Stocks Modestly Higher as Optimism Builds for a Fed Pause

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.18%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.24%.

Stocks this morning are slightly higher, with the S&P 500 climbing to a 2-1/2 week high, the Dow Jones Industrials rising to a 2-week high, and Nasdaq 100 stock indexes posting a 3-1/2 week high.  Stocks are moving higher after weaker-than-expected U.S. economic news today on the Aug ADP employment change, and Q2 GDP knocked bond yields lower and bolstered speculation the Fed is nearing the end of its rate-hike cycle.

Stock indexes today were initially under pressure on negative carryover from weakness in European stocks on signs of sticky inflation in Europe, which may prompt the ECB to raise interest rates higher for longer after Germany’s August CPI and Spain’s August core CPI rose more than expected.

The U.S. Aug ADP employment change rose +177,000, weaker than expectations of +195,000 and the smallest increase in 5 months.  However, July was revised upward to +371,000 from the initially reported +324,000. 

U.S. Q2 GDP was revised downward to 2.1% (q/q annualized) from 2.4%.  The Q2 core PCE price index was revised lower to +3.7% q/q from +3.8% q/q.

U.S. July pending home sales unexpectedly rose +0.9% m/m, stronger than expectations of -1.0% m/m decline.

The markets are discounting the odds at 11% for a +25 bp rate hike at the September 20 FOMC meeting and 49% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields are mixed.  The 10-year T-note yield is down -1.0 bp at 4.110%.  The 10-year German bund yield is up +4.8 bp at 2.558%.  The 10-year UK gilt yield is up +1.2 bp to 4.435%.  

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.28%.  China’s Shanghai Composite Index closed up +0.04%.  Japan’s Nikkei Stock Index closed up +0.33%.

Today’s stock movers…

Insulet (PDD) is up more than +7% to lead gainers in the S&P 500 on signs of insider buying after an SEC filing showed CEO Hollingshead bought $1.01 million of shares on Monday. 

Apple (AAPL) is up more than +1% to lead gainers in the Dow Jones Industrials after announcing it will unveil its new iPhone 15 and next-generation smartwatches on September 12.

Netflix (NFLX) is up more than +2% after Truist Securities raised its price target on the stock to $485 from $339.

Homebuilding stocks are moving higher after today’s news showed U.S. July pending home sales unexpectedly rose.  As a result,  DR Horton (DHI), Lennar (LEN), PulteGroup (PHM), and Toll Brothers (TOL) rose more than +1%. 

Transocean Ltd (RIG) is up more than +2% after winning a $222 million contract for an ultra-deepwater drillship to work offshore India.

Pal Alto Networks (PANW) is up more than +1% after WestPark Capital initiated a buy rating on the stock with a price target of $340.

UDR Inc (UDR) is up more than +1% after Scotiabank upgraded the stock to sector outperform from sector perform. 

HP Inc (HPQ) is down more than -8% to lead losers in the S&P 500 after reporting Q3 revenue of $13.20 billion, weaker than the consensus of $13.38 billion, and cutting its full-year free cash flow estimate to $3 billion from a prior forecast of $3.0 billion-$3.5 billion, below the consensus of $3.43 billion. 

Brown-Forman (BF/B) is down more than -5% after reporting Q1 EPS of 48 cents, weaker than the consensus of 53 cents.

Rockwell Automation (ROK) is down more than -2% after Barclays downgraded the stock to underweight from equal weight. 

Ambarella (AMBA) is down more than -17% after forecasting Q3 adjusted gross margin of 62%-64%, the midpoint below the consensus of 63.5%.  Cowen then downgraded the stock to market perform from outperform. 

Box Inc (BOX) is down more than -9% after reporting Q2 billings of $232.5 million, below the consensus of $243.1 million, and cutting its 2024 revenue forecast to $1.04 billion-$1.044 billion from a previous forecast of $1.045 billion-$1.055 billion, weaker than the consensus of $1.05 billion. 

Centene (CNC) is down more than -1% after Morgan Stanley downgraded the stock to equal weight from overweight. 

Texas Instruments (TXN) is down more than -1% after Bernstein downgraded the stock to underperform from market perform.

Across the markets…

September 10-year T-notes (ZNU23) today are up +5 ticks, and the 10-year T-note yield is down -1.0 bp at 4.110%.  Sep T-notes today rose to a 2-1/2 week high, and the 10-year T-note yield fell to a 2-1/2 week low of 4.085%. Weaker-than-expected U.S. economic news today on Aug ADP employment and Q2 GDP and Aug consumer confidence sparked gains in T-notes and fueled speculation the Fed may be nearing the end of its rate-hike cycle.

The dollar index (DXY00) today is down by -0.44% and posted a 1-week low. Weaker-than-expected U.S. economic news today on Aug ADP employment change and Q2 GDP knocked T-note yields lower and weighed on the dollar.  Also, higher-than-expected Aug consumer prices in Spain and Germany are hawkish for ECB policy and boosted the euro versus the dollar. 

EUR/USD (^EURUSD) today is up by +0.50% and posted a 2-week high. The euro today found support from news that showed sticky consumer price pressures in Germany and Spain, which pushed European government bond yields higher and strengthened the euro’s interest rate differentials.  The euro extended its gains this morning on hawkish comments from ECB Governing Council member de Cos, who said it was “important” for the ECB to bring inflation back down to levels consistent with its 2% objective.

Eurozone economic news was mixed for EUR/USD.  On the positive side, Eurozone July new car registrations rose +15.2% y/y to 851,000, the twelfth consecutive month of increases.  Conversely, Eurozone Aug economic confidence fell -1.2 to a 2-3/4 year low of 93.3, weaker than expectations of 93.5.

ECB Governing Council member de Cos said the effects of inflation on households "underscore the importance of bringing inflation back to levels consistent with our 2% medium-term objective."

The German July import price index fell -13.2% y/y, weaker than expectations of -13.1% y/y and the biggest decline in 36 years. 

Spain Aug CPI (EU harmonized) rose to +2.4% y/y from +2.1% y/y in July, right on expectations.  Aug core CPI eased to +6.1% y/y from +6.2% y/y in July, stronger than expectations of +6.0% y/y.

German Aug CPI (EU harmonized) eased to +6.4% y/y from +6.5% y/y in July, stronger than expectations of +6.3% y/y.

USD/JPY (^USDJPY) is down by -0.14%.  The yen today climbed to a 4-session high against the dollar.  A fall in T-note yields today has sparked short covering in the yen.  Gains in the yen were limited by dovish comments from BOJ Board member Tamura, who said the BOJ needs “a little more time” to judge on its price goal.   An unexpected decline in Japan Aug consumer confidence was also bearish for the yen.

The Japan Aug consumer confidence index unexpectedly fell -0.9 to 36.2, weaker than expectations of an increase to 37.4.

October gold (GCV3) today is up +11.3 (+0.58%), and Sep silver (SIU23) is up +0.112 (+0.45%). Precious metals prices this morning are moderately higher, with gold climbing to a 3-week high and silver posting a 1-month high.  The fall in the dollar today to a 1-week low supports precious metals.  Also, metals rose on today’s weaker-than-expected U.S. economic news on Aug ADP employment change and Q2 GDP, which may prompt the Fed to pause its rate-hiking campaign.   On the negative side is the continued liquidation of gold holdings by funds after long gold holdings in ETFs fell to a 3-1/3 year low Tuesday.

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