Stocks Rally as Treasury Yields Plunge on U.S. Unemployment Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +0.94%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.66%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.21%.

Stocks Friday extended the sharp rally that began after Wednesday’s FOMC meeting, when the Nasdaq 100 index closed +1.77% on Wednesday and +1.74% on Thursday.  Stocks rallied sharply starting on Wednesday after Fed Chair Powell’s post-meeting comments prompted the markets to speculate that the Fed’s rate-hike regime is over.

Friday’s U.S. unemployment report then provided a solid piece of economic data to support the theme that the U.S. economy is in the process of slowing and that another Fed rate hike might not be necessary.  In addition, Friday’s ISM services report was weaker than expected.

Friday’s unemployment report prompted the 10-year T-note to fall by another -9 bp to a 1-1/4 month low of 4.57%, adding to the combined -28 bp plunge seen on Wednesday and Thursday.  The 10-year T-note yield has now plunged by nearly one-half percentage point from 16-year high of 5.02% posted on October 23.  The 2-year T-note yield Friday fell sharply by -15 bp to 4.84%.

Friday’s U.S. unemployment report showed a weaker-than-expected labor market.  Oct U.S. payrolls rose by +150,000, weaker than expectations of +180,000.  Also, Sep payrolls were revised lower to +297,000 from +336,000.

Meanwhile, the Oct U.S. unemployment rate rose by +0.1 points to a 1-3/4 year high of 3.9%, which showed a slightly weaker labor market than expectations for an unchanged rate of 3.8%.  On the positive side for inflation, Oct average hourly earnings rose +0.2% m/m, which was slightly weaker than expectations of +0.3%, although the Oct year-on-year figure of +4.1% m/m was slightly stronger than expectations of +4.0%.

Friday’s Oct ISM services index fell by -1.8 points to 51.8, weaker than expectations for a -0.6 point decline to 53.0.  Meanwhile, the final-Oct S&P U.S. Services PMI was revised lower by -0.3 points to 50.6, which was weaker than expectations for an unrevised report.  The PMI reports indicated some slowing of growth in the U.S. service sector. 

The markets are discounting a 5% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and an 11% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024.  The markets are then expecting the FOMC to begin cutting rates by mid-2024 in response to an expected slowdown in the U.S. economy.

Stocks have underlying support from the generally favorable Q3 earnings season.  Of the S&P 500 companies reporting thus far, 82% have beaten the consensus, better than the year-earlier figure of 72%.

The Sep Eurozone unemployment rate rose by +0.1 point to 6.5%, which showed a slightly weaker labor market than expectations for an unchanged unemployment rate of 6.4%.

The German trade report showed economic weakness, with Sep exports falling -2.4% m/m and imports falling -1.7% m/m, weaker than expectations of -2.0% and -0.1%, respectively.  The Sep trade surplus of 16.5 billion euros was slightly larger than expectations of 16.3 billion euros, but was down from Aug’s revised 17.7 billion euros.

French Sep industrial production fell -0.5% m/m and -0.1% y/y, weaker than expectations of unchanged for both figures.  Sep manufacturing production fell -0.4% m/m and -0.9% y/y, weaker than expectations of +0.1% m/m.

Overseas stock markets closed higher.  The Euro Stoxx 50 closed up +0.12%.  China’s Shanghai Composite Index closed up +0.71%.  Japan’s stock market Friday was closed for the Culture Day national holiday.

Today’s stock movers…

Apple (AAPL) fell -1.06% after the company, in its earnings report late Thursday, reported weaker than expected revenue from China and management downplayed expectations for holiday sales.

Cardinal Health (CAH) rallied +6.27% and hit a record high after an earnings beat and a hike in full-year earnings guidance.

Church & Dwight (CHD) fell 6.13% on margin concerns after saying it expects a “significant increase” in marketing expenses in Q4.

JetBlue (JBLU) rallied +11.38% after U.S. regulators approved JetBlue’s attempt to fight expulsion from Amsterdam’s Schiphol Airport.

Bill Holdings (BILL) plunged -25.60% on disappointing management guidance on revenue and full-year earnings projections.

Block (SQ) rallied by +10.08% on a Q3 earnings beat and a hike in its full-year guidance.

Coinbase (COIN) rose +0.87% on a revenue beat, although there was disappointment about reduced Q3 trading volume.

Expedia (EXPE) rallied +18.19% after a Q3 earnings beat and the announcement of a $5 billion stock buyback program.

Nio (NIO) rallied +5.65% after saying it plans to cut jobs and might spin off non-core divisions to cut costs and boost margins.

Across the markets…

December 10-year T-notes (ZNZ23) Friday closed +28 ticks, and the 10-year T-note yield fell by -9.1 bp to 4.568%.  Dec T-notes Friday climbed to a 1-1/2 month high, while the 10-year T-note yield dropped to a 1-1/4 month low. 

T-note prices rallied after Friday’s U.S. unemployment report supported this week’s theme that the Fed’s rate-hike regime is likely over.  This week’s bullish tone should make it easier for the markets next week to absorb next week’s $112 billion Treasury quarterly refunding operation, with the sale of $48 billion of 3-year T-notes on Tuesday, $40 billion of 10-year T-notes on Wednesday, and $24 billion of 30-year T-bonds on Thursday.

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