Stocks Close Higher on Optimism the U.S. Economy is Headed for a Soft Landing

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed up +0.84%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.96%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.82%.

Stocks on Thursday settled moderately higher, with the S&P 500 and Nasdaq 100 posting 1-week highs and the Dow Jones Industrials posting a 1-1/2 week high.  Stocks rallied Thursday after better-than-expected U.S. economic news on weekly jobless claims and Aug retail sales bolstered speculation the Fed can achieve a soft landing of the U.S. economy.

U.S. stock indexes also had support Thursday after China cut the reserve requirement rate for banks by -25 bp to 10.50%.  In addition, stocks had carryover support from a rally in European stocks after the ECB raised interest rates by 25 bp Thursday 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 on Thursday were mixed.  The 10-year T-note yield rose +3.9 bp to 4.288%.  The 10-year German bund yield fell to a 1-1/2 month low of 2.564% and finished down -5.8 bp at 2.593%.  The 10-year UK gilt yield fell to a 7-week low of 4.249% and finished down -6.6 bp at 4.281%. 

Overseas stock markets Thursday settled higher.  The Euro Stoxx 50 closed +1.33%.  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.

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 also signaled its intent to stay on hold for now after 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. 

Today’s stock movers…

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) closed up more than +5% to lead gainers in the S&P 500.  Also, Carnival (CCL) closed up more than +4%, and Royal Caribbean Cruises Ltd (RCL) closed up more than +2%. 

CarMax (KMX) closed up more than +4% on speculation a strike between the UAW and U.S. automakers could undercut new car sales and boost demand for used cars. 

Match Group (MTCH) closed up more than +3% after JPMorgan Chase said the stock was a “top pick” and expects the company to return to double-digit growth in Q3. 

Moderna (MRNA) closed up more than +3% and extended Wednesday’s +3% advance after it said a reformulated version of its messenger-RNA-based flu shot met its primary goals in a final-stage trial, paving the way for it to seek FDA approval for the vaccine. 

Yum China Holdings (YUMC) closed 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) closed up more than +3% after Jeffries upgraded the stock to buy from hold with a price target of $72.

Etsy (ETSY) closed up more than +3% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $100.

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

Diamondback Energy (FANG) closed up more than +1% after Raymond James raised its price target on the stock to $191 from $173.

Dexcom (DXCM) closed down more than -3% to lead losers in the S&P 500 and Nasdaq 100 after Bloomberg News reported that Apple has named a new leader for its secret group working on a noninvasive blood sugar monitor. 

Visa (V) closed down more than -2% to lead losers in the 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.

Netflix (NFLX) closed 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) closed down more than -7% after announcing that it signed three agreements for Permian Basin assets with a total transaction consideration of about $1.7 billion.

HP Inc (HPQ) closed down more than -1% after Warren Buffet’s Berkshire Hathaway disclosed that it sold $158.5 million worth of its HP stake. 

Across the markets…

December 10-year T-notes (ZNZ23) on Thursday closed down -8.5 ticks, and the 10-year T-note yield rose +3.9 bp to 4.288%. Dec T-note prices Thursday closed moderately lower, weighed down by better-than-expected U.S. economic news on weekly jobless claims and Aug retail sales.  Also, stronger than expected U.S. Aug producer prices were bearish for T-notes. In addition, a rally in crude oil prices to a 10-month high Thursday boosted inflation expectations and undercut T-notes. Losses were limited on carryover strength from European government bond markets Thursday 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. 

• Dollar Rallies on U.S. Economic Strength and Euro Weakness
• Altria’s Option Activity Wednesday Was Smokin’: Time to Buy?
• Will Deteriorating Relations With China Push Apple Stock Lower?