Stocks Rally as Core CPI Slips to 2-3/4 Year Low

The S&P 500 Index ($SPX) (SPY) on Tuesday closed up +1.12%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.61%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.49%.

Stocks rallied after the U.S. CPI report was not as bad as some investors feared, and the core CPI dipped to a 2-3/4 year low.  Also, some tech stocks saw carry-over support from positive Oracle news about cloud and AI demand.  Stocks shook off Tuesday’s +5.1 bp rise in the 10-year T-note yield.

Tuesday’s headline Feb U.S. CPI report of +0.4% m/m was in line with market expectations.  Meanwhile, the year-on-year CPI figure of +3.2% y/y was slightly stronger than market expectations of +3.1% and was up from Jan’s +3.1%, but was only 0.2 points above the 2-3/4 year low of +3.0% y/y posted in June 2023.

The Feb U.S. core (ex food and energy) CPI report of +0.4% m/m was slightly stronger than expectations of +0.3%.  The core CPI year-on-year figure of +3.8% y/y was down from Jan’s +3.9% but was slightly stronger than market expectations of +3.7%.  The Feb core CPI report of +3.8% y/y was a new 2-3/4 year low but was still far above the Fed’s +2.0% inflation target.

The slightly stronger-than-expected U.S. CPI report essentially confirmed that the FOMC at its meeting next week will not cut interest rates due to above-target inflation.  However, the fact that the core CPI at least dipped to a 2-3/4 year low supported market hopes that the Fed could cut interest rates as soon as June.  Fed Chair Powell said in Senate testimony last week that the Fed is “not far” from being confident enough to start cutting interest rates. 

The markets are discounting the chances for a -25 bp rate cut at 1% for next week’s March 19-20 FOMC meeting, 15% for the following meeting on April 30-May 1, and 78% for the meeting after that on June 11-12.

In other U.S. economic news, the NFIB Small Business Optimism Index fell by 0.5 points to a 9-month low of 89.4, weaker than expectations for a +0.6 point increase to 90.5.

Overseas stock markets Tuesday were mixed.  The Euro Stoxx 50 closed up +1.07%.  China’s Shanghai Composite closed down -0.41%.  Japan’s Nikkei Stock Index closed down -0.06%.

Interest Rates

June 10-year T-notes (ZNM24) Tuesday closed down -13.5 ticks.  The 10-year T-note yield rose by +5.1 bp to 4.149%, well above last Friday’s 5-week low of 4.034%.  T-note prices were undercut by the stronger-than-expected U.S. CPI report and Tuesday’s +3 bp increase in the 10-year breakeven inflation expectations rate to 2.30%. 

T-note prices were also undercut by supply overhang from this week’s coupon package.  The Treasury sold $54 billion of 3-year T-notes on Monday and $42 billion of 10-year T-notes on Tuesday.  The Treasury will sell $25 billion of 30-year T-bonds on Wednesday.

European government bond yields were mixed.  The 10-year German bund yield rose +2.7 bp to 2.330%, up from last Friday’s 5-week low of 2.234%.  The 10-year UK gilt yield fell -2.5 bp to 3.946% and posted a new 5-week low.

U.S. Stock Movers

Several megacap tech stocks were on the Nasdaq 100 leaderboard Tuesday with gains of more than +3% on support from Oracle’s positive news regarding cloud and AI demand, including Nvidia (NVDA), Meta (META), Amazon (AMZN), and Adobe (ADBE).  Nvidia led chip stocks higher with its +7.16% surge.

Oracle (ORCL) rallied +11.88% Tuesday after its earnings report late Monday beat market expectations as bookings surged for its cloud business.  The company said, “demand for our Gen2 AI infrastructure substantially exceeds supply.”

Archer-Daniels-Midland (ADM) rallied +4.06% after the release of its quarterly earnings report, which also contained three years of inter-segment sales revisions after an internal probe.

Boeing (BA) fell by another -4.17% after news that officials from Chile started a probe into the recent mid-air plunge by a Latam flight traveling from Auckland to Sydney. Also, United Airlines CEO told Boeing it doesn’t want to take delivery of any more Boeing 737 Max 10 jets due to certification delays, and that United will switch to either Boeing Max 9 jets or Airbus A321s until the Max 10 jets can get certified.

Southwest Airlines (LUV) plunged by -14.76% after the airline announced plans to cut its flight schedules and halt new hiring in response to slowed deliveries of new Boeing 737 Max aircraft.

Bitcoin (^BTCUSD) Tuesday edged to a new record high but ended the day down about -1.6%, breaking a 6-day string of gains. Coinbase (COIN) rose +0.89%, reversing most of Monday’s loss of -0.93%.  Marathon Digital (MARA) fell -2.06%, adding to Monday’s plunge of -12.08%.

Earnings Reports (3/12/2024)

Kohl's Corp (KSS), Archer-Daniels-Midland Co (ADM).

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