Stocks Recover Early Losses on Dovish Fed Remarks

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed up +0.63%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.59%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.49%.

Stocks on Monday recovered from early losses and posted moderate gains, with the S&P 500 and Nasdaq 100 climbing to 2-week highs and the Dow Jones Industrials posting a 1-week high.  Stocks moved higher Monday on dovish Fed comments that signal the Fed may be willing to pause its rate hike cycle, saying the recent jump in long-term bond yields may mean less need for the Fed to tighten monetary policy again.

Stocks initially opened lower Monday morning as geopolitical concerns sparked risk-off sentiment in asset markets after the militant group Hamas attacked Israel over the weekend, leaving more than 1,100 dead.  European government bond yields moved lower as investors flocked to the safety of government debt, although trading in the U.S. Treasury market was closed Monday for the Columbus Day holiday.

The attack by Hamas on Israel sent crude oil prices soaring by more than +4% on concern the conflict could widen and threaten crude supplies from the Middle East.  The U.S. sent a group of warships to the eastern Mediterranean.  The Wall Street Journal reported that Iranian security officials helped Hamas plan Saturday’s surprise attack, which raises the risk there may be retaliation measures against Iran. 

On the positive side for stocks, Monday’s surge in crude prices by more than +4% sparked a rally in energy stocks.  Also, the surprise attack by Hamas on Israel over the weekend has fueled gains in defense stocks.

Fed Vice Chair Jefferson said policymakers are "in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary," as the recent increase in Treasury yields acts as a potential further restraint on the economy.  Vice Chair Jefferson’s comments suggest he favors pausing fed rate hikes. 

Comments on Monday from Dallas Fed President Logan, a known hawk, supported stocks.  Logan believes the recent jump in long-term Treasury yields may mean less need for the Fed to raise interest rates again, saying, "Higher term premiums result in higher interest rates for the same setting of the fed funds rate, all else equal.  Thus, if premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening."

The markets are discounting a 12% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 28% 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.

European bond yields on Monday moved lower.  The 10-year T-note is not trading today, with the U.S. Treasury market closed for the Columbus Day holiday.  The 10-year German bund yield fell to a 2-week low of 2.763% and finished down -11.2 bp at 2.772%.  The 10-year UK gilt yield fell to a 1-week low of 4.472% and finished down -9.7 bp at 4.476%. 

ECB Vice President Guindos said the ECB must stay vigilant on inflation, and interest rates are likely to stay at their current levels for some time "due to the evolution of oil prices, the depreciation of the euro, and the evolution of unit labor costs.

The Eurozone Oct Sentix investor confidence fell -0.4 to -21.9, a smaller decline than expectations of -24.0.

German Aug industrial production fell -0.2% m/m, weaker than expectations of -0.1% m/m.

Overseas stock markets on Monday settled lower.  The Euro Stoxx 50 closed down -0.77%.  China’s Shanghai Composite Index closed down -0.44%.  Japan’s Nikkei 225 today was closed for a holiday.

Today’s stock movers…

Defense stocks rallied Monday after the surprise attack by Hamas on Israel over the weekend.  Northrop Grumman (NOC) closed up more than +11% to lead gainers in the S&P 500.  Also, L3Harris Technologies (LHX) and Huntington Ingalls Industries (HII) closed up more than +9%.  In addition, Lockheed Martin (LMT) and General Dynamics (GD) closed up more than +8%, and RTX Corp (RTX) closed up more than +4%. 

Energy stocks and energy service companies moved higher after the price of WTI crude jumped more than +4%.  As a result, Marathon Oil (MRO) and Haliburton closed up more than +6%.  Also, Devon Energy (DVN), ConocoPhillips (COP), and Hess Corp (HES) closed up more than +5%.  In addition, Occidental Petroleum (OXY) and Schlumberger (SLB) closed up more than +4%.  Finally, Chevron (CVX) closed up more than +2% to lead gainers in the Dow Jones Industrials.

Zscaler (ZS) closed up more than +3% to lead gainers in the Nasdaq 100 after Barclays upgraded the stock to overweight from equal weight.

Motorola Solutions (MSI) closed up more than +3% after Bank of America started coverage of the stock with a buy recommendation and a price target of $330.

Kinder Morgan (KMI) closed up more than +2% after Goldman Sachs reinstated coverage of the stock with a buy recommendation and a price target of $20.

Walt Disney (DIS) closed up more than +2% after activist investor Nelon Peltz’s Trian Fund Management increased its Disney holding to more than 30 million shares and is said to be seeking several seats on Disney’s board of directors. 

Airline stocks were under pressure Monday as most international carriers suspended flights to Israel following the surprise attack by Hamas over the weekend.  United Airlines Holdings (UAL) closed down more than -5% to lead losers in the S&P 500.  Also, Delta Air Lines (DAL) closed down by more than -5%, and American Airlines Group (AAL) closed down by more than -4%.  In addition,  Alaska Air Group (ALK) and  Southwest Airlines (LUV) closed down more than -2%. 

Cruise line operators retreated Monday as travel stocks took a hit on the conflict in the Middle East.  Carnival (CCL) closed down more than -4%.  Also, Royal Caribbean Cruises Ltd (RCL) closed down more than -3%, and Norwegian Cruise Line Holdings (NCLH) closed down more than -1%. 

Datadog (DDOG) closed down more than -3% after Bank of America downgraded the stock to neutral from buy.

Fidelity National Information (FIS) closed down more than -2% after Truist Securities cut its price target on the stock to $50 from $60.  

Moderna (MRNA) closed down more than -2% after Bloomberg Intelligence said the company would need a “significant acceleration in inoculations” in Q4 of its Covid vaccines to achieve its guidance range of $6 billion to $8 billion. 

Illumina (ILMN) closed down more than -1% after Bloomberg reported that the European Union vetoed the company’s $7 billion takeover of Grail Inc amid concerns the deal would have hampered competition.

Across the markets…

December 10-year T-notes (ZNZ23) Monday closed up +1-00/32 point, although the cash Treasury market was closed Monday for the Columbus Day holiday.  Dec T-note futures rallied to a 1-week high Monday on the increase in safe-have demand due to geopolitical risks after the surprise attack by Hamas militants on Israel over the weekend.  T-notes extended their gains Monday on dovish comments from Fed Vice Chair Jefferson and Dallas Fed President Logan, who said the recent jump in long-term Treasury yields may mean less need for the Fed to raise interest rates again.  Monday’s +4% surge in crude oil prices raised inflation expectations and was negative for T-notes.

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