Stocks Settle Higher and Bond Yields Fall on Fed Rate Cut Optimism

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.51%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.67%.

Stock indexes on Wednesday posted moderate gains as bond yields fell after the ADP employment report showed companies hired fewer than expected workers in February, a dovish factor for Fed policy.  Stocks maintained their gains, and bond yields fell further after Fed Chair Powell said it would likely be appropriate to begin cutting interest rates “at some point this year,” although they’re not there yet.

The U.S. Feb ADP employment change rose +140,000, weaker than expectations of +150,000.

The U.S. Jan JOLTS job openings fell -26,000 to 8.863 million, showing a slightly stronger labor market than expectations of 8.850 million.

Fed Chair Powell said it will likely be appropriate to begin lowering borrowing costs "at some point this year," but "the committee does not expect that it will be appropriate to reduce the fed funds target range until it has gained greater confidence that inflation is moving sustainably toward 2%." 

The Fed Beige Book said that "economic activity increased slightly, on balance, since early January" and that "consumer spending, particularly on retail goods, inched down in recent weeks as consumers have become increasingly sensitive to price changes."

The markets are discounting the chances for a -25 bp rate cut at 5% for the March 19-20 FOMC meeting and 24% for the following meeting on April 30-May 1.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.46%.  China’s Shanghai Composite closed down -0.26%.  Japan’s Nikkei Stock Index closed down -0.02%.

Interest Rates

June 10-year T-notes (ZNM24) closed up +6 ticks on Wednesday, and the 10-year T-note yield fell -4.3 bp to 4.110%.  Jun T-notes Wednesday climbed to a 3-week high, and the 10-year T-note yield fell to a 4-week low of 4.077% after the Feb ADP employment change was weaker than expected, a dovish factor for Fed policy.  T-notes also garnered support on comments from Fed Chair Powel, who said it would likely be appropriate to begin lowering borrowing costs "at some point this year."  A decline in inflation expectations was bullish for T-notes as the 10-year breakeven inflation rate fell to a 1-week low Wednesday at 2.298%.

On the bearish side, strength in stocks Wednesday reduced safe-haven demand for government debt and limited gains in T-notes.  Also, the Fed Beige Book was slightly hawkish as it said, "economic activity increased slightly, on balance, since early January."

European government bond yields on Wednesday moved lower.  The 10-year German bund yield fell -0.2 bp to 2.322%.  The 10-year UK gilt yield fell to a 2-1/2 week low of 3.980% and finished down -2.0 bp at 3.991%.

Eurozone Jan retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German trade data was better than expected as Jan exports rose +6.3% m/m, stronger than expectations of +1.5% m/m and the largest increase in 3-1/2 years.  Also, Jan imports rose +3.6% m/m, stronger than expectations of +1.8% m/m and the biggest increase in 11 months.

U.S. Stock Movers

Dexcom (DXCM) closed up more than +9% to lead gainers in the S&P 500 after the U.S. FDA approved the company’s over-the-counter Stelo product, the first glucose biosensor cleared in the U.S. for use without a subscription.

Crowdstrike Holdings (CRWD) closed up more than +10% to lead gainers in the Nasdaq 100 after reporting Q4 revenue of $845.3 million, above the consensus of $839.6 million, and forecast 2025 revenue of $3.92 billion-$3.99 billion, the midpoint stronger than the consensus of $3.94 billion.

Palantir (PLTR) closed up more than +9% after being awarded a $178.4 million contract from the U.S. Army to develop and produce ten prototype ground stations that use artificial intelligence and machine learning to process targeting information from space-based, airborne, and ground sensors. 

Hewlett Packard Enterprise (HPE) closed up more than +3% on signs of strong demand for the company’s artificial-intelligence-focused servers, with a backlog of orders for the servers at $3 billion, up $500 million in the latest quarter. 

Progressive (PGR) closed up more than +3% after Morgan Stanley upgraded the stock to overweight from equal weight with a price target of $227.

Target (TGT) closed up more than +2% after HSBC upgraded the stock to buy from hold with a price target of $195.

JD.com (JD) closed up more than +16% after reporting Q4 sales of 306.1 billion yuan ($42.6 billion), stronger than the consensus of 300 billion yuan, and initiated a $3 billion stock repurchase program.

Super Micro Computer (SMCI) closed up more than +2% after Argus Research initiated coverage of the stock with a buy recommendation and a price target of $1,350.

Cigna Group (CI) closed up more than +1% after Barclays initiated coverage of the stock with a recommendation of overweight and a price target of $393.

Brown-Forman Corp (BF/B) closed down more than -7% to lead losers in the S&P 500 after reporting Q3 net sales of $1.07 billion, weaker than the consensus of $1.12 billion. 

Palo Alto Networks (PANW) closed down more than -4% to lead losers in the Nasdaq 100 on signs of insider selling after an SEC filing showed Chief Technology Officer Zuk sold $10.9 million of shares last Friday. 

Foot Locker (FL) closed down more than -29% after forecasting 2025 adjusted EPS of $1.50-$1.70, well below the consensus of $1.91. 

Nordstrom (JWN) closed down more than -16% after reporting Q4 net sales of $4.29 billion, weaker than the consensus of $4.33 billion. 

Thor Industries (THO) closed down more than -15% after reporting Q2 net sales of $2.21 billion, below the consensus of $2.26 billion, and cutting its full-year net sales forecast to $10.0 billion-$10.5 billion from a previous forecast of $10.5 billion-$11.0 billion, weaker than the consensus of $10.65 billion. 

Tesla (TSLA) closed down more than -2% after Morgan Stanley cut its price target on the stock to $320 from $345.

Estee Lauder (EL) closed down more than -1% after a report detailed how acne products from several brands are alleged to contain elevated levels of benzene, a chemical linked to cancer.

Fifth Third Bank (FITB) closed down more than -1% after the company said at a RBC financials conference that it expects Q1 net interest income to be “slightly softer,” down -3% versus previous expectations of down -2% to -3%.

Earnings Reports (3/7/2024)

BJ's Wholesale Club Holdings Inc (BJ), Broadcom Inc (AVGO), Burlington Stores Inc (BURL), Ciena Corp (CIEN), Costco Wholesale Corp (COST), DocuSign Inc (DOCU), Gap Inc/The (GPS), Guidewire Software Inc (GWRE), Kroger Co/The (KR), Marvell Technology Inc (MRVL), MongoDB Inc (MDB), Toro Co/The (TTC).

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