Stocks End Higher on an Improved Outlook for a Fed Pause

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed up +0.52%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.40%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.56%.

Stocks on Tuesday posted moderate gains, with the S&P 500 and Nasdaq 100 climbing to 2-1/2 week highs and the Dow Jones Industrials climbing to a 2-week high.  Stocks opened higher Tuesday 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) 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 14% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 31% 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 Tuesday were mixed.  The 10-year T-note yield fell to a 1-week low of 4.616% and finished down -14.4 bp at 4.657%.  The 10-year German bund yield fell to a 2-week low of 2.760% but recovered and finished up +0.2 bp at 2.775%.  The 10-year UK gilt yield fell to a 1-week low of 4.422% and finished down -5.0 bp at 4.426%. 

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 on Tuesday settled mixed.  The Euro Stoxx 50 closed up +2.25%.  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) closed 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) closed up more than +6% after confirming that Denso and Mitsubishi Electric agreed to invest an aggregate of $1 billion in its silicon carbide business. 

Hyatt Hotels (H) closed up more than +6% 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) closed up more than +5% after UBS upgraded the stock to buy from neutral with a price target of $24.

Boeing (BA) closed up more than +2% to lead gainers in the Dow Jones Industrials after reporting 224 jet orders in Sep, more than five times the orders from Aug and the most since June.

Dollar Tree (DLTR) closed up more than +3% after BNP Paribas Exane initiated coverage on the stock with a buy recommendation and a price target of $139.

Electronic Arts (EA) closed up more than +3% after Bank of America upgraded the stock to buy from neutral with a price target of $150.   

PepsiCo (PEP) closed 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 moved 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, JD.com (JD) closed up more than +3%. Also,Trip.com (TCOM), Alibaba Group Holding (BABA), PDD Holdings (PDD), and NetEase (NTES) closed up more than +2%.  In addition, Baidu (BIDU) closed up more than +1%.

Tapestry (TPR) closed down more than -2% after consumer transaction data from Bloomberg Second Measure showed the company’s observed sales fell -19% y/y in the fiscal quarter that ended October 1. 

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

Qorvo (QRVO) closed down more than -1% after Citigroup downgraded the stock to sell from neutral.

Akero Therapeutics (AKRO) closed down more than -62% after study results from a mid-stage trial of its live disease drug disappointed. 

Defense stocks moved lower as they gave back some of Monday’s sharp gains.  Northrup Grumman (NOC), L3Harris Technologies (LHX), and Huntington Ingalls Industries (HII) closed down more than -1%, and General Dynamics (GD) closed down -0.76%. 

Across the markets…

December 10-year T-notes (ZNZ23) Tuesday closed down -4 ticks, and the 10-year T-note yield fell -14.4 bp to 4.657%.   Dec T-note futures posted modest losses, although the 10-year T-note posted a 1-week low of 4.616% as it caught up with Monday’s rally in Dec T-notes since the U.S. cash Treasury market was closed Monday for the Columbus Day holiday.  Strength in stocks Tuesday curbed safe-haven demand for T-notes. Also, weak demand for the Treasury’s $46 billion 3-year T-note auction weighed on prices as the auction had a bid-to-cover ratio of 2.56, weaker than the 10-auction average of 2.72. 

Losses in T-notes were limited Tuesday by dovish comments from Atlanta Fed President Bostic, who said, "I don't think we need to increase interest rates anymore.”  Also, the ongoing turmoil in the Middle East supports safe-haven demand for T-motes. 

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