Stocks End Lower as U.S. Economic Strength Dampens Fed Rate-Cut Expectations

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.56%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.56%.

On Wednesday, stocks closed moderately lower, with the S&P 500 and Nasdaq 100 falling to 1-week lows and the Dow Jones Industrials falling to a 3-1/2 week low.  Stocks opened lower Wednesday as central bankers pushed back against market expectations for interest rate cuts.  ECB President Lagarde and ECB Governing Council member Knot downplayed the prospects of imminent rate cuts Wednesday, following Tuesday’s comments from Fed Governor Waller, who urged caution on the pace of easing. 

Losses in stock index futures accelerated as bond yields rose on stronger-than-expected U.S. economic news on Dec retail sales, Dec manufacturing production, and the Jan NAHB housing market index.  Wednesday’s better-than-expected economic news has dampened Fed rate cut expectations and undercut stocks.  Limiting losses in the overall market was the strength of defensive consumer food companies. 

Global equity markets were also under pressure after disappointing Chinese economic news Wednesday knocked the Shanghai Composite to a 3-1/2 year low and boosted concerns that economic weakness in China will weigh on global growth prospects.

U.S. Dec retail sales rose +0.6% m/m, stronger than expectations of +0.4% m/m.  Also, Dec retail sales ex-autos rose +0.4% m/m, stronger than expectations of +0.2% m/m. 

The U.S. Dec import price index ex-petroleum was unchanged m/m, weaker than expectations of +0.1% m/m.   

U.S. Dec manufacturing production rose +0.1% m/m, stronger than expectations of no change.

The U.S. Jan NAHB housing market index rose +7 to 44, stronger than expectations of 39.

The Fed Beige Book said most Fed districts reported "little or no change" in economic activity and "overall, most districts indicated that expectations of their firms for future growth were positive, had improved, or both." Also, inflationary pressures eased as businesses in most districts cited examples of steady or falling input prices.

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 60% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields Wednesday moved higher. The 10-year T-note yield climbed to a 1-month high of 4.127% and finished up +4.2 bp at 4.100%.  The 10-year German bund yield rose to a 6-week high of 2.326% and finished up +5.8 bp at 2.316%.  The 10-year UK gilt yield rose to a 5-week high of 3.992% and finished up +18.8 bp at 3.985%.   

ECB President Lagarde said policymakers need more evidence before they can be sure that consumer prices are under control and that the ECB's first rate cut will probably be in the summer. 

ECB Governing Council member Knot said, "Markets are getting ahead of themselves," and the ECB will need to see a turnaround in wages before it can start to lower interest rates.

UK Dec CPI unexpectedly ticked up to +4.0% y/y from +3.9% y/y in Nov, stronger than expectations of +3.8% y/y.  Dec core CPI was unchanged from Nov at +5.1% y/y, stronger than expectations of +4.9% y/y. 

China's Q4 GDP grew +5.2% y/y, weaker than expectations of +5.3% y/y.

China Dec new home prices fell -0.45% m/m, the biggest decline in 8-3/4 years, and the seventh consecutive month home prices have fallen.

China Dec industrial production rose +6.8% y/y, stronger than expectations of +6.6% y/y and the largest increase in 2-1/2 years.

China Dec retail sales eased to +7.4% y/y from +10.1% y/y in Nov, weaker than expectations of +8.0% y/y.

The China Dec surveyed jobless rate unexpectedly rose +0.1 to 5.1%, the first increase in 5 months and a weaker labor market than expectations of no change at 5.0%.

Overseas stock markets on Wednesday settled lower.  The Euro Stoxx 50 closed down -0.98%. China’s Shanghai Composite Index closed down -2.09%.  Japan’s Nikkei Stock Index closed down -0.40%.

Today’s stock movers…

Albemarle (ALB) closed down more than -4% to lead losers in the S&P 500 after it cut its capital expenditures budget for this year to $1.6 billion-$1.8 billion, down from $2.1 billion in 2023 as lithium prices plunged 80% from a 2022 record high.

Crowdstrike Holdings (CRWD) closed down more than -3% to lead losers in the Nasdaq 100 after WestPark Capital downgraded the stock to hold from buy.

Chip stocks retreated Wednesday as T-note yields rose.  As a result, Intel (INTC), Microchip Technology (MCHP), and ON Semiconductor (ON) closed down more than -2%.  Also, NXP Semiconductors NV (NXPI), Micron Technology (MU), Marvell Technology (MRVL), Qualcomm (QCOM), Lam Research (LRCX), Analog Devices (ADI), and Globalfoundries (GFS) closed down more than -1%. 

Rivian Automotive (RIVN) closed down more than -5% after Deutsche Bank downgraded the stock to hold from buy. 

Mattel (MAT) closed down more than -2% after Morgan Stanley downgraded the stock to equal weight from overweight. 

Aptiv Plc (APTV) closed down more than -2% after Raymond James cut their price target on the stock to $95 from $105. 

Morgan Stanley (MS) closed down more than -1% after JPMorgan Chase downgraded the stock to neutral from overweight. 

Tesla (TSLA) closed down more than -1% after Investor’s Business Daily reported that it cut its Model Y price in Europe from 4% to 9%. 

Charles Schwab (SCHW) closed down more than -1% after reporting Q4 total net new assets fell -48% to $66.3 billion, below the consensus of $67.54 billion. 

PayPal Holdings (PYPL) closed up more than +2% to lead gainers in the Nasdaq 100 after CEO Chriss said the company will now focus on profitability and prioritize growth as he aims to “right-size” the business. 

Defensive consumer food companies moved higher Wednesday with the selloff in the broader market. As a result, JM Smucker (SJM) closed up more than +2%.  Also, Conagra Brands (CAG) and Campbell Soup (CPB) closed up more than +1%.  Also, Kellanova (K) closed up +0.72%, and Mondelez International (MDLZ) closed up +0.62%. 

Boeing (BA) closed up more than +1% to lead gainers in the Dow Jones Industrials after the FAA completed the first 40 inspections on the Boeing 737-9 Max aircraft, a key step to eventually end the grounding of the aircraft. 

Natera (NTRA) closed up more than +7% after a jury said the company must pay $57 million in a payment infringement lawsuit to Ravgen, well below the $410 million in damages Ravgen was seeking.  

Maplebear Inc (CART) closed up more than +7% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $35.

Nutanix (NTNX) closed up more than +4% after William Blair upgraded the stock to outperform from market perform. 

ExlService (EXLS) closed up more than +3% after Citigroup upgraded the stock to buy from neutral with a price target of $36. 

Citizens Financial Group (CFG) closed up more than -1% after reporting Q4 net interest income of $1.50 billion, better than the consensus of $1.49 billion. 

Across the markets…

March 10-year T-notes (ZNH24) on Wednesday closed down -13.5 ticks, and the 10-year T-note yield rose by +4.2 bp to 4.100%. Mar T-notes Wednesday fell to a 1-1/2 week low, and the 10-year T-note yield climbed to a 1-month high of 4.127%. T-notes moved lower Wednesday on carryover weakness from a fall in 10-year German bunds to a 6-week low on hawkish ECB comments.  Wednesday’s stronger-than-expected U.S. economic reports on Dec retail sales, Dec manufacturing production, and the Jan NAHB housing market index dampened expectations for Fed interest rate cuts and weighed on T-note prices.   Slack demand for the Treasury’s $13 billion auction of 20-year T-bonds was another bearish factor for T-note prices as the auction was awarded at a yield of 4.423%, above the 4.415% when-issued yield at the 1pm EST bidding deadline. 

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