Stocks Fade Early Gains on Hawkish Fed Comments

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -0.27%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.47%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.08%.

Stocks on Friday settled mixed.  Signs of deceleration in global inflation were supportive for stocks on Friday.  The Aug PCE core deflator, the Fed’s preferred inflation gauge, rose +3.9% y/y, the slowest pace in 2 years.  Also, Eurozone Sep CPI eased to +4.3% y/y from +5.2% y/y in Aug, the slowest pace of increase in almost two years.  The friendly inflation news sparked a bond rally, adding to the positive sentiment in stocks.

However, hawkish comments Friday from New York Fed President Williams pushed bond yields slightly higher and knocked stocks off of their best levels when he said, "My current assessment is that we are at, or near, the peak level of the target range for the federal funds rate, though I expect we will need to maintain a restrictive stance of monetary policy for some time."

A negative factor for stocks is the near certainty of a U.S. government shutdown, with House Republicans unable to agree on a plan to continue funding federal operations.  A shutdown appears imminent on October 1 as House Speaker McCarthy cannot get GOP lawmakers to agree on a temporary spending bill to keep the government open. 

Possible improvement in U.S.-China relations supports market sentiment after the Wall Street Journal reported that China’s Vice Premier He Lifeng and Foreign Minister Wang Yi are discussing possible visits to Washington to prepare for a potential summit between President Xi Jinping and President Biden.

U.S. Aug personal spending rose +0.4% m/m, weaker than expectations of +0.5% m/m.  Aug personal income rose +0.4% m/m, right on expectations.

The U.S. Aug PCE core deflator eased to +3.9% y/y from +4.3% y/y in July, right on expectations and the slowest pace of increase in 2 years.

The U.S. Sep MNI Chicago PMI fell -4.6 to 44.1, weaker than expectations of 47.6,

The University of Michigan U.S. consumer sentiment was revised upward by +0.4 to 68.1, stronger than expectations of no change at 67.7.

The markets are discounting a 19% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 39% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields Friday were mixed.  The 10-year T-note yield rose +0.8 bp to 4.583%. The 10-year German bund yield fell -9.1 bp to 2.839%.  The 10-year UK gilt yield fell -4.7 bp to 4.437%. 

ECB Governing Council member Kazaks said, "Interest rates will probably remain steady for an extended period.  However, if inflation doesn't go down, then there could be a small increase."

Eurozone Sep CPI eased to +4.3% y/y from +5.2% y/y in Aug, better than expectations of +4.5% y/y and the slowest pace of increase in almost two years.  Also, Sep core CPI eased to +4.5% y/y from +5.2% y/y in Aug, better than expectations of +4.8% y/y and the slowest pace of increase in 13 months.

German Aug retail sales unexpectedly fell -1.2% m/m, weaker than expectations of an increase of +0.5% m/m and the biggest decline in 8 months.

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.31%.  China’s Shanghai Composite Index was closed for the Golden Week holidays.  Japan’s Nikkei 225 today closed -0.05%.

Today’s stock movers…

Cruise line operators tumbled Friday after Carnival forecasted Q4 adjusted Ebitda of $800 million to $900 million, weaker than the consensus of $949.5 million.  As a result, Carnival (CCL) closed down more than -5% to lead losers in the S&P 500.  Also, Norwegian Cruise Line Holdings (NCLH) is down more than -3%, and Royal Caribbean Cruises (RCL) is down more than -1%.

Weakness in crude oil prices Friday pressured energy stocks.  As a result, Schlumberger (SLB) closed down more than -4%.  Also, Baker Hughes (BKR), Valero Energy (VLO), and Haliburton (HAL) closed down more than -3%. In addition, APA Corp (APA), Hess (HES), Marathon Oil (MRO), Devon Energy (DVN), ConocoPhillips (COP), and Phillips 66 (PSX) are down more than -2%.   

Insulin device-making stocks that treat diabetes moved lower on speculation that new weight-loss drugs that reduce the risk of heart attacks and diabetes will reduce demand for the devices.  As a result, Insulet (PODD) and Dexcom (DXCM) closed down by more than -2%, and ResMed (RMD) closed down by more than -1%.

Nike (NKE) closed up more than +6% to lead gainers in the S&P 500 and Dow Jones Industrials after reporting Q4 EPS of 93 cents, stronger than the consensus of 75 cents.  Other sports apparel and footwear stocks rallied on the Nike news, with Foot Locker (FL) closing more than +2% and Dick’s Sporting Goods (DKS) and Lululemon Athletica (LULU) closing up more than +1%.

Walgreens Boot Alliance (WBA) closed up more than +6% to lead gainers in the Nasdaq 100 after Bloomberg reported the company is looking at former Cigna Group CEO Wentworth to be its next CEO. 

Micron Technology (MU) closed up more than +4% after Nikkei reported that Japan’s Ministry of Economy, Trade and Industry will subsidize up to 192 billion yen toward Micron’s semiconductor plant in Hiroshima prefecture. 

Ball Corp (BALL) closed up more than +3% after Jeffries upgraded the stock to buy from hold with a price target of $64. 

CarMax (KMX) closed up more than +2% after General United Auto Workers said they plan to extend their strike to three more plants, which will curb auto output and may boost demand for used cars. 

Zions Bancorp (ZION) closed up more than +3% after Citigroup initiated coverage on the stock with a recommendation of buy and a price target of $42. 

Trimble (TRMB) closed up more than +2% after Raymond James upgraded the stock to outperform from market perform with a price target of $65. 

Across the markets…

December 10 year T-notes (ZNZ23) Friday closed up +6.5 ticks.  The 10-year T-note yield rose +0.8 bp to 4.583%.  Dec T-notes Friday posted moderate gains on carryover support from a rally in 10-year German bunds after Eurozone Sep CPI rose less than expected.  T-notes extended their gains after Friday’s report on the Aug PCE core deflator, the Fed’s preferred inflation gauge, rose at the slowest pace in 2 years, and after the Sep MNI Chicago PMI report fell more than expected.

T-notes fell back from their best levels Friday, and yields moved slightly higher on hawkish comments for New York Fed President Williams, who said the Fed would need to keep interest rates high for “some time” to bring inflation down to its 2% target.

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