Stocks Finish Lower Ahead of Thursday’s Core PCE Deflator Report

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -0.17%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.061%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.54%.

Stock indexes on Wednesday posted moderate losses.  Long liquidation pressure from recent record highs weighed on the stock market ahead of Thursday’s PCE deflator report, the Fed’s preferred inflation gauge.  The consensus is that the Jan core PCE deflator will ease to 2.8% y/y from 2.9% y/y in December.  Wednesday’s U.S. Q4 U.S GDP was mixed for stocks as Q4 GDP was revised lower, but Q4 personal consumption was revised higher.  Lower bond yields on Wednesday were supportive of stocks.

U.S. weekly MBA mortgage applications for the week ended Feb 23 fell by -5.6% to a 3-month low.  The mortgage purchase sub-index fell -4.5% to a 4-month low, and the refinancing sub-index fell -7.3%.  The average 30-year fixed mortgage rate fell -2 bp to 7.04% from 7.06% the prior week. 

U.S. Q4 GDP was revised downward by -0.1 point to +3.2% (q/q annualized) from the previously reported +3.3%. Q4 personal consumption was unexpectedly revised upward to +3.0% from +2.8%, stronger than expectations of +2.7%. Also, the Q4 core PCE price index was revised upward to +2.1% from +2.0%.

On Wednesday, several Fed presidents cautioned against cutting interest rates too soon.  Atlanta Fed President Bostic said he's comfortable being patient in lowering borrowing costs as there's still work to do to return inflation toward the Fed's 2% target, and it may be appropriate for the Fed to begin cutting rates this summer.

New York Fed President Williams said the Fed still has "a ways to go" in its battle over inflation and will likely cut interest rates "later this year."  He added that three 25 bp rate cuts in 2024 is a "reasonable starting point."

Boston Fed President Collins said inflation "remains elevated," and the path to a steady rate of 2% is likely to be "bumpy," and "when we see more evidence of a sustained trajectory to price stability, it will likely become appropriate to begin easing policy later this year."

Bitcoin (^BTCUSD) closed up more than +6% Wednesday at a 2-1/4 year high after the recent successful launch of spot bitcoin ETFs in the U.S. The ETFs have attracted more than $6 billion since they began trading on Jan 11.  Some analysts warn of a looming supply squeeze as new coins from Bitcoin miners can’t keep up with demand.  Some 80% of Bitcoin’s supply hasn’t changed hands in the past six months, potentially exacerbating the squeeze and fueling additional gains in Bitcoin prices. 

The markets are discounting the chances for a -25 bp rate cut at 3% for the March 19-20 FOMC meeting and 21% for the following meeting on April 30-May 1.

Overseas stock markets on Wednesday settled lower.  The Euro Stoxx 50 closed down -0.04%.  China’s Shanghai Composite closed down -1.91%.  Japan’s Nikkei Stock Index closed down -0.08%.

Interest Rates

March 10-year T-notes (ZNH24) on Wednesday closed up by +9 ticks, and the 10-year T-note yield fell -3.5 bp to 4.268%. Strength in European government bonds Wednesday provided carryover support for T-notes.   Also, the weakness in stocks Wednesday boosted some safe-haven demand for T-notes. Wednesday’s U.S. economic news was mixed for T-note prices as Q4 GDP was revised lower, but the Q4 core PCE price index was revised upward.  In addition, T-notes have support on anticipation of month-end rebalancing of bond indexes Thursday, which may spur the buying of longer-dated Treasuries by bond fund managers who need to balance the duration of their portfolios.

On the negative side for T-notes were hawkish comments from Atlanta Fed President Bostic, New York Fed President Williams, and Boston Fed President Collins, who said inflation remains elevated and they favor waiting before cutting interest rates,

European government bond yields Wednesday moved lower.  The 10-year German bund yield fell -0.5 bp to 2.459%.  The 10-year UK gilt yield fell back from a 2-3/4 month high of 4.203% and finished down -1.2 bp at 4.185%.

The Eurozone Feb economic confidence index unexpectedly fell -0.7 to 95.4, weaker than expectations of an increase to 96.6.

ECB Vice President Guindos said, "When the data we receive on inflation, and underlying inflation, make it clear that we're approaching 2%, monetary policy will be modified."

ECB Governing Council member Kazaks said the ECB shouldn't rush to cut interest rates as doing so would risk harsher action being required later on.

ECB Governing Council member Kazimir said there's "no reason for the ECB to rush an interest rate cut,” and he favors June for the timing of the first rate cut.

U.S. Stock Movers

Viatris (VTRS) closed down more than -7% to lead losers in the S&P 500 after reporting Q4 net sales of $3.83 billion, weaker than the consensus of $3.86 billion.

United Health Group (UNH) closed down more than -2% to lead losers in the Dow Jones Industrials after the Wall Street Journal reported the U.S. Justice Department is launching an antitrust investigation into the company. 

Applied Materials (AMAT) closed down more than -2% on new requests from U.S. government agencies for information about the company’s shipments to Chinese customers.

Bumble (BMBL) closed down more than -14% after reporting Q4 revenue of $273.6 million, below the consensus of $275.6 million, and forecasting Q1 revenue of $262 million-$268 million, weaker than the consensus of $277.6 million. 

Urban Outfitters (URBN) closed down more than -12% after reporting Q4 adjusted EPS of 50 cents, weaker than the consensus of 74 cents. 

Patterson Cos (PDCO) closed down more than -7% after reporting Q3 adjusted EPS of 59 cents, weaker than the consensus of 61 cents, and cut its full-year adjusted EPS forecast to $2.20-$2.35 from a previous view of $2.35-$2.45, below the consensus of $2.36.

Extra Space Storage (EXR) closed down more than -1% after forecasting 2024 core FFO/share of $7.85-$815, well below the consensus of $8.29.   

Henry Schein (HSIC) closed down more than -1%, adding to Tuesday’s -3% loss, after saying in a conference call that it is experiencing merchandise sales that are running below the October cyber security incident levels.

Axon Enterprise (AXON) closed up more than +13% to lead gainers in the S&P 500 after reporting Q4 adjusted EPS of $1.12, stronger than the consensus of 85 cents.

Constellation Energy (CEG) closed up more than +9% to lead gainers in the Nasdaq 100 after KeyBanc Capital Markets upgraded the stock to overweight from sector weight with a price target of $190.

EBay (EBAY) closed up more than +7% after reporting Q4 net revenue of $2.56 billion, above the consensus of $2.51 billion. 

Agilent (A) closed up more than +3% after reporting Q1 net revenue of $1.66 billion, above the consensus of $1.59 billion.

Revolve Group (RVLV) closed up more than +22% after Raymond James upgraded the stock to outperform from market perform with a price target of $21. 

Flywire (FLYW) closed up more than +18% after forecasting full-year revenue of $501 million-$535 million, well above the consensus of $483.1 million.

Bath & Body Works (BBWI) closed up more than +1% after Deutsche Bank raised its price target on the stock to $55 from $49.

NRG Energy (NRG) closed up more than +1% after forecasting 2024 adjusted Ebitda of $3.30 billion-$3.55 billion, the midpoint stronger than the consensus of $3.32 billion.

Earnings Reports (2/29/2024)

Autodesk Inc (ADSK), Bath & Body Works Inc (BBWI), Best Buy Co Inc (BBY), Cooper Cos Inc/The (COO), DENTSPLY SIRONA Inc (XRAY), Evergy Inc (EVRG), Hewlett Packard Enterprise Co (HPE), Hormel Foods Corp (HRL), NetApp Inc (NTAP).

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