Stocks Rally on Speculation the Fed May Pause Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +1.10%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.54%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.60%.

Stocks on Wednesday posted moderate gains, with the Nasdaq 100 climbing to a 1-week high.  A fall in global bond yields boosted stocks after weaker-than-expected U.S. and European economic news bolstered speculation that the Fed and ECB may pause their interest rate hikes.  Also, Nvidia rose more than +2% on optimism ahead of its Q2 earnings results later today. U.S. economic news Wednesday was mixed for stocks as July new home sales rose more than expected to a 1-1/2 year high, but the Aug S&P manufacturing PMI contracted more than expected.

On the negative side, was a selloff in activewear apparel makers after Foot Locker plunged more than -30% to lead the sector lower when it cut its 2023 earnings forecast. 

The Mortgage Bankers Association reported that weekly U.S. mortgage applications fell -4.2% w/w in the week ended Aug 18 and that home-purchase applications dropped -5.0% w/w to their lowest since 1995.  The 30-year fixed mortgage rate jumped +15 bp to 7.31%, the highest since 2000.   

The U.S. Aug S&P manufacturing PMI fell -2.0 to 47.0, weaker than expectations of no change at 49.0.

U.S. Jul new home sales rose +4.4% m/m to a 1-1/2 year high of 714,000, stronger than expectations of +703,000.

The markets are discounting the odds at 11% for a +25 bp rate hike at the September 20 FOMC meeting and 43% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields Wednesday moved lower.  The 10-year T-note yield fell -13.2 bp t0 4.192%.  The 10-year German bund yield fell to a 1-1/2 week low of 2.516% and finished down -12.7 bp at 2.517%.  The 10-year UK gilt yield fell to a 1-1/2 week low of 4.462% and finished down -17.6 bp at 4.468%. 

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.15%.  China’s Shanghai Composite Index closed down -1.34%. Japan’s Nikkei Stock Index closed up +0.48%.

Today’s stock movers…

Chip stocks rallied Wednesday to lead technology stocks and the overall market higher on optimism Nvidia will beat Q2 earnings estimates when they are reported after Wednesday’s close.  Nvidia (NVDA),  Advanced Micro Devices (AMD), Intel (INTC), and Marvell Technology (MRVL) closed up more than +3%.  Also, Micron Technology (MU) and Broadcom (AVGO) closed up more than +2%

Brown-Forman (BF/B) closed up more than +3% after Morgan Stanley double-upgraded the stock to overweight from underweight with a price target of $75.

Netflix (NFLX) closed up more than +3% after researcher Antenna said the company signed up about 2.6 million new subscribers in July. 

Thermo Fisher Scientific (TMO) closed up more than +3% after Reuters reported that Novo Nordisk had hired the company as its second contract manufacturer to make its weight-loss drug Wegovy.

Avery Dennison (AVY) closed up more than +3% after UBS upgraded the stock to buy from neutral with a price target of $222. 

Advanced Auto Parts (AAP) closed up more than +3% after it announced Shane O’Kelly will become CEO effective Sep 11.

Zoom Video Communications (ZM) closed up more than +3% after daily trading data compiled by Bloomberg showed two funds run by Cathie Wood’s ARK Investment Management bought a total of 122,831 shares of Zoom on Tuesday, raising its stake in the company to 4%. 

Alphabet (GOOGL) closed up more than +2% after Wedbush initiated coverage of the stock with an outperform rating and a price target of $160.

Activewear apparel makers are falling today after Foot Locker reported Q2 sales of $1.86 billion, below the consensus of $1.88 billion, and lowered its 2024 sales guidance to a decline of -9% to -10% from a prior view of -7.5% to -9%, weaker than the consensus of -8.02%.  As a result, Foot Locker (FL) closed down more than -28%.  Also, Nike (NKE) closed down more than -2% to lead losers in the Dow Jones Industrials.

Energy stocks and energy service providers are under pressure as the price of WTI crude fell to a 4-week low.  As a result, Occidental Petroleum (OXY), Valero Energy (VLO), and Marathon Oil (MRO) closed down more than -1%.  Also, Exxon Mobil (XOM), Phillips 66 (PSX), and Devon Energy (DVN) closed down more than -0.5%.

EQT Corp (EQT) closed down more than -3% after registering up to 50 million shares for potential sale by holders that were issued as partial consideration after the company closed its previously announced acquisition of Tug Hill and XcL Midstream.

Across the markets…

September 10-year T-notes (ZNU23) Tuesday closed up +27 ticks, and the 10-year T-note yield fell -13.2 bp to 4.192%.  Sep T-notes Wednesday moved higher on carryover support from a rally in European government bonds as weak Eurozone economic news sparked a rally in 10-year German bunds and 10-year UK gilts to 1-1/2 week highs.  T-notes extended their gains after the U.S. Aug S&P manufacturing PMI fell more than expected, bolstering speculation the Fed may pause its interest rate hiking campaign.  

T-notes maintained most of their gains Wednesday despite a rally in stocks and lukewarm demand for the Treasury’s auction of $16 billion 20-year T-bonds with a bid-to-cover ratio of 2.56, below the 10-auction average of 2.65. 

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