Stocks Gain on the Outlook for Pause in Fed Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.71%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.48%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.83%.

Stocks this morning are moderately higher, with the S&P 500 and Nasdaq 100 posting 2-1/2 week highs and the Dow Jones Industrials posting a 1-week high.  Stocks opened higher this morning on the prospects for additional Chinese stimulus, which would be favorable for global growth after Bloomberg reported that China is preparing to unleash a new round of stimulus to support its economy. Stocks extended their gains after comments from Atlanta Fed President Bostic bolstered speculation the Fed is heading toward a pause in interest rate hikes. 

Stock gains were limited by the ongoing Middle East turmoil and the IMF’s cut in its global 2024 GDP forecast and hike in its inflation forecast.

Atlanta Fed President Bostic said, "I don't think we need to increase interest rates anymore, and I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%."

The International Monetary Fund (IMF) today warned of persistent inflation and called on the world's central banks to keep policy tight until there is an easing of price pressures as it cut its 2024 global GDP forecast to 2.9% from a 3.0% forecast in July and raised its 2024 global inflation forecast to 5.8% from a July forecast of 5.2%. 

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.

U.S. and European bond yields are mixed.  The 10-year T-note yield fell to a 1-week low of 4.620% and is down -13.3 bp at 4.668%.  The 10-year German bund yield fell to a 2-week low of 2.760% but recovered and is up +2.8 bp at 2.801%.  The 10-year UK gilt yield fell to a 1-week low of 4.451% but recovered and is down -1.5 bp at 4.461%. 

Bloomberg reported that China is considering raising its budget deficit for 2023 as the government prepares to unleash a new round of stimulus to help the economy reach its 5% growth target.  Policymakers may issue 1 trillion yuan ($137 billion) of additional sovereign debt for spending on infrastructure.

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +2.38%.  China’s Shanghai Composite Index closed down -0.70%.  Japan’s Nikkei 225 today closed up +2.43%.

Today’s stock movers…

Truist Financial (TFC) is up more than +6% to lead gainers in the S&P 500 after Semafor reported that the company is in talks to sell its insurance brokerage unit to Stone Pont for about $10 billion.

Coherent (COHR) is up more than +11% after confirming that Denso and Mitsubishi Electric agreed to invest an aggregate of $1 billion in its silicon carbide business. 

Hyatt Hotels (H) is up more than +5% after S&P Dow Jones Indices announced the stock would replace National Instruments in the S&P MidCap 400 Index, effective Thursday. 

Rivian Automotive (RIVN) is up more than +5% after UBS upgraded the stock to buy from neutral with a price target of $24.

Dollar Tree (DLTR) is up more than +2% after BNP Paribas Exane initiated coverage on the stock with a buy recommendation and a price target of $139.

Electronic Arts (EA) is up more than +2% after Bank of America upgraded the stock to buy from neutral with a price target of $150. 

PepsiCo (PEP) is up more than +1% after reporting Q3 core EPS of $2.25, better than the consensus of $2.16, and raised its full-year core EPS growth constant currency forecast to +13% from a prior view of +12%. 

U.S.-listed Chinese stocks are moving higher after Bloomberg News reported that China is considering raising its 2023 budget deficit and adding a new round of stimulus measures. As a result, Trip.com (TCOM) and JD.com (JD) are up more than +3%.  Also, Alibaba Group Holding (BABA) and PDD Holdings (PDD) are up more than +2%.  In addition, NetEase (NTES) and Baidu (BIDU) are up more than +1%.

Qorvo (QRVO) is down more than -2% to lead losers in the S&P 500 after Citigroup downgraded the stock to sell from neutral.

Realty Income (O) is down more than -1% after Bank of America downgraded the stock to neutral from buy.

Juniper Networks (JNPR) is down more than -1% after JPMorgan Chase downgraded the stock to neutral from overweight.

Akero Therapeutics (AKRO) is down more than -65% after study results from a mid-stage trial of its live disease drug disappointed. 

Defense stocks are falling back today as they give back some of Monday’s sharp gains.  Northrup Grumman (NOC), L3Harris Technologies (LHX), and Huntington Ingalls Industries (HII) are down more than -1%, and Lockheed Martin (LMT) is down -0.73%. 

Across the markets…

December 10-year T-notes (ZNZ23) this morning are down -7 ticks, and the 10-year T-note yield is down -13.3 bp at 4.668%. Dec T-notes are moderately lower, although the 10-year T-note posted a 1-week low of 4.620% as it catches up with Monday’s rally in Dec T-notes as the U.S. cash Treasury market was closed Monday for the Columbus Day holiday.  Strength in stocks today is curbing safe-haven demand for T-notes.  Also, supply pressures are weighing on T-notes as the Treasury will auction $46 billion of 3-year T-notes later today as part of this week’s $101 billion T-notes and T-bonds auction package. 

The dollar index (DXY00) today is down by -0.08% and fell to a 1-week low.  The dollar is under pressure today from strength in stocks, which reduces liquidity demand for the dollar.  Also, a decline in the 10-year T-note to a 1-week low today weakens the dollar’s interest rate differentials.  Losses in the dollar are limited as the ongoing turmoil in the Middle East is boosting some safe-haven demand for the dollar. 

EUR/USD (^EURUSD) today is up by +0.21% and posted a 1-week high.  A weaker dollar today has sparked short covering in the euro.  EUR/USD also garnered support from hawkish comments from ECB Governing Council member Holzmann, who said supply shocks could cause the ECB to raise interest rates further. 

Today’s Eurozone economic news was supportive for the euro after Italy Aug industrial production unexpectedly rose +0.2% m/m, stronger than expectations of -0.3% m/m.

ECB Governing Council member Holzmann said, "Inflation needs to be kept under control," and supply shocks could force the ECB to raise interest rates "one or two more times."

USD/JPY (^USDJPY) today is up by +0.34%.  The yen is moving lower today on reduced safe-haven demand after the Nikkei Stock Index rallied more than +2%.  A decline in Japanese government bond yields also weighed on the yen after the 10-year JGB bond yield fell to a 1-week low of 0.767%.  In addition, a fall in the Japan Sep eco watchers outlook survey to an 8-month low undercut the yen.  The yen recovered from its worst levels after Kyodo reported the BOJ is considering lifting its fiscal 2023 inflation forecast to near 3.0% from 2.5% announced in July.

The Japan Sep eco watchers outlook survey fell -1.9 to an 8-month low of 49.5, weaker than expectations of 51.3.   

December gold (GCZ3) today is up +4.7 (+0.25%), and Dec silver (SIZ23) is up +0.011 (+0.05%).  Precious metals prices this morning are slightly higher, with gold climbing to a 1-week high.  A weaker dollar today is giving metals prices a boost.  Also, the fall in the 10-year T-note yield to a 1-week low is bullish for precious metals.  Gold also received a boost in demand as an inflation hedge after the IMF raised its global 2024 inflation forecast to 5.8% from a July forecast of 5.2%. 

On the negative side, strength in stocks today has curbed the safe-haven demand for precious metals. Also, hawkish comments today from ECB Governing Council member Holzmann weighed on precious metals when he said supply shocks may force the ECB to raise interest rates again.  In addition, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low Monday. 

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