Stocks Rebound on Hopes Fed is Near the End of its Rate Hike Campaign

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.46%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.68%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.41%.

U.S. stocks this morning shook off early losses and are moderately higher, with the S&P 500 at a 13-3/4 month high and the Nasdaq 100 at a 14-1/4 month high.  Stocks are moving higher today as signs of weakness in the U.S. labor market knocked bond yields lower and bolstered hopes the Fed may end its rate hike campaign sooner rather than later after weekly jobless claims remained at a 19-month high.

Stock indexes this morning initially opened lower on concern major central banks will keep interest rates higher for longer to contain inflation.  The Federal Reserve on Wednesday projected peak interest rates higher than expected, and the ECB today raised interest rates and said its monetary tightening campaign isn’t over.

U.S. weekly initial unemployment claims were unchanged at a 19-month high of 262,000, showing a weaker labor market than expectations of a decline to 245,000.

U.S. May retail sales unexpectedly rose +0.3% m/m, stronger than expectations of a -0.2% m/m decline.

The U.S. May import price index ex-petroleum fell -0.2% m/m, report than expectations of -0.1% m/m.

The U.S. Jun Philadelphia Fed business outlook survey fell -3.3 to -13.7, slightly stronger than expectations of -14.0.

The U.S. Jun Empire manufacturing survey general business conditions index rose +38.4 to 6.6, stronger than expectations of -15.1.

Market odds for the Fed to raise the fed funds target range by +25 bp at the July 25-26 FOMC meeting stand at 67%. 

Global bond yields are mixed.  The 10-year T-note yield is down -3.3 bp at 3.753%.  The 10-year German bund yield rose to a 2-1/2 week high of 2.547% and is up +5.5 bp at 2.506%, and the UK 10-year gilt yield rose to an 8-month high of 4.454% and is up +0.3 bp at 4.395%.

On the bullish side for stocks, home builders are moving higher today after Lennar reported Q2 revenue above consensus.  Also, U.S.-listed Chinese stocks are climbing today after the PBOC cut interest rates.  T-Mobile US is up more than +2% after Morgan Stanley reinstated the stock as its top pick in telecom services. 

On the bearish side, chip stocks are falling as concern about higher global interest rates sparked long liquidation in the sector.   Also, Arista Networks is down more than -5% on signs of inside selling after an SEC filing showed CTO Duda sold $6.58 million of shares on June 12.  In addition, Kroger is down more than -4% after reporting Q1 sales below consensus and saying it sees comparable sales at the low end of its outlook for the rest of the year.

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.35%.  China’s Shanghai Composite closed up +0.74%, and Japan’s Nikkei Stock Index closed down -0.05%. 

Today’s stock movers…

Domino’s Pizza (DPZ) is up more than +6% to lead gainers in the S&P 500 after Stifel upgraded the stock to buy from hold with a price target of $350. 

Microsoft (MSFT) is up more than +2% to lead gainers in the Dow Jones Industrials on optimism future sales will expand after it unveiled several artificial intelligence-based products in recent months. 

Home builders are moving higher today after Lennar reported Q2 revenue of $8.0 billion, well above the consensus of $7.29 billion.  As a result, Lennar (LEN) is up more than +4%.  Also, DR Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) are up more than +1%. 

U.S.-listed Chinese stocks are climbing today after the PBOC cut interest rates.  PDD Holdings (PDD) is up more than +2% to lead gainers in the Nasdaq 100.  Also, Alibaba Group Holding (BABA) and JD.com (JD) are up more than +2%, and NetEase (NTES) is up +0.5%.

Health insurance companies are moving higher today on speculation Wednesday’s sell-off was overdone after an executive at UnitedHealth Group said the recent increase in surgeries and other medical care delayed during the pandemic could push expenses higher than anticipated.  As a result, Cigna Group (CIG) is up more than +3%.  Also, CVS Health (CVS), UnitedHealth Group (UNH), and Elevance Health (ELV) are up more than +2%.  In addition, Cardinal Health (CAH) and Molina Healthcare (MOH) are up more than +1%. 

T-Mobile US (TMUS) is up more than +2% after Morgan Stanley reinstated the stock as its top pick in telecom services.   

Coherent (COHR) is up more than +5% to extend Wednesday’s +14% surge after it unveiled new laser processing heads aimed at electric vehicle manufacturing.

Aldeyra Therapeutics (ALDX) is up more than +10% after announcing topline results from a late-stage study of its treatment for patients with allergic conjunctivitis that met its main goal.

Corning (GLW) is up more than +1% after Citigroup upgraded the stock to buy from neutral with a price target of $40. 

Chip stocks are falling today as concerns about higher global interest rates sparked long liquidation in the sector.  Advanced Micro Devices (AMD) is down more than 3%.  Also, Marvell Technology (MRVL), Lam Research (LRCX), KLA Corp (KLAC), Applied Materials (AMAT), and Microchip Technology (MCHP) are down -1% or more. 

Arista Networks (ANET) is down more than -5% to lead losers in the S&P 500 on signs of inside selling after an SEC filing showed CTO Duda sold $6.58 million of shares on June 12. 

Kroger (KR) is down more than -4% after reporting Q1 sales of $45.2 billion, below the consensus of $45.3 billion, and said it sees comparable sales at the low end of its outlook for the rest of the year.

Nike (NKE) is down more than -2% to lead losers in the Dow Jones Industrials after RBC Capital Markets lowered its price target on the stock to $138 from $145.

Editas Medicine (EDIT) is down more than -14% after announcing a $125 million public stock offering via JP Morgan Securities, Cowen, and Evercore Group.   

Across the markets…

September 10-year T-notes (ZNU23) today are up +15 ticks, and the 10-year T-note yield is down -5.4 bp at 3.732%.  T-notes this morning are moderately higher on U.S. economic news that showed weekly jobless claims were higher than expected, and price pressures eased after the May import price index ex-petroleum fell more than expected.  Weakness in stocks has also boosted the safe-haven demand for T-notes.

The dollar index (DXY00) this morning is down -0.18% and posted a 4-week low. Central bank divergence is weighing on the dollar after the ECB raised interest rates by 25 bp today and signaled another rate hike in July, while the Fed on Wednesday paused its rate hikes. Lower T-note yields today are also weighing on the dollar. 

EUR/USD (^EURUSD) today is up by +0.61% and posted a 4-week high.  The euro is climbing today after the ECB raised interest rates by +25 bp, and ECB President Lagarde said another +25 bp rate hike by the ECB in July is "very likely." EUR/USD also garnered support after the ECB raised its 2023 Eurozone GDP forecast and raised its 2023 inflation forecast.

The ECB, as expected, raised its main refinancing rate by +25 bp to 4.00% and said, "Future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary." The ECB also said it would halt reinvestment in its 3.2 trillion euro Asset Purchase Program from next month, which means the ECB will be draining liquidity as securities mature and its balance sheet declines.

The ECB cut its 2023 Eurozone GDP forecast to +0.9% from +1.0% and raised its 2023 inflation forecast to +5.4% from a prior forecast of +5.3%.

ECB President Lagarde said with projections showing inflation set to "remain too high for too long," another +25 bp rate hike by the ECB in July is "very likely."

USD/JPY (^USDJPY) today is up by +0.24%.  The yen today fell to a 7-1/2 month low against the dollar on expectations the BOJ at Friday’s policy meeting will maintain stimulus measures and record low-interest rates.  The yen recovered from its worst levels after Japan Chief Cabinet Secretary Matsuno said that excessive movements in foreign-exchange markets aren’t desirable. The yen also garnered support today from a decline in T-note yields.

Better-than-expected Japanese economic news today was supportive of the yen.  Apr core machine orders rose +5.5% m/m, stronger than expectations of +3.0% m/m.  Also, the Apr tertiary industry index rose +1.2% m/m, stronger than expectations of +0.4% m/m.  Japanese trade data was better than expected after May exports unexpectedly rose +0.6% y/y, stronger than expectations of a -1.2% y/y decline.  Also, May imports fell -9.9% y/y, the biggest drop in 2-1/4 years but a smaller decline than expectations of -10.3% y/y.

August gold (GCQ3) this morning is down -6.4 (-0.33%), and July silver (SIN23) is down -0.290 (-1.22%).  Precious metals prices this morning are moderately lower, with gold falling to a 3-month low and silver dropping to a 2-week low.  Hawkish central banks weigh on precious metals prices after the Fed on Wednesday signaled two more 25 bp rate hikes this year, and the ECB today raised interest rates by 25 bp and signaled another rate hike in July. Losses in metals were contained after the dollar index dropped to a 4-week low. 

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