Stocks Fall and Bond Yields Climb as Strong U.S. PPI Curbs Rate Cut Hopes

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.16%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.19%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.51%.

Stock indexes this morning are under pressure as bond yields jumped after U.S Jan producer prices rose more than expected, bolstering speculation the Fed will be in no hurry to cut interest rates.  Also, today’s U.S. housing news was weaker than expected after Jan housing starts and Jan building permits unexpectedly declined.  Stocks recovered from their worst levels after the University of Michigan U.S. Feb consumer sentiment index rose to a 2-1/2 year high.

U.S. Jan PPI final demand eased to +0.9% y/y from +1.0% y/y in Dec, stronger than expectations of +0.6% y/y.  Also, Jan PPI ex-food and energy unexpectedly increased to +2.0% y/y from +1.7% y/y in Dec, stronger than expectations of an easing to +1.6% y/y. 

U.S. Jan housing starts unexpectedly fell -14.8% m/m to a 5-month low of 1.331 million, weaker than expectations of no change at 1.460 million.  Also, Jan building permits, a proxy for future construction, unexpectedly fell -1.5% m/m to 1.470 million, weaker than expectations of an increase to 1.512 million.

The University of Michigan U.S. Feb consumer sentiment index rose +0.6 to a 2-1/2 year high of 79.6, although weaker than expectations of 80.0. 

The University of Michigan U.S. Feb 1-year inflation expectations unexpectedly increased to +3.0% from +2.9% in Jan, stronger than expectations of no change at 2.9%.  Also, Feb 5-10 year inflation expectations were unchanged from Jan at 2.9%, stronger than expectations of an easing to 2.8%.   

Comments on Thursday night from Atlanta Fed President Bostic were hawkish when he said there's no rush to cut interest rates with the U.S. labor market and economy still strong, and it may "take some time" before inflation is heading sustainably toward the Fed's 2% target.

Strength in overseas equity markets is a positive factor for U.S. stocks after the Euro Stoxx 50 rallied to a new 23-year high today, and the Nikkei Stock Index rose to a new 34-year high.

Bank of America reported that EPFR Global data showed U.S. equity funds had $11 billion of inflows in the week through February 14, the most in seven weeks.  However, the breadth of the S&P 500 is currently the weakest since 2009, as the top five stocks in the index have fueled 75% of its gain so far this year.

The markets are discounting the chances for a -25 bp rate cut at 12% for the March 19-20 FOMC meeting and 35% for the following meeting on April 30-May 1.

U.S. and European government bond yields today are higher.  The 10-year T-note yield is up +6.3 bp at 4.293%. The 10-year German bund yield climbed to a 2-1/2 month high of 2.423% and is up +3.7 bp at 2.396%.  The 10-year UK gilt yield is up +4.0 bp at 4.095%.  

Overseas stock markets are higher.  The Euro Stoxx 50 is up +0.37%.  China’s Shanghai Composite Index was closed for a holiday.  Japan’s Nikkei Stock Index closed up +0.86%.

Today’s stock movers…

Digital Realty (DLR) is down more than -6% to lead losers in the S&P 500 after reporting Q4 FFO per share of $1.63, weaker than the consensus of $1.65, and forecast full-year FFO per share of $6.60-$6.75, below the consensus of $6.84.

Nike (NKE) is down more than -4% to lead losers in the Dow Jones Industrials after Oppenheimer downgraded the stock to perform from outperform.

DoorDash (DASH) is down more than -10% to lead losers in the Nasdaq 100 after forecasting a full-year marketplace gross order value of $74 billion-$78 billion, the midpoint below the consensus of $76.54 billion.   

Roku (ROKU) is down more than -21% after forecasting Q1 adjusted Ebitda of $0, weaker than the consensus of $12.5 million. 

Dropbox (DBX) is down more than -19% after reporting Q4 paying users at 18.12 million, below the consensus of 18.21 million.

TreeHouse Foods (THS) is down more than -15% after reporting Q4 net sales of $910.8 million, below the consensus of $925 million. 

Yelp Inc (YELP) is down more than -13% after forecasting full-year adjusted Ebitda of $315 million-$335 million, weaker than the consensus of $342.4 million. 

Carvana (CVNA) is down more than -7% after Raymond James downgraded the stock to underperform on valuation concerns.

Bio-Rad Laboratories (BIO) is up more than +8% to lead gainers in the S&P 500 after reporting Q4 adjusted EPS of $3.10, stronger than the consensus of $2.82.

Trade Desk (TTD) is up more than +18% to lead gainers in the Nasdaq 100 after reporting Q4 revenue of $606 million, above the consensus of $582.1 million, and forecasting Q1 revenue of at least $478 million, stronger than the consensus of $451.2 million.

Applied Materials (AMAT) is up more than +8% after reporting Q4 net sales of $6.71 billion, better than the consensus of $6.48 billion, and forecast Q2 net sales of $6.1 billion-$6.9 billion, the midpoint above the consensus of $6.32 billion.

Vulcan Materials (VMC) is up more than +7% after reporting Q4 adjusted EPS continuing operations of $1.46, above the consensus of $1.40.

Eli Lilly (LLY) is up more than +4% after Morgan Stanley raised its price target on the stock to $950 from $805. 

Ingersoll Rand (IR) is up more than +3% after reporting Q4 adjusted Ebitda of $500.5 million, better than the consensus of $471.5 million, and forecast full-year adjusted Ebitda of $1.92 billion-$1.98 billion, stronger than the consensus of $1.89 billion.

Toast (TOST) is up more than +17% after reporting Q4 revenue of $1.04 billion, better than the consensus of $1.02 billion, and forecasting full-year adjusted Ebitda of $200 million-$220 million, well above the consensus of $170.2 million.

United Parcel Service (UPS) is up more than +1% after Baird upgraded the stock to outperform from neutral with a price target of $170. 

Across the markets…

March 10-year T-notes (ZNH24) this morning are down -13 ticks, and the 10-year T-note yield is up +6.3 bp at 4.293%.  Mar T-note prices fell to a 2-1/2 month low on this morning’s stronger-than-expected U.S. Jan PPI report.  Also, hawkish comments Thursday night from Atlanta Fed President Bostic undercut T-note prices when he said there's no rush to cut interest rates.  In addition, rising inflation expectations are bearish for T-note prices after the 10-year breakeven inflation rate today rose to a 3-1/2 week of 2.339%. 

The dollar index (DXY00) this morning is up by +0.02%.  The dollar is moving higher today as the stronger-than-expected U.S Jan PPI report pushed up bond yields and pushed back expectations for Fed interest rate cuts.  Also, hawkish comments Thursday night from Atlanta Fed President Bostic gave the dollar a boost when he said there's no rush to cut interest rates.  Gains in the dollar are limited after U.S. Jan housing starts and building permits unexpectedly declined.

EUR/USD (^EURUSD) this morning is down by -0.02%.  The euro today is slightly lower, weighed down by a stronger dollar.  An easing of price pressures in the Eurozone is dovish for ECB policy and bearish for the euro after the German Jan wholesale price index weakened from Dec. Limiting losses in EUR/USD were hawkish comments today from ECB Executive Board member Schnabel, who said the ECB must take its time before cutting interest rates.   

The German Jan wholesale price index eased to -2.7% y/y from -2.6% y/y in Dec.

ECB Executive Board member Schnabel said, "The recent long period of high inflation suggests that to avoid being forced into adopting a stop-and-go policy akin to that of the 1970s, we must be cautious not to adjust our policy stance prematurely."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 7% for its next meeting on March 7 and at 47% for the following meeting on April 11.

USD/JPY (^USDJPY) this morning is up by +0.26%.  The yen today is moving lower against the dollar as a stronger-than-expected U.S. Jan PPI report pushed T-note yields higher.   Also, today’s rally in the Nikkei Stock Index to a 34-year high has reduced safe-haven demand for the yen. 

Today’s Japanese economic news supported the yen after the Dec tertiary industry index rose +0.7% m/m, stronger than expectations of +0.2% m/m.

Swaps are pricing in the chances for a +10 bp BOJ rate hike at 33% for its next meeting on March 19 and at 69% for the following meeting on April 26.

April gold (GCJ24) this morning is up +6.3 (+0.09%), and Mar silver (SIH24) is up +0.339 (+1.48%). Gold and silver prices this morning are moderately higher.  Weakness in stocks today has boosted safe-haven demand for precious metals. Gold also has support as an inflation hedge after the U.S. 10-year breakeven inflation rate today rose to a 3-1/2 week high. 

Limiting gains in metals today is a stronger dollar.  Also, higher global bond yields today are bearish for precious metals.  Today’s weaker-than-expected reports on U.S. Jan housing starts and building permits are negative for industrial metals demand and bearish for silver prices.  In addition, gold remains under pressure from 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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