Stocks Pressured by Hawkish Fed But Close Mostly Higher

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.08%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.68%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.70%.

Stock indexes on Wednesday settled mixed, with the S&P 500 climbing to a 13-1/2 month high and the Nasdaq 100 posting a 14-1/4 month high.  The broader market rose Wednesday as bond yields fell after the U.S. May PPI report showed price pressures at the producer level slowed more than expected.  The Dow Jones Industrials posted moderate losses on weakness in health insurers after UnitedHealth Group warned of rising costs.

Stocks fell back from their best levels Wednesday afternoon after the FOMC kept the fed funds target range at 5.00%-5.25% as expected but signaled it would raise interest rates by another 50 bp this year.  Market odds for the Fed to raise the fed funds target range by +25 bp at the next FOMC meeting on July 25-26 are at 64%. 

U.S. May PPI final demand eased to +1.1% y/y from +2.3% y/y in April, better than expectations of +1.5% y/y and the smallest increase in over two years.  Also, May PPI ex-food and energy eased to +2.8% y/y from +3.1% y/y in April, better than expectations of +2.9% y/y and the smallest increase in over two years.

The FOMC voted 12-0 to maintain the fed funds target range at 5.00%-5.25% and said, "holding the target range steady at this meeting allows the committee to assess additional information and its implication for monetary policy."

The Fed’s new dot plot showed that FOMC members are forecasting that the federal funds rate will rise to 5.6% by year-end, up from the previous projection of 5.1%, signaling another 50 bp of rate hikes this year. 

The FOMC raised its 2023 U.S. real GDP central tendency range to 0.7%-1.2% from a March projection of 0.0%-0.8% and raised its 2023 core PCE range to 3.6%-4.5% from a March estimate of 3.5%-4.1%.

Fed Chair Powell said nearly all FOMC members expect further tightening this year as inflation pressures continue to run high and labor demand substantially exceeds the supply of workers.

Global bond yields on Wednesday were mixed.  The 10-year T-note yield fell -1.3 bp to 3.800%.  The 10-year German bund yield rose +2.9 bp to 2.452%, and the UK 10-year gilt yield fell -4.1 bp to 4.392%.

On the bullish side of stocks, semiconductor stocks Wednesday moved higher for a second day to lead technology stocks higher.  Also, surgery-center operators and medical equipment makers rallied after executives at the Goldman Sachs Global Healthcare Conference said surgery centers saw “strong volumes” and that post-Covid volume trends should remain strong over the next four to five years.   

On the bearish side, health insurance companies retreated after an executive at UnitedHealth Group said the recent increase in surgeries and other medical care procedures delayed during the pandemic could push expenses higher than anticipated.  Also, regional bank stocks retreated after Zions Bancorp warned that its net interest margin would fall this quarter as it pays more to hold onto depositors.  

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.65%.  China’s Shanghai Composite closed down -0.14%, and Japan’s Nikkei Stock Index closed up +1.47%. 

Today’s stock movers…

Semiconductor stocks Wednesday moved higher for a second day to lead technology stocks higher.  Intel (INTC) closed up more than +4% to lead gainers in the Nasdaq 100.  Also, Nvidia (NVDA) closed up more than +4%, and Broadcom (AVGO) closed up more than +3%. In addition, Micron Technology (MU) closed up more than +1%. 

Oracle (ORCL) closed up more than +4% after its better-than-expected Q4 earnings results Tuesday prompted Goldman Sachs to upgrade the stock to neutral from sell.

Advanced Micro Devices (AMD) closed up more than +2% after falling more than -3% on Tuesday as more analysts expressed optimism about the company’s new line of artificial intelligence processors unveiled at an event on Tuesday. 

Surgery-center operators and medical equipment makers rallied after executives at the Goldman Sachs Global Healthcare Conference said surgery centers saw “strong volumes” and that post-Covid volume trends should remain strong over the next four to five years.  As a result, Boston Scientific (BSX) and Stryker (SYK) closed up more than +4%. Also, Universal Health Services (UHS), Zimmer Biomet Holdings (ZBH), and Edward Lifesciences (EW) closed up more than +3%.  In addition, Steris Plc (STE), Medtronic Plc (MDT), Teleflex (TFX), and Intuitive Surgical (ISRG) closed up more than +2%. 

Estee Lauder (EL) closed up more than +4% after President Capital Management upgraded the stock to buy from neutral with a price target of $220.

Jack Henry & Associates (JKHY) closed up more than +1% after BTIG LLC initiated coverage on the stock with a buy rating and a price target of $183.

Health insurance companies retreated Wednesday after an executive at UnitedHealth Group said a recent increase in surgeries and other medical care delayed during the pandemic could push expenses higher than anticipated. As a result, Humana (HUM) closed down more than -11% to lead losers in the S&P 500.  Also, UnitedHealth Group (UNH) closed down more than -6% to lead losers in the Dow Jones Industrials.  In addition, CVS Health Corp (CVS) closed down more than -7%, and Centene (CNC) and Elevance Health (ELV) closed down by more than -6%. Finally, Molina Healthcare (MOH) closed down more than -5%, and Cigna Group (CIG) closed down more than -3%. 

Regional bank stocks were under pressure after Zions Bancorp warned that its net interest margin would fall this quarter as it pays more to hold onto depositors.  As a result, Zions Bancorp (ZION), Comerica (CMA), and KeyCorp (KEY) closed down more than -5%. Also, Citizens Financial Group (CFG), Huntington Bancshares (HBAN), and M&T Bank (MTB) closed down more than -3%. In addition, Fifth Third Bancorp (FITB), Lincoln National (LNC), Cincinnati Financial Corp (CINF), Regions Financial (RF), and Truist Financial (TFC) closed down more than -2%.

Catalent (CTLT) closed down more than -4% after Jeffries downgraded the stock to hold from buy.

Cinemark (CNK) closed down more than -6% after B Riley Securities downgraded the stock to neutral from buy, saying the film slate for 2024/25 looks increasingly uncertain.

Across the markets…

September 10-year T-notes (ZNU23) on Wednesday closed up +6.5 ticks, and the 10-year T-note yield fell by -1.3 bp to 3.800%.  Sep T-notes Wednesday posted moderate gains on an easing of producer price pressures after the U.S. May PPI rose less than expected.  T-notes also found support after the Fed paused its rate hike campaign following the conclusion of the FOMC meeting.  However, T-notes fell back from their best levels after the Fed raised its median forecast for the fed funds rate by year-end to 5.6% from 5.1% projected in March, signaling two more 25 bp rate hikes this year.  Also, the Fed raised its 2023 U.S. GDP forecast and its 2023 core PCE forecast. 

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