Stocks Settle Higher as Bond Yields Fall on Dovish Fed Comments

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +0.43%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.19%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.72%.

Stocks on Wednesday closed moderately higher 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 said Wednesday that the Fed is finally getting very good inflation we wanted and is in a position to "watch and see" on interest rates.  

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

Bearish factors for stocks included 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.

The minutes of the Sep 19-20 FOMC meeting were slightly hawkish as they stated that "Participants generally judged that with the stance of monetary policy in restrictive territory, risks to the achievement of the committee's goals had become more two-sided."  The minutes also noted that "a majority" of Fed officials saw one more rate increase "would likely be appropriate," while "some" said "no further increases would be warranted."

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 an 8% 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 Wednesday moved lower.  The 10-year T-note yield fell to a 1-1/2 week low of 4.542% and finished down -7.0 bp at 4.583%.  The 10-year German bund yield fell to a 2-1/2 week low of 2.706% and finished down -5.7 bp at 2.718%.  The 10-year UK gilt yield fell to a 2-week low of 4.317% and finished down -9.8 bp at 4.328%. 

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed down -0.11%. China’s Shanghai Composite Index closed up +0.12%.  Japan’s Nikkei 225 today closed up +0.60%.

Today’s stock movers…

Amgen (AMGN) closed up more than +4% 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. 

Coherent (COHR) closed up more than +5% after B. Riley Securities upgraded the stock to buy from neutral with a price target of $51.

Adobe (ADBE) closed up more than +3% after releasing new features for generative AI models at the Max conference in Los Angeles. 

Ventas (VTR) closed up more than +2% after BNP Paribas Exane initiated coverage on the stock with an outperform recommendation and a price target of $47. 

Caesars Entertainment (CZR) closed up more than +2% 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.” 

Boeing (BA) closed up more than +1% after UBS initiated coverage on the stock with a buy recommendation. 

Cava Group (CAVA) closed 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) closed down more than -16% to lead losers in the S&P 500.  Also, Baxter International (BAX) closed down more than -12%, and Dexcom (DXCM) closed down more than -7% to lead losers in the Nasdaq 100.  In addition, Insulet (PODD) closed down more than -8%, and ResMed (RMD) closed down more than -4%. 

Norwegian Cruise Line Holdings (NCLH) closed down more than -5% after it sold $790 million of junk bonds to refinance debt.

Exxon Mobil (XOM) closed down more than 3% after agreeing to buy Pioneer Natural Resources for $59.5 billion, or $253 per share.

Keurig Dr Pepper (KDP) closed down more than -3% after Barclays cut its price target on the stock to $34 from $40.

Portillo’s (PTLO) closed down more than -6% after Morgan Stanley downgraded the stock to equal weight from overweight.

RXO Inc (RXO) closed down more than -2% after JPMorgan Chase downgraded the stock to underweight from neutral. 

Arista Networks (ANET) closed down more than -1% after Piper Sandler downgraded the stock to neutral from overweight.

Across the markets…

December 10-year T-notes (ZNZ23) Wednesday closed up +7 ticks, and the 10-year T-note yield fell -7.0 bp to 4.583%.   Dec T-notes Wednesday 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 dovish Fed comments after San Francisco Fed President Daly said tighter financial conditions may mean the Fed "doesn't have to do as much" on interest rates. Also, Fed Governor Waller said the Fed is in a position to "watch and see" on interest rates.  In addition, concerns the Middle East conflict may spread boosted safe-haven demand for T-notes after Hezbollah militants launched missiles into Israel from Lebanon.  T-notes maintained their gains on strong demand for the Treasury’s $35 billion 10-year T-note auction with a bid-to-cover ratio of 2.50, better than the 10-auction average of 2.46. 

Gains in T-notes were limited after U.S. producer prices rose more than expected in September. 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, strength in stocks curbed the safe-haven demand for T-notes.

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