Stocks Finish Higher as Negotiators Inch Toward a Debt-Ceiling Agreement

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +1.30%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.00%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.58%.

Stock indexes Friday closed moderately higher, with the Nasdaq 100 posting a 13-1/2 month high.  Stocks rallied Friday as negotiators appear to be moving closer to an agreement to raise the U.S. debt ceiling and cap federal spending for two years.

Bloomberg reported that Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years, although the terms are tentative, and a final accord is still not in hand.  Although most lawmakers have left Washington D.C. and gone home for the long holiday weekend, negotiators have been asked to keep working until they reach a deal.

Stocks are moving higher today despite stronger-than-expected U.S. economic reports that pushed bond yields higher and bolstered the outlook for the Fed to keep raising interest rates.  As a result, market expectations for a 25 bp Fed rate hike at the June 13-14 FOMC meeting have risen to 69%.

U.S. Apr personal spending rose +0.8% m/m, stronger than expectations of +0.5% m/m.  Apr personal income rose +0.4% m/m, right on expectations.

The U.S. Apr PCE core deflator, the Fed's preferred inflation gauge, rose +0.4% m/m and +4.7% y/y, stronger than expectations of +0.3% m/m and +4.6% y/y.

U.S. Apr capital goods orders nondefense ex-aircraft and parts, a proxy for capital spending, unexpectedly rose +1.4% m/m, stronger than expectations of a decline of -0.1% m/m and the biggest increase in 16 months.

The University of Michigan U.S. May consumer sentiment index was revised upward by +1.5 to 59.2, stronger than expectations of 58.0.

Friday’s comments from Cleveland Fed President Mester were bearish for stocks as she would not rule out a Fed rate hike at next month's FOMC meeting when she said, "The data that came in Friday suggests we have more work to do, and everything is on the table in June.  Inflation is still too high, and it's stubborn."

Global bond yields Friday were mixed.  The 10-year T-note yield rose to a 2-1/2 month high of 3.857% and finished up +0.3 bp at 3.818%.  The 10-year German bund yield climbed to a 2-1/2 month high of 2.557% and finished up +1.6 bp at 2.538%, and the UK 10-year gilt yield rose to a 7-1/2 month high of 4.414% but finished down -4.0 bp at 4.334%.

On the bullish side for stocks, chip stocks rallied for a second day Friday, led by a +32% surge in Marvell Technology after it reported Q1 net revenue above consensus and projected fiscal 2024 artificial intelligence (AI) revenue to “a least double” from a year ago.  Also, Workday closed up more than +10% after reporting Q1 subscription revenue above consensus and raising the lower end of its 2024 subscription revenue estimate.  In addition, Ford Motor closed up more than +6% after announcing that it entered into a pact with Tesla that will allow Ford electric vehicle customers to access more than 12,000 Tesla Superchargers across the U.S. and Canada starting in spring 2024.

On the bearish side, Ulta Beauty closed down more than -13% after forecasting 2024 comparable sales below consensus.  Also, Big Lots closed down more than -13% after reporting a larger-than-expected Q1 adjusted loss per share.   In addition, pharmaceutical companies and providers moved lower Friday. 

Overseas stock markets Friday settled higher.  The Euro Stoxx 50 closed up +1.59%.  China’s Shanghai Composite closed up +0.35%, and Japan’s Nikkei Stock Index closed up +0.37%. 

Today’s stock movers…

Chip stocks Friday rallied for a second day, led by a +32% surge in Marvell Technology (MRVL) to lead the Nasdaq 100 higher after reporting Q1 net revenue of $1.32 billion, stronger than the consensus of $1.30 billion and projecting fiscal 2024 artificial intelligence (AI) revenue to “a least double” from a year ago.  Other chip stocks also rallied on the news, with KLA Corp (KLAC), Globalfoundries (GFS), Qualcomm (QCOM), and Micron Technology (MU) closing up more than +6%.  Also, Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), and ON Semiconductors (ON) closed up more than +5%.  In addition, Applied Materials (AMAT) and Lam Research (LRCX) closed up more than +4%.

Broadcom (AVGO) closed up more than +11% to lead gainers in the S&P 500 after Oppenheimer raised its price target on the stock to $800 from $720. 

Workday (WDAY) closed up more than +10% after reporting Q1 subscription revenue of $1.53 billion, above the consensus of $1.52 billion and raising the lower-end of its 2024 subscription revenue estimate to $6.55 billion-$6.58 billion from a previous estimate of $6.53 billion-$6.58 billion, with the midpoint above the consensus of $6.56 billion.

Ford Motor (F) closed up more than +6% after announcing that it entered into a pact with Tesla to allow Ford electric vehicle customers to access more than 12,000 Tesla Superchargers across the U.S. and Canada starting in spring 2024.

PDD Holdings (PDD) closed up more than +18% after reporting Q1 revenue of 37.64 billion yuan, well above the consensus of 32.32 billion yuan. 

RingCentral (RNG) closed up more than +17% after Needham upgraded the stock to buy from hold with a price target of $42.

Paramount Global (PARA) closed up more than +5% after Loop Capital Markets upgraded the stock to hold from sell. 

Ulta Beauty (ULTA) closed down more than -13% to lead losers in the S&P 500 after forecasting 2024 comparable sales up +4% to +5%, weaker than the consensus of +5.18%. 

KeyCorp (KEY) closed down more than -2% after the New York City Banking Commission voted to prohibit New York agencies from allowing additional deposits at KeyBank for two years after the bank failed to submit plans demonstrating their efforts to combat discrimination.

Pharmaceutical companies and providers moved lower Friday.  Cardinal Health (CAH) closed down more than -2%.  Also, McKesson (MCK), Organon (OGN), and Bristol-Myers Squibb (BMY) closed down more than -1%.  In addition, Merck & Co (MRK) closed down more than -1% to lead losers in the Dow Jones Industrials. 

Big Lots (BIG) closed down more than -13% after reporting a Q1 adjusted loss per share of -$3.40, much wider than the consensus of -$1.74 per share. 

Domo Inc (DOMO) closed down more than -13% after forecasting Q2 revenue of $78.5 million-$79.5 million, weaker than the consensus of $79.8 million.

Across the markets…

June 10-year T-notes (ZNM23) on Friday closed down -7 ticks, and the 10-year T-note yield rose by +0.3 bp to 3.818%.  June T-notes Friday fell to a 2-1/2 month low, and the 10-year T-note yield rose to a 2-1/2 month high of 3.857%.  T-notes were under pressure Friday from stronger-than-expected U.S. news on consumer spending and inflation, which was hawkish for Fed policy.  Also, strength in stocks Friday on signs that U.S. lawmakers are making progress on a deal to raise the debt ceiling has reduced safe-haven demand for T-notes.  In addition, comments from Cleveland Fed President Mester weighed on T-notes when she said she would not rule out a Fed rate hike at next month's FOMC meeting.  Short covering before the long holiday weekend lifted T-notes from their worst levels.

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