Stocks Rally on Improved Prospects for a Pause in Fed Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed up +1.45%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.85%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.15%.

Stocks on Tuesday moved higher throughout the day, with the S&P 500 posting a 2-1/2 week high, the Dow Jones Industrials posting a 1-1/2 week high, and the Nasdaq 100 posting a 3-week high.  Stocks rallied after weaker-than-expected U.S. economic news Tuesday on July JOLTS job openings and August consumer confidence knocked bond yields lower and bolstered the prospects for the Fed to pause its rate hike campaign.

A rally in the Shanghai Composite by more than +1% Tuesday also provided some carryover support to global bourses on hopes that an increase in stimulus measures by China will bolster confidence in its markets. Bloomberg reported that China is poised to cut interest rates on trillions of yuan of outstanding home mortgages for the first time since the global financial crisis.  Also, Bloomberg reported that Chinese state-owned banks will soon cut deposit rates for the third time in a year to boost their margins.

The U.S. Jun S&P CoreLogic composite-20 home price index rose +0.92% m/m and fell -1.17% y/y, stronger than expectations of +0.80% m/m and -1.60% y/y.

The U.S. Jul JOLTS job openings fell -338,000 to a nearly 2-1/2 year low of 8.827 million, weaker than expectations of 9.500 million.

The Conference Board U.S. Aug consumer confidence index fell -7.9 to 106.1, weaker than expectations of 116.0.

Bitcoin (^BTCUSD) rallied more than +7% to a 1-1/2 week high after Greyscale Investments LLC won a legal fight in its push to launch a Bitcoin exchange-traded fund.  A U.S. appeals court overturned a decision by the SEC to block Grayscale Investments from starting a Bitcoin ETF, which paves the way for the first Bitcoin ETF and may spark a flurry of brokerage firms and wealth management companies from filing applications to start their own Bitcoin ETFs. 

The markets are discounting the odds at 14% for a +25 bp rate hike at the September 20 FOMC meeting and 51% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields on Tuesday moved lower.  The 10-year T-note yield fell to a 2-week low of 4.104% and finished down -9.0 bp at 4.112%.  The 10-year German bund yield fell -5.5 bp at 2.510%.  The 10-year UK gilt yield fell -1.9 bp to 4.422%. 

Overseas stock markets Tuesday settled higher.  The Euro Stoxx 50 closed up +0.76%.  China’s Shanghai Composite Index closed up +1.20%. Japan’s Nikkei Stock Index closed up +0.18%.

Today’s stock movers…

Alphabet (GOOGL) closed up more than +2%, and Nvidia (NVDA) closed up more than +3% after Alphabet announced new AI infrastructure and software as part of an expanded partnership with Nvidia.

Mega-cap technology stocks rallied Tuesday to lift technology stocks and the broader market.  Tesla (TSLA) closed up more than +7% to lead gainers in the S&P 500.  Also, Apple (AAPL) and Meta Platforms (META) closed up more than +2%.  In addition, Amazon.com (AMZN) and Microsoft (MSFT) closed up more than +1%.

A decline in the 10-year T-note yield to a 2-week low on Tuesday sparked a rally in chip stocks.  As a result, On Semiconductor (ON) closed up more than +4%.  Also, Advanced Micro Devices (AMD), Applied Materials (AMAT), Broadcom (AVGO), Globalfoundries (GFS), and NXP Semiconductors NV (NXPI) closed up more than +3%.  In addition, Intel (INTC), Lam Research (LRCX), KLA Corp (KLAC), and Microchip Technology (MCHP) closed up more than +2%.   

Catalent (CTLT) closed up more than +4% after it said its board had established a committee to review its business, strategy, and capital-allocation priorities to maximize long-term value. 

Verizon Communications (VZ) closed up more than +3% to lead gainers in the Dow Jones Industrials after Citigroup upgraded the stock to buy from neutral.   

PDD Holdings (PDD) closed up more than +15% to lead gainers in the Nasdaq 100 after reporting Q2 revenue of 52.28 billion yuan, well above the consensus of 43.28 billion yuan.   

AT&T (T) closed up more than +3% after Citigroup upgraded the stocks to buy from neutral with a price target of $17.

Best Buy (BBY) closed up more than +3% after it said a sales slump in consumer electronics and household appliances is starting to show signs of easing. 

JM Smucker (SJM) closed up more than +2% after reporting Q1 adjusted EPS of $2.21, better than the consensus of $2.04, and raising its 2024 adjusted EPS forecast to $9.45-$9.85 from a prior view of $9.20-$9.60, stronger than the consensus of $9.44.

Paccar (PCAR) closed down more than -2% to lead losers in the S&P 500 and Nasdaq 100 after a FreightWaves report said results from major trucking lender Bank of Montreal showed a deterioration in the credit rating of its trucking customers. Cummins (CMI) closed down more than -1% on the news.

Norfolk Southern (NSC) closed down more than -1% after it said it expects a now-resolved hardware-related technology outage to impact its rail operations for at least a couple of weeks. 

Heico (HEI) closed down more than -1 % after reporting Q3 Ebitda of $179.8 million, below the consensus of $181.2 million. 

Across the markets…

September 10-year T-notes (ZNU23) Tuesday closed up +22 ticks, and the 10-year T-note yield fell -9.0 bp to 4.112%.  Sep T-notes Tuesday rallied to a 2-week high, and the 10-year T-note yield dropped to a 2-week low of 4.104%. Weaker-than-expected U.S. economic news Tuesday on Jul JOLTS job openings and Aug consumer confidence are dovish for Fed policy and sparked a rally in T-notes.  Also, easing inflation expectations are bullish for T-notes after the 10-year breakeven inflation rate Tuesday declined to a 5-week low of 2.274%. 

T-note prices raced to their highs Tuesday afternoon on signs of strong demand for the Treasury’s $36 billion auction of 7-year T-note.  The auction had a bid-to-cover ratio of 2.66, well above the 10-auction average of 2.49 and a sign of exceptional demand.

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