Stocks Finish Higher as Speculation Builds for a Less Aggressive Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.38%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.56%.

Stocks on Wednesday posted moderate gains, with the S&P 500 climbing to a 2-1/2 week high, the Dow Jones Industrials rising to a 2-week high, and the Nasdaq 100 climbing to a 3-1/2 week high.  Stocks found support Wednesday from weaker-than-expected U.S. economic news on August ADP employment and Q2 GDP, which knocked bond yields lower and bolstered speculation the Fed is approaching the end of its interest rate hikes.

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.  German Aug CPI (EU harmonized) eased to +6.4% y/y from +6.5% y/y in July, but was stronger than expectations of +6.3% y/y.  Also, Spain Aug core CPI eased to +6.1% y/y from +6.2% y/y in July, but was stronger than expectations of +6.0% y/y.

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 a -1.0% m/m decline.

The markets are discounting the odds at 12% 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 on Wednesday were mixed.  The 10-year T-note yield fell to a 2-1/2 week low of 4.085% and finished down -0.4 bp at 4.116%.  The 10-year German bund yield rose +3.5 bp to 2.545%.  The 10-year UK gilt yield fell -0.1 bp to 4.422%. 

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed down -0.26%. China’s Shanghai Composite Index closed up +0.04%.  Japan’s Nikkei Stock Index closed up +0.33%.

Today’s stock movers…

Insulet (PDD) closed up more than +6% 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. 

HP Enterprise (HPE) closed up more than +3% after reporting Q3 adjusted EPS of 49 cents, better than the consensus of 47 cents, and raising its full-year adjusted EPS forecast to $2.11-$2.15 from a previous forecast of $2.06-$2.14.

Apple (AAPL) closed 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.

Homebuilding stocks are moving higher after today’s news showed U.S. July pending home sales unexpectedly rose.  As a result, Toll Brothers (TOL) closed up more than +3%, and Lennar (LEN) closed up more than +2%.  Also, DR Horton (DHI) and PulteGroup (PHM) closed up more than +1%. 

Transocean Ltd (RIG) closed up more than +3% after winning a $222 million contract for an ultra-deepwater drillship to work offshore India.

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

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

HP Inc (HPQ) closed down more than -6% 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) closed down more than -3% after reporting Q1 EPS of 48 cents, weaker than the consensus of 53 cents.

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

Centene (CNC) closed down more than -2% after Morgan Stanley downgraded the stock to equal weight from overweight. 

Regional bank stocks retreated Wednesday after Bloomberg News reported the Federal Reserve issued a slew of private warnings to lenders with assets between $100 billion and $250 billion in an attempt to tighten supervision.  As a result, Regions Financial (RF), M&T Bank (MTB), Huntington Bancshares (HBAN), Zions Bancorp (ZION), Citizens Financial Group (CFG), and Lincoln National (LNC) closed down more than -1%.

Ambarella (AMBA) closed down more than -20% 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) closed down more than -12% 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. 

Across the markets…

September 10-year T-notes (ZNU23) Wednesday closed up +1 tick, and the 10-year T-note yield fell -0.4 bp to 4.116%.  Sep T-notes Wednesday 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 Wednesday 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. Also, a decline in inflation expectations was bullish for T-notes after the 10-year breakeven inflation rate dropped to a 1-1/4 month low of 2.263%.  T-notes gave up most of their gains after the S&P 500 rallied to a 2-1/2 week high, which curbed safe-haven demand for T-notes. 

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