Stocks Slump as Hot U.S. CPI Report Dashes Fed Rate Cut Hopes

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -1.37%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.35%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.58%.

Stocks on Tuesday sold off sharply, with the S&P 500 and Nasdaq 100 falling to 1-week lows and the Dow Jones Industrials falling to a 2-week low.  Stocks retreated Tuesday on a stronger-than-expected U.S. Jan CPI report that pushed bond yields higher and dampened expectations for Fed rate cuts.

U.S. Jan CPI eased to +3.1% y/y from +3.4% y/y in Dec, stronger than expectations of +2.9% y/y.  The Jan CPI report of +3.1% was 0.1 point above the 2-3/4 year low of +3.0% posted in June 2023.  Meanwhile, the Jan core CPI (ex-food and energy) of +3.9% y/y was unchanged from December’s 2-1/2 year low and was stronger than expectations of +3.7% y/y.

The markets are discounting the chances for a -25 bp rate cut at 11% for the March 19-20 FOMC meeting and 42% for the following meeting on April 30-May 1.

U.S. and European government bond yields Tuesday moved higher. The 10-year T-note jumped to a 2-1/4 month high of 4.316% and finished up +13.1 bp at 4.310%.  The 10-year German bund yield rose to a 2-1/4 month high of 2.419% and finished up +3.2 bp at 2.393%.  The 10-year UK gilt yield rose to a 2-1/4 month high of 4.167% and finished up +9.4 bp at 4.151%.   

The German Feb ZEW survey expectations of economic growth rose +4.7 to a 1-year high of 19.9, stronger than expectations of 17.3.

Japan's Jan PPI rose +0.2% y/y, stronger than expectations of +0.1% y/y.

Overseas stock markets on Tuesday settled mixed.  The Euro Stoxx 50 closed down -1.20%. China’s Shanghai Composite Index was closed for a holiday.  Japan’s Nikkei Stock Index closed up +2.89%.

Today’s stock movers…

Moody’s Corp (MCO) closed down more than -7% to lead losers in the S&P 500 after reporting Q4 adjusted EPS of $2.19, weaker than the consensus of $2.33. 

Biogen (BIIB) closed down more than -7% to lead losers in the Nasdaq 100 after reporting Q4 revenue of $2.39 billion, below the consensus of $2.46 billion. 

Zoetis (ZTS) closed down more than -6% after forecasting 2024 revenue of $9.08 billion-$9.23 billion, with the midpoint falling below the consensus of $9.20 billion. 

Marriott International (MAR) closed down more than -5% after forecasting 2024 adjusted EPS of $9.18-$9.52, weaker than the consensus of $9.68. 

VF Corp (VFC) closed down more than -5% after Reuters corrected a story it published Monday that now says only a single member of the company's founding family backs replacing two directors on the company’s board with members of Engaged Capital, not the entire family that was published on Monday. 

Arista Networks (ANET) closed down more than -5% after forecasting Q1 adjusted operating margin of 42%, below the consensus of 42.1%.

Children’s Place (PLCE) closed down more than -33% after B. Riley Securities downgraded the stock to sell from neutral with a price target of $4.

Homebuilders were under pressure Tuesday after the 10-year T-note yield jumped to a 2-1/4 month high, a bearish factor for housing demand.  As a result, Toll Brothers (TOL) closed down more than -5%.  Also, Lennar (LEN) and DR Horton (DHI) closed down more than -4%.  In addition, Builders FirstSource (BLDR) and PulteGroup (PHM) closed down more than -3%. 

Ecolab (ECL) closed up more than +8% to lead gainers in the S&P 500 after forecasting Q1 adjusted EPS of $1.27-$1.37, stronger than the consensus of $1.12. 

Waste Management (WM) closed up more than +5% after reporting Q4 adjusted operating Ebitda of $1.56 billion, stronger than the consensus of $1.50 billion, and forecasting full-year adjusted operating Ebitda of $6.28 billion-$6.43 billion, the midpoint above the consensus of $6.32 billion. 

Leidos Holdings (LDOS) closed up more than +5% after reporting Q4 revenue of $3.98 billion, better than the consensus of $3.81 billion. 

TripAdvisor (TRIP) closed up more than +13% after announcing the formation of a special committee to evaluate any proposals that may be brought forward for a potential deal for the company. 

Howmet Aerospace (HWM) closed up more than +4% after reporting Q4 revenue of $1,73 billion, better than the consensus of $1,65 billion, and forecasting 2024 revenue of $7.00 billion-$7.20 billion, with the midpoint above the consensus of $7.07 billion.

Trimble (TRMB) closed up more than +2% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $68. 

Incyte (INCY) closed up more than 2% after reporting Q4 total revenue of $1.01 billion, better than the consensus of $1.00 billion.

American Electric Power (AEP) closed up more than +1% to lead gainers in the Nasdaq 100 after activist investor Icahn reached an agreement with AEP to add two directors to the company’s board. 

Across the markets…

March 10-year T-notes (ZNH24) on Tuesday closed down sharply by -1-3/32 points, and the 10-year T-note yield rose by +13.1 bp to 4.310%.  Mar T-note prices on Tuesday sold off to a 2-1/2 month low, and the 10-year T-note yield rose to a 2-1/4 month high of 4.316%.  Tuesday’s stronger than expected U.S. Jan CPI report weighed on T-note prices and pushed back expectations for Fed interest rate cuts.  Also, rising inflation expectations undercut T-note prices after the 10-year breakeven inflation rate on Tuesday climbed to a 2-week high of 2.298%.

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