Stocks Rally on Speculation the Fed is Nearing the End of Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.74%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.24%.

Stock indexes Wednesday rallied, with the S&P 500 posting a 14-1/2 month high, the Dow Jones Industrials posting a 3-1/2 week high, and the Nasdaq 100 posting a 17-month high.  Speculation the Fed may be nearing the end of its interest rate hiking campaign fueled a rally in stocks Wednesday after U.S. June consumer prices slowed more than expected.  While Wednesday’s CPI report is unlikely to dissuade the Fed from raising interest rates by +25 bp later this month, it increases the chances that this month’s rate hike could be the last in this cycle. 

The June U.S. CPI eased to +3.0% y/y from +4.0% y/y in May, better than expectations of +3.1% y/y and the smallest increase in 2-1/4 years.  Also, the June CPI ex-food and energy eased to +4.8% y/y from +5.3% y/y in May, better than expectations of +5.0% y/y and the smallest increase in 1-1/2 years.

The Fed Beige Book was neutral for stocks, stating that "Overall economic activity increased slightly since late May" and prices increased at a "modest" pace overall in the month through June 30.  The report added, "Economic expectations for the coming months generally continued to call for slow growth."

Positive comments Wednesday from White House National Economic Council Director Brainard were supportive of stocks when she said, "Despite repeated forecasts that recession is just around the corner, the U.S. recovery is solid, and inflation is down.  The economy is defying predictions that inflation would not fall absent significant job destruction."

Richmond Fed President Barkin said even though U.S. inflation slowed in June, "it is still too high.  Our target is 2%.  If you back off too soon, inflation comes back strong, which then requires the Fed to do even more."

The markets are discounting the odds at 89% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields Wednesday moved lower.  The 10-year T-note yield fell -11.3 bp to 3.857%. The 10-year German bund yield fell -7.2 bp to 2.578%.  The 10-year UK Gilt yield fell -14.9 bp to 4.514%. 

Overseas stock markets Wednesday settled mixed. The Euro Stoxx 50 closed up +1.72%. China’s Shanghai Composite Index today closed down -0.78%.  Japan’s Nikkei Stock Index today closed down -0.81%.

Today’s stock movers…

Domino’s Pizza (DPZ) closed up more than +11% to lead gainers in the S&P 500 on an agreement allowing U.S. customers to order Domino’s products through the Uber Eats marketplace.

Lower T-note yields Wednesday sparked a rally in mega-cap technology stocks.  Nvidia (NVDA) and Meta Platforms (META) closed up more than +3%.  Also, Microsoft (MSFT), Alphabet (GOOGL) and Apple (AAPL) closed up more than +1%. 

Speculation the Fed is close to ending its rate hike campaign sparked a rally in homebuilding stocks.  DR Horton (DHI) closed up more than +3%.  Also, Lennar (LEN), Toll Brothers (TOL), and Pulte Group (PHM) closed up more than +2%. 

U.S.-listed Chinese stocks are climbing today after Chinese Premier Li Qiang met with senior executives from the country’s leading technology firms and vowed more support for the economy.  As a result, PDD Holdings (PDD) closed up more than +6% to lead gainers in the Nasdaq 100.  Also, NetEase (NTES) closed up more than +3%.  In addition, JD.com (JD) and Baidu (BIDU) closed up more than +3%, and Alibaba Group Holding (BABA) closed up more than +2%. 

Newmont (NEM) closed up more than +4% to lead mining stocks higher as metals prices rallied, with gold and copper posting 3-week highs and silver posting a 1-month high.

Cybersecurity stocks came under pressure Wednesday after Microsoft announced new services in the sector, potentially representing a competitive threat to other companies.  As a result, Palo Alto Networks (PANW) closed down more than -7% to lead losers in the S&P 500.  Also, Zscaler (ZS) closed down more than -6%.  In addition, Crowdstrike Holdings (CRWD) and Fortinet (FTNT) closed down more than -2%.

Lucid Group (LCID) closed down more than -11% to lead losers in the Nasdaq 100 after it reported Q2 vehicle deliveries of 1,404, well below the consensus of 1,873.

Centene (CNC) closed down more than -5% after Wolfe Research downgraded the stock to peer perform from outperform.

Health insurance companies retreated Wednesday ahead of Q2 earnings on concern whether they are adequately prepared for an unexpected rise in medical-care usage that United Health and Humana recently said they saw emerge in Q2.  As a result, Cigna Group (CI) closed down more than -4%, and Molina Healthcare (MOH) closed down more than -3%.  Also, Humana (HUM) and UnitedHealth Group (UNH) closed down more than -2%. 

Elevance Health (ELV) closed down more than -4% after Wolfe Research downgraded the stock to peer perform from outperform.

Cisco Systems (CSCO) closed down more than -2% to lead losers in the Dow Jones Industrials after Bank of America downgraded the stock to neutral from buy.

WW Grainger (GWW) closed down more than -2% after UBS downgraded the stock to neutral from buy, citing valuation. 

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed up +1-00/32 point, and the 10-year T-note yield fell -11.3 bp to 3.856%. Sep T-notes today rallied to a 1-week high on positive inflation news after U.S. June CPI fell to a 2-1/2 year low, which bolstered speculation the Fed is very near the end of its rate-hike cycle.  T-notes maintained their gains on solid demand for the Treasury’s $32 billion auction of 10-year T-notes, which had a bid-to-cover ratio of 2.53, well above the 10-auction average of 2.40.

On the negative side was Wednesday’s rally in the S&P 500 to a 14-1/2 month high, which curbed the safe-haven demand for T-notes.  Also, hawkish comments from Richmond Fed President Barkin were bearish for T-note when he said even though U.S. inflation slowed in June, "it is still too high.” 

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