Stocks Retreat as Persistent Inflation Dents Fed Rate-Cut Hopes

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.46%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.98%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.55%. 

US stock indexes Thursday closed moderately lower, led by weakness in technology stocks.  Meta Platforms fell more than -10% after forecasting Q2 revenue below consensus and raising its full-year total expenses estimate.  Also, IBM fell more than -8% after reporting lackluster Q1 revenue from its consulting division.  In addition, Caterpillar closed down more than -6% after saying it expects sales for Q2 to be lower compared to last year. 

Losses in stocks accelerated Thursday morning after bond yields jumped on signs of persistent inflation and labor market strength when Thursday’s US Q1 core PCE price index was revised higher and weekly jobless claims unexpectedly fell to a 2-month low, hawkish factors for Fed policy.  Also, the larger-than-expected downward revision to US Q1 GDP and upward revision to the Q1 core price index fueled fears of stagflation. 

Stock indexes recovered from their worst levels Thursday after a +3% rally in Nvidia sparked gains in chip stocks.  Also, on the positive side, Newmont closed up more than +12% after reporting stronger-than-expected Q1 corporate sales.  In addition, Carrier Global closed up more than +9% after reporting Q1 adjusted EPS above consensus.  Finally, Chipotle Mexican Grill closed up more than +6% after reporting better-than-expected Q1 comparable sales.

US weekly initial unemployment claims unexpectedly fell -5,000 to a 2-month low of 207,000, showing a stronger labor market than expectations of an increase to 215,000.

US Q1 GDP was revised downward to 1.6% (q/q annualized) from 3.4%, weaker than expectations of 2.5%, as Q1 personal consumption was revised lower to 2.5% from 3.3%, weaker than expectations of 3.0%.  The Q1 core PCE price index was revised upward to +3.7% from +2.0%, stronger than expectations of +3.4%

US Mar pending home sales rose +3.4% m/m, stronger than expectations of +0.4% m/m.

The US Apr Kansas City Fed manufacturing activity survey unexpectedly fell -1 to -8, weaker than expectations of an increase to -5.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 12% for the following meeting on June 11-12.

Overseas stock markets today on Thursday settled mixed. The Euro Stoxx 50 closed down -1.02%. China's Shanghai Composite closed up +0.27%.  Japan's Nikkei Stock Index closed down -2.16%.

Interest Rates

June 10-year T-notes (ZNM24) on Thursday closed down -12 ticks.  The 10-year T-note yield rose +6.0 bp to 4.702%.  T-notes prices Thursday dropped to a 5-1/2 month low, and the 10-year T-note yield climbed to a 5-3/4 month high of 4.735%. Signs of faster inflation and labor market strength weighed on T-note prices after Thursday’s Q1 core PCE price index was revised higher, and weekly initial unemployment claims unexpectedly fell to a 2-month low, hawkish factors for Fed policy.  Also, weak demand for the Treasury’s $44 billion auction of 7-year T-notes weighed on T-note prices as the auction had a bid-to-cover ratio of 2.48, below the 10-auction average of 2.57.

European government bond yields on Thursday moved higher. The 10-year German bund yield rose to a 4-3/4 month high of 2.648% and finished up +4.2 bp at 2.630%.  The 10-year UK gilt yield rose to a 5-1/2 month high of 4.393% and finished up +2.9 bp at 4.362%.

The German May GfK consumer confidence index rose +3.1 to a 2-year high of -24.2, stronger than expectations of -26.0.

ECB Governing Council member Muller said he is not in favor of cutting interest rates for a second straight meeting following an expected first cut in June.

ECB Governing Council member Panetta said that ECB rate cuts are needed soon as "unnecessary delays may take us uncomfortably close to the effective lower bound at a later stage if stagflation is entrenched and inflation expectations fall below target."

US Stock Movers

Meta Platforms (META) closed down more than -10% to lead losers in the S&P 500 and Nasdaq 100 after forecasting Q2 revenue of $36.5 billion-$39 billion, the midpoint of which was below the consensus of $38.24 billion and raising its full-year total expenses estimate to $96 billion-$99 billion from a previous estimate of $94 billion-$99 billion, above the consensus of $96.87 billion. Other megacap technology stocks fell on the news, as Amzon.com (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) closed down more than -2%.

Textron (TXT) closed down more than -9% after reporting Q1 revenue of $3.14 billion, weaker than the consensus of $3.29 billion.

International Business Machines (IBM) closed down more than -8% to lead losers in the Dow Jones Industrials after reporting Q1 revenue from its consulting division was unchanged y/y at $5.2 billion and saying clients continue to tighten their spending due to an uncertain economic environment.

Bristol-Myers Squibb (BMY) closed down more than -8% after announcing that it will eliminate 2,200 jobs this year and end about 12 drug development programs. 

Southwest Airlines (LUV) closed down more than -7% after reporting a Q1 adjusted loss of -36 cents a share, wider than the consensus of -31 cents. 

Caterpillar (CAT) closed down more than -6% after saying it expects sales for Q2 to be lower compared to last year. 

AO Smith (AOS) closed down more than -4% after forecasting full-year net sales of $3.97 billion-$4.05 billion, the midpoint below the consensus of $4.02 billion.

ServiceNow (NOW) closed down more than -4% after forecasting full-year subscription revenue of $10.56 billion-$10.58 billion, below the consensus of $10.59 billion. 

Newmont (NEM) closed up more than +12% to lead gainers in the S&P 500 after reporting Q1 corporate sales of $4.02 billion, well above the consensus of $3.61 billion.

Carrier Global (CARR) closed up more than +9% after reporting Q1 adjusted EPS of 62 cents, above the consensus of 50 cents.

Teradyne (TER) closed up more than +8% after reporting Q1 net revenue of $599.8 million, above the consensus of $566.3 million, and forecasting Q2 revenue of $665 million-$725 million, stronger than the consensus of $636.5 million. 

Chipotle Mexican Grill (CMG) closed up more than +6% after reporting Q1 comparable sales rose +7%y/y, stronger than the consensus of +5.13% y/y.

AstraZeneca Plc (AZN) closed up more than +5% to lead gainers in the Nasdaq 100 after reporting Q1 revenue of $12.68 billion, stronger than the consensus of $11.82 billion.

Nvidia (NVDA) closed up more than +3% to lead chip stocks higher after Meta Platforms announced it will boost investment in AI, which could increase demand for Nvidia’s AI chips.  Also, Marvell Technology (MRVL) closed up more than +4%, and Broadcom (AVGO) closed up +3%.  In addition, KLA Corp (KLAC) closed up more than +2%, and Microchip Technology (MCHP), Lam Research (LRCX), ON Semiconductor Corp (ON), Intel (INTC), Advanced Micro Devices (AMD), and NXP Semiconductors NV (NXPI) closed up more than +1%.   

Keurig Dr Pepper (KDP) closed up more than +4% after reporting Q1 net sales of $3.47 billion, above the consensus of $3.41 billion. 

Merck & Co (MRK) closed up more than +2% to lead gainers in the Dow Jones Industrials after reporting Q1 adjusted EPS of $2.07, stronger than the consensus of $1.86, and raising its full-year adjusted EPS estimate to $8.53-$8.65 from a previous estimate of $8.44-$8.59. 

Earnings Reports (4/26/2024)

AbbVie Inc (ABBV), Aon PLC (AON), Ball Corp (BALL), Centene Corp (CNC), Charter Communications Inc (CHTR), Chevron Corp (CVX), Colgate-Palmolive Co (CL), Exxon Mobil Corp (XOM), HCA Healthcare Inc (HCA), LyondellBasell Industries NV (LYB), Phillips 66 (PSX), Roper Technologies Inc (ROP), T Rowe Price Group Inc (TROW).

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