S&P 500 Index Posts 2-year High on Friendly U.S. PPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed up +0.08%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.31%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.07%.

Stocks on Friday settled mixed, with the S&P 500 posting a 2-year high.  The broader market Friday found support on a friendly U.S. Dec PPI report, bolstering expectations for Fed rate cuts.  Also, energy stocks rose after crude prices climbed to a 2-week high.

A sell-off in airline stocks limited gains in the overall market after Delta Air Lines backed away from its 2024 profit target due to high costs.  Also, health insurance stocks retreated after UnitedHealth Group reported a Q4 medical-loss ratio well above consensus.

The threat of a wider war in the Middle East also weighed on stocks Friday and pushed crude prices up 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 7% at the next FOMC meeting on Jan 30-31 and 82% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields Friday moved lower. The 10-year T-note yield fell to a 1-week low of 3.915% and finished down -1.2 bp at 3.954%.  The 10-year German bund yield fell -5.2 bp to 2.184%. The 10-year UK gilt yield fell -4.9 bp to 3.793%.   

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.854%.  China’s Shanghai Composite Index closed down -0.16%. Japan’s Nikkei Stock Index closed up +1.50%.

Today’s stock movers…

Cognizant Technology Solutions (CTSH) closed up more than +4% to lead gainers in the S&P 500, adding to Thursday’s +2% gain after Jeffries upgraded the stock to buy from hold with a price target of $85. 

Bank of New York Mellon (BK) closed up more than +4% after reporting Q4 adjusted revenue of $4.46 billion, above the consensus of $4.30 billion. 

Defense stocks moved higher Friday on an 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), and Lockheed Martin (LMT) closed up more than +2%.  Also, TransDigm Group (TDG) and RTX Corp (RTX) closed up more than +1%.

Energy stocks and energy service providers rose Friday after the price of WTI crude climbed to a 2-week high.  As a result, Marathon Oil (MRO) and Valero Energy (VLO) closed up more than +2%.  Also, Diamondback Energy (FANG), Marathon Petroleum (MPC), Phillips 66 (PSX), Occidental Petroleum (OXY), Schlumberger (SLB), Exxon Mobil (XOM), and Chevron (CVX) closed up more than +1%.

International Business Machines (IBM) closed up more than +2% to lead gainers in the Dow Jones Industrials after it announced it was collaborating with SAP SE to develop new AI solutions. 

Regeneron Pharmaceuticals (REGN) closed up more than +1% after RBC Capital Markets upgraded the stock to outperform from sector perform with a price target of $1,076.

Twilio (TWLO) closed up more than 1% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $82.

Airline stocks retreated Friday 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) closed down more than -10% to lead losers in the S&P 500.  Also, American Airlines Group (AAL) closed down more than -9%, and Delta Air Lines (DAL) closed down more than -8%.  In addition, Southwest Airlines (LUV) closed down more than -4%. 

Health insurance stocks were under pressure Friday after UnitedHealth Group reported a Q4 medical-loss ratio of 85%, above the consensus of 83.9%.  As a result, UnitedHealth Group (UNH) closed down more than -3% to lead losers in the Dow Jones Industrials, and Humana (HUM) closed down more than -3%.  Also, CVS Health (CVS) closed down more than -2%.  In addition, Molina Healthcare (MOH), Centene (CNC), and Elevance Health (ELV) closed down more than -1%.

Whirlpool (WHR) closed down more than -5% on negative carryover from a -5% fall in Electrolux AB, which reported an unexpected Q4 operating loss.

Tesla (TSLA) closed down more than 3% after cutting car prices again in China and saying it would suspend production at its European factory as suppliers shift transport routes in response to attacks on vessels in the Red Sea. 

Wells Fargo (WFC) closed down more than -3% after reporting Q4 non-interest expenses of $15.79 billion, above the consensus of $14.40 billion.

VFC Corp (VFC) closed down more than -4%, and Tapestry (TPR) closed down more than -3% on a negative carryover from a -5% slump in Burberry Group Plc after it slashed its full-year profit forecast on weak demand for luxury goods. 

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

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

Across the markets…

March 10-year T-notes (ZNH24) on Friday closed up +8 ticks, and the 10-year T-note yield fell by -1.2 bp to 3.954%.  Mar T-notes Friday climbed to a 2-week high, and the 10-year T-note yield fell to a 1-week low of 3.915%.  T-notes rallied Friday on the friendly U.S. Dec PPI report, reinforcing expectations for Fed rate cuts this year.  T-notes also had carryover support from a rally in 10-year German bunds on dovish comments from ECB President Lagarde.

T-note prices fell back from their best levels Friday after the S&P 500 rose to a 2-year high, which curbed safe-haven demand for T-notes.  Also, an increase in inflation expectations was bearish for T-notes after the 10-year breakeven inflation rate Friday rose to a 6-week high of 2.283%. 

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