Stocks Weighed Down by Losses in Airlines and Health Insurers

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.21%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.59%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.25%.

Stocks this morning gave up early gains and are moderately lower. Airline stocks are under pressure after Delta Air Lines backed away from its 2024 profit target due to high costs. Also, health insurance stocks are falling today after UnitedHealth Group reported a Q4 medical-loss ratio well above consensus.

Stocks today initially opened higher from a friendly U.S. Dec PPI report, which knocked bond yields lower and bolstered expectations for Fed rate cuts.  Also, energy stocks are climbing, with crude prices up more than +3% at a 2-week high.

The threat of a wider war in the Middle East is also weighing on stocks today and pushed crude prices up more than +3% to a 2-week high after the U.S. and its allies launched joint air strikes against Houthi rebels in Yemen.

U.S. Dec PPI final demand fell -0.1% m/m and rose +1.0% y/y, weaker than expectations of +0.1% m/m and +1.3% y/y.  Dec PPI ex-food and energy eased to +1.8% y/y from +2.0% y/y in Nov, weaker than expectations of no change at +2.0% y/y and the smallest increase in 3 years.

The markets are discounting the chances for a -25 bp rate cut at 5% at the next FOMC meeting on Jan 30-31 and 88% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields today are lower. The 10-year T-note yield fell to a 1-week low of 3.915% and is down -1.6 bp at 3.950%.  The 10-year German bund yield is down -4.3 bp at 2.193%.  The 10-year UK gilt yield is down -4.3 bp at 3.799%.   

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.74%.  China’s Shanghai Composite Index closed down -0.16%.  Japan’s Nikkei Stock Index closed up +1.50%.

Today’s stock movers…

Bank of New York Mellon (BK) is up more than +4% to lead gainers in the S&P 500 after reporting Q4 adjusted revenue of $4.46 billion, above the consensus of $4.30 billion. 

Cognizant Technology Solutions (CTSH) is up more than +3% to lead gainers in the Nasdaq 100, adding to Thursday’s +2% gain after Jeffries upgraded the stock to buy from hold with a price target of $85. 

Energy stocks and energy service providers are climbing today, with the price of WTI crude up more than +3% at a 2-week high.  As a result, Marathon Oil (MRO) and Valero Energy (VLO) are up more than +2%.  Also, Marathon Petroleum (MPC), Phillips 66 (PSX), Occidental Petroleum (OXY), Schlumberger (SLB), Haliburton (HAL), and Chevron (CVX) are up more than +1%.

Defense stocks are moving higher today on escalation of Middle Eastern hostilities after the U.S. and its allies launched joint air strikes against Houthi rebels in Yemen. As a result, Northrop Grumman (NOC), L3Harris Technologies (LHX), Lockheed Martin (LMT), and RTX Corp (RTX) are up more than +1%.

Twilio (TWLO) is up more than +3% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $82.

JPMorgan Chase (JPM) is up more than +1% after reporting Q4 FICC sales and trading revenue of $4.03 billion, stronger than the consensus of $3.84 billion. 

International Flavors & Fragrances (IFF) is up more than +1% after Jeffries upgraded the stock to buy from hold with a price target of $112. 

Airline stocks are retreating today after Delta Air Lines backed away from its 2024 profit target as high costs counter the gains from a rebound in international travel.  As a result, United Airlines Holdings (UAL) is down more than -8% to lead losers in the S&P 500.  Also, American Airlines Group (AAL) is down more than -8%, and Delta Air Lines (DAL) is down more than -7%. In addition, Southwest Airlines (LUV) is down more than -4%. 

Health insurance stocks are under pressure today after UnitedHealth Group reported a Q4 medical-loss ratio of 85%, above the consensus of 83.9%.  As a result, UnitedHealth Group (UNH) is down more than -3% to lead losers in the Dow Jones Industrials.  Also, CVS Health (CVS) and Humana (HUM) are down more than -3%.  In addition, Cigna Group (CI), Centene (CNC), and Elevance Health (ELV) are down more than -1%.

Tesla (TSLA) is down more than -2% after cutting car prices again in China and saying it will suspend production at its European factory as suppliers shift transport routes in response to attacks on vessels in the Red Sea. 

Whirlpool (WHR) is down more than -3% on negative carryover from a -3% fall in Electrolux AB, who reported an unexpected Q4 operating loss.

ZoomInfo Technologies (ZI) is down more than -2% after Barclays downgraded the stock to equal weight from overweight. 

Bank of America (BAC) is down more than -1% after reporting Q4 trading revenue ex-DVA of $3.75 billion, below the consensus of $3.84 billion. 

Wells Fargo (WFC) is down more than -1% after reporting Q4 non-interest expenses of $15.79 billion, above the consensus of $14.40 billion.

Across the markets…

March 10-year T-notes (ZNH24) this morning are up +8 ticks, and the 10-year T-note yield is down -1.6 bp at 3.950%.  Mar T-note prices today rose to a 1-week high, and the 10-year T-note yield fell to a 1-week low of 3.915%.  T-notes have support today from the friendly U.S. Dec PPI report, which has reinforced expectations for Fed rate cuts this year. Gains in T-notes are limited as a +3% jump in crude prices today has boosted inflation expectations after the 10-year breakeven inflation rate climbed to a 4-week high of 2.262%.

The dollar index (DXY00) today is down by -0.07%.  Today’s Dec PPI report showed an easing of price pressures that knocked bond yields lower and boosted expectations for Fed rate cuts, bearish factors for the dollar.  Losses in the dollar are limited as an escalation in geopolitical risks has boosted safe-haven demand for the dollar after the U.S. and its allies launched joint air strikes against Houthi rebels in Yemen. 

The markets are discounting the chances for a -25 bp rate cut at 7% at the next FOMC meeting on Jan 30-31 and 90% for the following meeting on March 19-20.

EUR/USD (^EURUSD) is up by +0.11%.  A weaker dollar today is positive for the euro.  Also, positive economic news today boosted the euro after French Nov consumer spending unexpectedly rose by the most in 5 months. Gains in the euro are limited by dovish comments from ECB President Lagarde, who said that once the ECB’s 2% inflation goal comes into view, she’s “very confident interest rates will start to decline.” 

French Nov consumer spending unexpectedly rose +0.7% m/m, stronger than expectations of a -0.2% m/m decline and the biggest increase in 5 months.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 4% for its next meeting on January 25 and 38% for the following meeting on March 7.

USD/JPY (^USDJPY) is down by -0.53%.  The yen today is posting moderate gains as T-note yields fall. Also, today’s dovish U.S. Dec PPI report boosted expectations for Fed rate cuts and knocked the dollar lower, benefiting the yen.  A bearish factor for the yen was a Bloomberg report today that said BOJ officials are likely to discuss cutting their forecasts for economic growth and inflation ex-energy when they meet later this month.   

The Japan Dec eco watchers survey outlook unexpectedly fell -0.3 to 49.1, weaker than expectations of an increase to 49.5.

February gold (GCG24) today is up +44.5 (+2.20%), and Mar silver (SIH24) is up +0.895 (+3.946%).  Gold and silver prices this morning are sharply higher.  A weaker dollar today is supportive of metals.  Also, today’s Dec PPI report was bullish for precious metals, showing producer prices rising less than expected, bolstering the outlook for Fed rate cuts.  In addition, an escalation of geopolitical risks in the Middle East has sparked safe-haven demand for precious metals after the U.S. and its allies launched joint air strikes against Houthi rebels in Yemen.  A bearish factor for gold is the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Thursday.

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