Markets Today: Stocks Move Higher as Bond Yields Fall Despite Strong U.S. PPI

Morning Markets

December E-Mini S&P 500 futures (ESZ23) are up +0.15%, and the Dec Nasdaq 100 E-Mini futures (NQZ23) are up +0.22%.

Stock index futures this morning are moderately higher on a decline in bond yields after comments late Tuesday from San Francisco Fed President Daly bolstered speculation the Fed is heading toward a pause in interest rate hikes when she said tighter financial conditions may mean the Fed "doesn't have to do as much" on interest rates.  Stock index futures fell back from their best levels after the stronger-than-expected U.S. PPI report. 

Stock gains were also limited by ongoing Middle East turmoil and concerns the conflict could spread after Hezbollah militants launched missiles into Israel from Lebanon. 

U.S. Sep PPI final demand rose +0.5% m/m and +2.2% y/y, stronger than expectations of +0.2% m/m and +1.6% y/y.  Also, Sep PPI ex-food and energy rose +0.3% m/m and +2.7% y/y, stronger than expectations of +0.2% m/m and +2.3% y/y.

Fed Governor Bowman said, despite recent improvements, "inflation remains well above the FOMC's 2% target.  Domestic spending has continued at a strong pace, and the labor market remains tight. This suggests that the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC's goal."

U.S. MBA mortgage applications rose +0.6% w/w in the week ended October 6.  The mortgage purchase sub-index rose +0.7%, and the refinancing sub-index rose +0.3%.  The average 30-year fixed mortgage rate rose +14 bp to 7.67%, the highest in almost 23 years.

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 are lower.  The 10-year T-note yield fell to a 1-1/2 week low of 4.542% and is down -6.4 bp at 4.589%.  The 10-year German bund yield fell to a 2-1/2 week low of 2.706% and is down -4.3 bp at 2.731%. The 10-year UK gilt yield fell to a 2-week low of 4.317% and is down -8.2 bp at 4.345%.  

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.02%.  China’s Shanghai Composite Index closed up +0.12%.  Japan’s Nikkei 225 today closed up +0.60 %.

The Euro Stoxx 50 today is moderately lower on some disappointing corporate news. Luxury goods makers are weaker, led by an -8% slump in LVMH after the world’s largest luxury goods group reported softening sales, a sign that the post-pandemic luxury boom is waning. Also, kidney dialysis stocks retreated after Norvo Nordisk A/S/ said its diabetes drug Ozempic showed surprisingly early effectiveness in a kidney failure study.  Stock losses were limited by lower European government bond yields after the 10-year German bund yield fell to a 2-1/2 week low.

Monthly Eurozone consumer expectations rose slightly as the ECB Aug 1-year CPI expectations rose +0.1 to 3.5% and the Aug 3-year CPI expectations rose +0.1 to 2.5%.

China’s Shanghai Composite Stock Index today recovered from a 6-week low and closed slightly higher.  Chinese stocks found support after Bloomberg reported that China is considering raising its budget deficit for 2023 and issuing additional debt for infrastructure spending.  Construction and mining stocks rallied on the news.  Also, short covering pushed property stocks higher.  Fund buying of Chinese stocks also supported the market as Bloomberg data showed mainland Chinese investors bought $170.5 million of Hong Kong shares today.

Japan’s Nikkei Stock Index extended Tuesday’s rally, climbed to a 1-week high, and closed moderately higher.  Japanese stocks found carryover support from Tuesday’s rally in U.S. equity markets after comments from Atlanta Fed President Bostic bolstered speculation the Fed is heading toward a pause in interest rate hikes.  Gains in technology stocks led the overall market higher as bond yields declined.  The 10-year Japan JGB bond yield fell to a 1-week low of 0.766%.  Stock gains were limited after economic news showed that Japan Sep machine tool orders fell for the ninth consecutive month.

Japan Sep machine tool orders fell -11.2% y/y, the ninth consecutive month machine tool orders have declined.

Pre-Market U.S. Stock Movers

Cava Group (CAVA) climbed more than +4% in pre-market trading after Morgan Stanley upgraded the stock to overweight from equal weight. 

CSX Corp (CSX) rose more than +2% in pre-market trading after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $40.   

Coherent (COHR) jumped down more than +5% in pre-market trading after B. Riley Securities upgraded the stock to buy from neutral with a price target of $51.

Pioneer Natural Resources (PXD) is up more than +2% in pre-market trading after Exxon Mobil agreed to buy the company for $59.5 billion, or $253 per share.

CVS Health Corp (CVS) rose more than +1% in pre-market trading after CVS’s Aetna said 87% of its Medicare Advantage members are in 2024 Medicare Advantage Prescription Drug plans rated 4 stars or higher out of 5 stars.

Walgreens Boots Alliance (WBA) rose more than +1% in pre-market trading after naming former Cigna executive Tim Wentworth as its new CEO. 

Dialysis providers are tumbling in pre-market trading after Norvo Nordisk said its Ozempic medication showed effectiveness surprisingly early in a kidney failure trial.  As a result, Davita (DVA) plunged more than -14%, and Baxter International (BAX) tumbled more than -8%. 

Portillo’s (PTLO) slid more than -1% in pre-market trading after Morgan Stanley downgraded the stock to equal weight from overweight.

RXO Inc (RXO) fell more than -1% in pre-market trading after JPMorgan Chase downgraded the stock to underweight from neutral. 

Texas Instruments (TXN) is down more than -1% in pre-market trading after Oppenheimer downgraded the stock to market perform from outperform.

Arista Networks (ANET) fell more than -1% in pre-market trading after Piper Sandler downgraded the stock to neutral from overweight.

Olin Corp (OLN) slipped more than -1% in pre-market trading after Barclays downgraded the stock to equal weight from overweight.

Earnings Reports (10/11/2023)

DZS Inc (DZSI), Orthofix Medical Inc (OFIX), Richardson Electronics Ltd/Uni (RELL), Vitesse Energy Inc (VTS).

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