Stocks Mixed as Dovish Fed Comments Knock Bond Yields Lower

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.12%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.18%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.16%.

Stocks are mixed on a decline in bond yields after dovish Fed comments bolstered speculation the Fed is heading toward a pause in interest rate hikes.  Late Tuesday, San Francisco Fed President Daly said tighter financial conditions might mean the Fed "doesn't have to do as much" on interest rates. Also, Fed Governor Waller today said the Fed is finally getting very good inflation we wanted and is in position to "watch and see" on interest rates.  

M&A activity is also supporting equities after Exxon Mobil agreed to buy Pioneer Natural Resources for $59.5 billion.

Bearish factors for stocks include the stronger-than-expected U.S. PPI report and concern the Israel-Hamas war could expand 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 33% 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 -6.6 bp at 4.587%.  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 -6.9 bp at 4.357%. 

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -0.09%.  China’s Shanghai Composite Index closed up +0.12%.  Japan’s Nikkei 225 today closed up +0.60 %.

Today’s stock movers…

Caesars Entertainment (CZR) is up more than +3% to lead gainers in the S&P 500 after Stifel raised its price target on the stock to $80 from $74, and Wells Fargo Securities said the company’s 2024 outlook is “upbeat.” 

Amgen (AMGN) is up more than +3% to lead gainers in the Dow Jones Industrials and Nasdaq 100 after Leerink Partners upgraded the stock to outperform from market perform with a price target of $318. 

Boeing (BA) is up more than +2% after UBS initiated coverage on the stock with a buy recommendation. 

Ball Corp (BALL) is up more than +2% after Barclays upgraded the stock to overweight from equal weight with a price target of $59.

Adobe (ADBE) is up more than +2% after releasing new features for generative AI models at the Max conference in Los Angeles. 

Coherent (COHR) is up more than +6% after B. Riley Securities upgraded the stock to buy from neutral with a price target of $51.

Cava Group (CAVA) is up more than +1% after Morgan Stanley upgraded the stock to overweight from equal weight. 

Dialysis providers and makers of devices that treat diabetes are under pressure after Norvo Nordisk said its Ozempic medication showed effectiveness surprisingly early in a kidney failure trial.  As a result, Davita (DVA) is down more than -16% to lead losers in the S&P 500.  Also, Baxter International (BAX) is down more than -8%, and Dexcom (DXCM) is down more than -5% to lead losers in the Nasdaq 100.  In addition, Insulet (PODD) is down more than -5%, and ResMed (RMD) is down more than -4%. 

Exxon Mobil (XOM) is down more than 4% after agreeing to buy Pioneer Natural Resources for $59.5 billion, or $253 per share.

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

Portillo’s (PTLO) is down more than -4% after Morgan Stanley downgraded the stock to equal weight from overweight.

RXO Inc (RXO) is down more than -3% after JPMorgan Chase downgraded the stock to underweight from neutral. 

Keurig Dr Pepper (KDP) is down more than -2% after Barclays cut its price target on the stock to $34 from $40.

Texas Instruments (TXN) is down nearly -1% after Oppenheimer downgraded the stock to market perform from outperform.

Across the markets…

December 10-year T-notes (ZNZ23) this morning are up +10 ticks, and the 10-year T-note yield is down -6.6 bp at 4.587%. Dec T-notes today climbed to a 1-1/2 week high, and the 10-year T-note yield fell to a 1-1/2 week low of 4.542%.  T-notes found support on comments late Tuesday from San Francisco Fed President Daly, who said tighter financial conditions may mean the Fed "doesn't have to do as much" on interest rates.  Also, concerns the Middle East conflict may spread boosted safe-haven demand for T-notes after Hezbollah militants launched missiles into Israel from Lebanon. 

Gains in T-notes are limited after U.S. producer prices in September rose more than expected.  Also, hawkish comments from Fed Governor Bowman were negative for T-note prices when she said still high inflation may mean the Fed will need to keep the policy rate higher and for longer.  In addition, supply pressures are weighing on T-notes as the Treasury will auction $35 billion of 10-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 -0.14% and posted a 2-week low.  Today's decline in bond yields is undercutting the dollar as the 10-year T-note yield fell to a 2-week low.  Also, strength in stocks is curbing liquidity demand for the dollar.  Losses in the dollar are limited after U.S. Sep PPI final demand rose more than expected, a hawkish factor for Fed policy.

EUR/USD (^EURUSD) today is up by +0.08% and climbed to a 2-week high.  Dollar weakness today is supporting the euro.  Also, an increase in the ECB’s monthly consumer expectations for August is hawkish for ECB policy and bullish for EUR/USD.  The euro fell back from its best levels on dovish comments from ECB Governing Council member and Bundesbank President Nagel, who said “pausing could be an option” for the ECB at its next policy meeting later this month.

The ECB’s Aug 1-year CPI expectations rose +0.1 to 3.5%, and the Aug 3-year CPI expectations rose +0.1 to 2.5%.

USD/JPY (^USDJPY) today is up by +0.20%.  The yen today is moderately lower on reduced safe-haven demand after the Nikkei Stock Index today climbed to a 1-week high.  Also, a decline in Japanese government bond yields weighed on the yen after the 10-year JGB bond yield fell to a 1-week low of 0.766%. In addition, weak economic news undercut the yen after Japan Sep machine tool orders fell for the ninth consecutive month.  Losses in the yen are limited due to a decline in T-note yields, which is bullish for the yen.

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

December gold (GCZ3) today is up +8.2 (+0.44%), and Dec silver (SIZ23) is up +0.132 (+0.60%).  Precious metals prices this morning are moderately higher, with gold posting a 1-1/2 week high and silver posting a 1-week high.  A weaker dollar today is bullish for metals prices.  Also, a decline in global bond yields is supportive of precious metals. In addition, concerns that the Middle East turmoil may spread have boosted safe-haven demand for precious metals after Hezbollah militants launched missiles into Israel from Lebanon.  Finally, today’s stronger-than-expected U.S. Sep PPI final demand report boosted demand for gold as an inflation hedge.  Gains in metals are limited as today’s stock rally has curbed the safe-haven demand for precious metals.

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