Stocks Rally on Improved Soft-Landing Prospects

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.67%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.66%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.75%.

Stock indexes this morning are moderately higher, with the S&P 500 climbing to a 1-week high.  Better-than-expected U.S. economic news today on weekly jobless claims and Aug retail sales boosted stocks and bolstered speculation that the Fed can achieve a soft landing for the U.S. economy.

U.S. stock indexes also have support today after China cut the reserve requirement rate for banks by -25 bp to 10.50%.  In addition, stocks have carryover support from a rally in European stocks after the ECB raised interest rates by 25 bp today but signaled that it will pause interest rate hikes for now. 

U.S. weekly initial unemployment claims rose +3,000 to 220,000, showing a stronger labor market than expectations of 225,000.

The U.S. Aug final-demand PPI accelerated to +1.6% y/y from +0.8% y/y in July, the highest in 4 months and slightly stronger than expectations of +1.3% y/y.  However, Aug PPI ex-food and energy eased to +2.2% y/y from +2.4% y/y in July, right on expectations and the smallest increase in 2-1/2 years.

U.S. Aug retail sales rose +0.6% m/m, stronger than expectations of +0.1% m/m.  Aug retail sales ex-autos rose +0.6% m/m, stronger than expectations of +0.4% m/m.

The markets are discounting the odds at 2% for a +25 bp rate hike at the September 20 FOMC meeting and 35% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields are mixed.  The 10-year T-note yield is up +0.8 bp at 4.257%.  The 10-year German bund yield fell to a 1-1/2 month low of 2.564% and is down -6.1 bp at 2.590%.  The 10-year UK gilt yield fell to a 7-week low of 4.249% and is down -6.5 bp at 4.282%. 

Overseas stock markets are higher.  The Euro Stoxx 50 is up +1.40%.  China’s Shanghai Composite Index closed +0.11%.  Japan’s Nikkei Stock Index closed +1.41%.

The People’s Bank of China (PBOC) cut the reserve requirement ratio by 25 bp to 10.50% from 10.75% for most banks effective Friday.  The reduction in the ratio frees up cash for banks, allowing them to extend more loans to businesses and consumers.

Today’s stock movers…

Match Group (MTCH) is up more than +4% to lead gainers in the S&P 500 after JPMorgan Chase said the stock was a “top pick” and expects the company to return to double-digit growth in Q3. 

Cruise line operators are moving higher today after Redburn Atlantic upgraded Carnival and Norwegian Cruise Line Holdings Ltd to buy from neutral.  As a result, Norwegian Cruise Line Holdings Ltd (NCLH) and Carnival (CCL) are up more than +3%, and Royal Caribbean Cruises Ltd (RCL) is up more than +1%. 

Freeport-McMoRan (FCX) is up more than +3%, with iron ore prices climbing to a 5-month high and copper prices rising to a 1-week high. 

Marathon Oil (MRO) is up more than +2% after Raymond James raised its price target on the stock to $45 from $40. 

Diamondback Energy (FANG) is up more than +2% after Raymond James raised its price target on the stock to $191 from $173.

Yum China Holdings (YUMC) is up more than +5% after it said it sees high-single to double-digit sales growth in the next three years and sets a target for new-store openings at 1,400 to 1,600 this year, up from a previous outlook of 1,100 to 1,300.

MetLife (MET) is up more than +2% after Jeffries upgraded the stock to buy from hold with a price target of $72.

Etsy (ETSY) is up more than +1% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $100.

Visa (V) is down more than -3% to lead losers in the S&P 500 and Dow Jones Industrials after it took steps to allow the biggest U.S. banks to eventually sell their shares in the company and amend a share structure that was implemented before Visa’s 2008 initial public offering.

HP Inc (HPQ) is down more than -2% after Warren Buffet’s Berkshire Hathaway disclosed that it sold $158.5 million worth of its HP stake. 

Netflix (NFLX) is down more than -2%, adding to the -7% drop over the past two sessions after the CFO said the company isn’t looking for dramatic growth in revenue per customer this year. 

Vital Energy (VTLE) is down more than -5% after announcing that it signed three agreements for Permian Basin assets with a total transaction consideration of about $1.7 billion.

J.M. Smucker (SJM) is down more than -1% after Bank of America downgraded the stock to neutral from buy. 

RTX Corp (RTX) is down more than -1% after Bank of America downgraded the stock to underperform from neutral.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -2 ticks, and the 10-year T-note yield is up +0.8 bp at 4.257%.  Today’s stronger-than-expected U.S. economic news on weekly jobless claims, Aug retail sales, and Aug producer prices are weighing on T-note prices.  Losses are limited on carryover strength from European government bond markets after the 10-year UK gilt yield fell to a 7-week low and the 10-year German bund yield fell to a 1-1/2 week low. 

The dollar index (DXY00) today is up by +0.32% and posted a 6-month high. Stronger-than-expected U.S. economic reports today on weekly initial unemployment claims, Aug producer prices, and Aug retail sales are giving the dollar a boost.  Also, weakness in EUR/USD benefits the dollar after the ECB today signaled it will pause its rate hike cycle, which knocked the euro down to a 3-1/2 month low against the dollar.

EUR/USD (^EURUSD) is down by -0.62% and dropped to a 3-1/2 month low.  The euro tumbled today after the ECB signaled it will pause its rate hike cycle.  Also, today’s action by the ECB to cut its 2024 Eurozone GDP forecast undercut the euro.  In addition, comments from ECB President Lagarde weighed on the euro when she said the Eurozone is in a period of" slow and sluggish growth."

The ECB raised its main refinancing rate by 25 bp to 4.50% from 4.25% and said the new level of constriction would make a "substantial contribution" to bringing inflation under control. 

The ECB signaled its intent to stay on hold for now, saying, "Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. 

The ECB cut its Eurozone 2023 GDP forecast to 0.7% from a prior forecast of 0.9% and raised its 2023 inflation forecast to +5.6% from a prior forecast of +5.4%. 

ECB President Lagarde said the Eurozone is in a period of" slow and sluggish growth" and that inflation is still seen as too high for too long. 

USD/JPY (^USDJPY) is down -0.07%.  The yen today is slightly higher.  Weakness in the euro is boosting the yen, as is higher Japanese bond yields. Gains in the yen today are limited due to higher T-note yields. 

Today’s Japanese economic news was mixed for the yen.  On the positive side, Japan Jul industrial production was revised upward by +0.2 to -1.8% m/m from the initially reported -2.0% m/m.  Conversely, Jul core machine orders fell -1.1% m/m and -13.0% y/y, weaker than expectations of -0.8% m/m and -10.3% y/y, with the -13.0% drop the biggest year-on-year decline in almost three years.

October gold (GCV3) today is down -9.3 (-0.49%), and Dec silver (SIZ23) is down -0.506 (-2.18%).  Precious metals prices this morning are moderately lower, with gold falling to a 3-week low and silver dropping to a 1-month low.  Today’s rally in the dollar index to a 6-month high is bearish for metals. Also, higher T-note yields today are undercutting precious metals.  In addition, the continued liquidation of gold holdings by funds is bearish for gold after long gold holdings in ETFs fell to a 3-1/3 year low Wednesday. 

Losses in gold are limited after China boosted stimulus when the PBOC today cut the reserve requirement ratio for banks by 25 bp.  Also, the signal from the ECB today that it will pause its rate-hike cycle is bullish for metals.  By contrast, silver prices came under pressure today after the ECB cut its 2023 Eurozone GDP forecast, a sign of reduced demand for industrial metals.

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