%.  China’s Shanghai Composite stock index closed up +0.29%, and Japan’s Nikkei Stock index closed down -0.03%. 

Today’s stock movers…

Skyworks Solutions (SWKS) closed up more than +12% to lead gainers in the S&P 500 after reporting Q1 adjusted operating income of $491.3 million, above the consensus of $487.9 million. 

Cincinnati Financial Corp (CINF) closed up more than +10% after reporting Q4 investment income, net of expenses of $208 million, stronger than the consensus of $197.9 million.

Fiserv (FISV) closed up more than +8% after forecasting 2023 adjusted EPS of $7.25 to $7.40, with a midpoint above the consensus of $7.29.

Microsoft (MSFT) closed up more than +4% to lead gainers in the Dow Jones Industrials after it unveiled a new version of its Bing internet-search engine and Edge browser using the newest technology from Open AI.

Zoom Video Communications (ZM) closed up more than +9% to lead gainers in the Nasdaq 100 after it announced it was cutting 15% of its global workforce.

Energy stocks and energy service providers rallied Tuesday after WTI crude oil surged by more than +3%.  Valero Energy (VLO) and Marathon Petroleum (MPC) closed up more than +5%. Also, Diamondback Energy (FANG), Occidental Petroleum (OXY), ConocoPhillips (COP), and Marathon Oil (MRO) closed up more than +4%. 

Royal Caribbean Cruises (RCL) closed up more than +7% after forecasting a Q1 adjusted loss per share of -65 cents to -85 cents, narrower than the consensus of -83 cents. 

DuPont de Nemours (DD) closed up more than +7% after reporting Q4 operating Ebitda of $758 million, stronger than the consensus of $746.7 million. 

Activision Blizzard (ATVI) closed up more than +5% after reporting Q4 net bookings of $3.57 billion, stronger than the consensus of $3.08 billion. 

Oak Street Health (OSH) closed up more than +29% after the Wall Street Journal reported that the company is close to an agreement to be acquired by CVS Health for about $10.5 billion. 

Incyte (INCY) closed down more than -4% to lead losers in the S&P 500 after forecasting full-year Jakafi net product revenues of $2.53 billion-$2.63 billion, the midpoint below the consensus of $2.60 billion. 

Pinterest (PINS) closed down more than -5% after reporting Q4 revenue of $877.2 million, weaker than the consensus of $887.2 million. 

Carrier Global (CARR) closed down more than -3% after reporting Q4 EPS of 32 cents, weaker than the consensus of 40 cents, and forecasting free cash flow of about $1.9 billion, below the consensus of $2.13 billion. 

Simon Property Group LP (SPG) closed down more than -2% after forecasting full-year FFO per share of $11.70-$11.95, below the consensus of $12.12.

Across the markets…

March 10-year T-notes (ZNH23) on Tuesday closed down -8.5 ticks, and the 10-year T-note yield rose by +3.5 bp to 3.675%.  Mar T-notes Tuesday fell to a new 1-month low, and the 10-year T-note yield climbed to a 1-month high of 3.689%.  T-note prices Tuesday were under pressure on hawkish comments from Fed Chair Powell and Minneapolis Fed President Kashkari, who said last Friday’s strong U.S. jobs report shows the need for more rate hikes. Also, an increase in inflation expectations weighed on T-note prices after the 10-year breakeven inflation rate rose to a 1-week high of 2.329%.  T-note prices fell to their lows Tuesday afternoon on weak demand for the Treasury’s $40 billion auction of 3-year T-notes, which had a bid-to-cover ratio of 2.33 that was well below the 10-auction average of 2.55.

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