Stocks Rally Late to Close Out a Volatile Session

The S&P 500 Index ($SPX) (SPY) Friday closed up +0.80%, the Dow Jones Industrials Index ($DOWI) (DIA) closed +1.51%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed -0.01%.

Stocks Friday rallied sharply in the last 20 minutes of the session, reversing the losses seen earlier in the day when the S&P 500 index was down as much as -0.8% and the Nasdaq 100 index was down as much as -1.9%. Volatility emerged on Friday partly because of the last trading day of the month and the rebalance of some stock indexes.

US stock indexes Friday saw support from the -4.6 bp decline in the 10-year T-note yield on the as-expected US PCE deflator, which kept alive hopes for a Fed interest rate cut later this year.  The T-note yield also fell on the slightly weaker-than-expected US personal spending report.  Tech stocks were undercut by weakness in chip stocks and long liquidation pressure in some of the mega-cap tech stocks.

The April PCE deflator report of +0.3% m/m and +2.7% y/y was unchanged from March and was in line with market expectations.  The April core PCE deflator report of +0.2% m/m and +2.8% y/y was also in line with market expectations.  The PCE deflator is the Fed’s preferred inflation measure. 

The April PCE deflator report of +2.7% y/y remained 0.2 points above the 3-year low of +2.5% y/y posted in January and February.   The core PCE deflator report of +2.8% y/y was unchanged from the 3-year low of +2.8% posted in February and March.  The nominal and real PCE deflators are still well above the Fed’s 2% inflation target, but those measures are at least near or at 3-year lows.

Meanwhile, April US personal spending rose +0.2% m/m, down from March’s revised +0.7% (preliminary +0.8%) and slightly weaker than market expectations of +0.3%.  April real personal spending fell -0.1% m/m, weaker than expectations of +0.1%.   April US personal income rose +0.3% m/m, down from March’s +0.5% but in line with market expectations.

In mildly hawkish comments, Dallas Fed President Lorie Logan said late Thursday afternoon that policy “is just not as restrictive as we think it might have been relative to the level of interest rates before the pandemic.”  She said, “It’s really important to keep all the options on the table and that we continue to be flexible,” which seemed to indicate she wants to leave open the outside possibility of a rate hike.  However, she also said there are good reasons to believe we’re still on the path to 2% inflation. 

The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting and 14% for the following meeting on July 30-31.

Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

Overseas stock markets Friday closed mixed.  The Euro Stoxx 50 closed +0.03%.  China's Shanghai Composite closed down -0.16%.  Japan's Nikkei Stock 225 Index closed up +1.14%.

Interest Rates

June 10-year T-notes (ZNM24) Friday closed up +10 ticks.  The 10-year T-note yield fell -4.6 bp to 4.501%.  June T-notes moved higher after the PCE deflator report was in line with market expectations, leading to hopes for a slow improvement in inflation as the year progresses.  T-note prices also saw support after the April US personal spending report of +0.2% m/m was slightly weaker than market expectations of +0.3%. Also, April US real personal spending fell -0.1% m/m, weaker than expectations of +0.1%.

Eurozone government bond yields Friday saw upward pressure on a disappointing Eurozone CPI report.  The 10-year German bund yield rose +1.2 bp to 2.664%.  By contrast, the 10-year UK gilt yield fell -2.8 bp to 4.318%. 

The Eurozone May preliminary CPI rose to +2.6% y/y from +2.4% in April and was slightly stronger than market expectations of +2.5%.  The Eurozone May preliminary core CPI rose to +2.9% y/y from +2.7% in April and was stronger than market expectations of +2.7%.

The Eurozone CPI report didn’t have much impact on nearly unanimous expectations for the ECB at its meeting next Thursday to cut its benchmark rate by -25 bp.  However, Friday’s CPI report dampened expectations for further ECB rate cuts following next week’s meeting.  

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for its next meeting on June 6.  If the ECB cuts rates by -25 bp next week as expected, then the markets are expecting a 0% chance of another rate cut at the following meeting on July 18 and a 50% chance of a rate cut at the September 12 meeting.

US Stock Movers

Marvell Technology (MRVL) fell -10.46% Friday after reporting revenue and guidance that was in line with market expectations but with analysts noting the stock’s expensive valuation.  Marvell dragged down other chip stocks, with Lam Research (LRCX), Micron (MU), and KLA Corp (KLAC) closing down more than -1%. 

Data-based software developer MongoDB (MDB) fell -24% and was the biggest loser in the Nasdaq 100 index on the company’s cut in its full-year earnings guidance.

Other notable losers in the Nasdaq 100 included Amazon.com (AMZN) with a -1.61% decline, Netflix (NFLX) with a -0.93% decline, and NVIDIA (NVDA) with a -0.78% decline.

Dell Technologies (DELL) fell -17.87% after reporting revenue that was below expectations and that undercut high hopes for the company’s AI server products.

Zscaler (ZS) rallied +8.50% and was the biggest gainer in the Nasdaq 100 index after beating earnings expectations and raising its full-year guidance.

Gap (GPS) soared by +28.40% after reporting better-than-expected results and raising its full-year guidance.

Trump Media & Technology Group (DJT) fell -5.45% after Donald Trump late Thursday was convicted by a NY jury of 34 felony counts of falsifying business records.

Earnings Reports (5/31/2024)

Genesco Inc (GCO), Mesa Laboratories Inc (MLAB).

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