Stocks Rally on Heightened Speculation about a 50 bp Rate Cut Next Week

The S&P 500 Index ($SPX) (SPY) Friday closed up by +0.54%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up by +0.72%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up by +0.47%.

Stocks posted moderate gains on Friday, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 posting 2-week highs. Speculation that the Fed may cut interest rates by 50 bp at next week’s FOMC meeting supported stocks Friday after former New York Fed President Dudley said there’s “a strong case for a 50 bp rate cut” at next week’s FOMC meeting.  According to the swaps market, the chances of a 50 bp rate cut next week rose to 53% Friday from 17% on Wednesday.  

Signs of easing price pressures are also bullish for bonds and stocks after Friday’s news showed the US Aug import price index ex-petroleum unexpectedly fell -0.1% m/m, weaker than expectations of a +0.2% m/m increase.  Stocks extended their gains after the University of Michigan’s Sep US consumer sentiment index rose more than expected to a 4-month high, supporting the prospects for a soft landing.  The strength of chip stocks on Friday also boosted the overall market. 

The University of Michigan’s Sep US consumer sentiment index rose +1.1 to a 4-month high of 69.0, stronger than expectations of 68.5.

News on inflation expectations was mixed.  The University of Michigan’s Sep US 1-year inflation expectations indicator unexpectedly eased to a 3-3/4 year low of +2.7% from +2.8% in Aug.  However, the Sep 5-10 year inflation expectations indicator unexpectedly rose to a 10-month high of +3.1% from +3.0% in Aug.

Corporate news today is mixed for stocks.  On the positive side, Uber Technologies closed up more than +6% on the news it will be the sole supplier of driverless rides on Alphabet’s Waymo cars in Austin and Atlanta. Also, RH surged more than +24% and boosted online retailers after reporting better-than-expected Q2 adjusted EPS.  On the negative side, Adobe closed down more than -8% after forecasting weaker-than-expected Q4 revenue.  Also, Boeing closed down more than -3% after the company’s workers in Seattle walked off the job for the first time since 2008, and Moody’s Ratings placed the company’s debt rating on review for a potential downgrade to junk.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 53% for a -50 bp rate cut at that meeting.

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 rose to a 1-week high and closed up +0.62%.  China's Shanghai Composite fell to a 7-1/4 month low and closed down -0.48%.  Japan's Nikkei Stock 225 closed down by +0.68%.

Interest Rates

December 10-year T-notes (ZNZ24) Friday closed up +7.5 ticks.  The 10-year T-note yield fell -2.4 bp to 3.650%.  Dec T-notes moved higher Friday on dovish comments from former New Tork Fed President Dudley, who said “there’s a strong case for a 50 bp rate cut” at next week’s FOMC meeting.  T-notes also found support after the Aug import price index ex-petroleum unexpectedly fell, a dovish factor for Fed policy.  In addition, short covering propped up T-note prices as bond dealers covered short hedges they put on during this week’s $119 billion Treasury auction slate of T-notes and T-bonds.

T-note prices fell back from their best levels after the University of Michigan’s Sep US consumer sentiment index rose more than expected to a 4-month high.  Also, an increase in inflation expectations undercut T-notes after the 10-year breakeven inflation expectations rate rose to a 1-week high of 2.090%.  In addition, strength in stocks Friday curbed safe-haven demand for T-notes.

European government bond yields on Friday moved lower.  The 10-year German bund yield fell -0.3 bp to 2.148%.  The 10-year UK gilt yield fell -1.3 bp to 3.768%.

Eurozone July industrial production fell -0.3% m/m, right on expectations.

ECB President Lagarde said she is open to considering an interest rate cut in October if the Eurozone economy suffers a major setback, but a cut at the December ECB meeting is more likely since the ECB would have more comprehensive information available on the economy by then. 

ECB Governing Council member Holzmann said the October ECB meeting might not be the time for another rate cut, but there could be room for another rate cut at the December meeting.

ECB Governing Council member Kazaks said a slump in the Eurozone economy would be required for the ECB to cut interest rates at its next meeting in October.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 47% for the October 17 meeting.

US Stock Movers

Chip stocks rallied Friday to support gains in the broader market. Micron Technology (MU) closed up more than +4%, and ON Semiconductor (ON) closed up more than +3%.  Also, Applied Materials (AMAT), Microchip Technology (MCHP), KLA Corp (KLAC), NXP Semiconductors NV (NXPI), Texas Instruments (TXN), and Lam Research (LRCX) closed up more than +2%.  In addition, Advanced Micro Devices (AMD), Qualcomm (QCOM), and Intel (INTC) are up more than +1%. 

Warner Bos Discovery (WBD) closed up more than +10% to lead gainers in the S&P 500 and Nasdaq 100 and added to Thursday’s+10% jump after it said its multiyear distribution partnership with Charter Communications was renewed early.

Uber Technologies (UBER) closed up more than +6% on the news it will be the sole supplier of driverless rides on Alphabet’s Waymo cars in Austin and Atlanta that will begin next year.

ARM Holdings Plc (ARM) closed up more than +6% after Raymond James initiated coverage on the stock with a recommendation of outperform and a price target of $160. 

RH (RH) closed up more than +24% after reporting Q2 adjusted EPS of $1.69, stronger than the consensus of $1.60.  Also, Etsy (ETSY) closed up more than +7%, and Wayfair (W) closed up more than +6% on the news. 

Summit Therapeutics (SMMT) closed up more than +15%, adding to Thursday’s +20% surge after it raised $235 million from investors in a private placement on the heels of promising late-stage trial data from its lung cancer drug ivonescimab.

Vistra Corp (VST) closed up more than +6% after Jeffries named the stock its top pick in the power sector with a buy recommendation and a price target of $99.

GE Vernova (GEV) closed up more than +4% after BMO Capital Markets initiated coverage on the stock with a recommendation of outperform and a price target of $245. 

Adobe (ADBE) closed down more than -8% to lead losers in the S&P 500 and Nasdaq 100 after forecasting Q4 revenue of $5.50 billion-$5.55 billion, below the consensus of $5.60 billion. 

Boeing (BA) closed down more than -3% to lead losers in the Dow Jones Industrials after the company’s workers in Seattle walked off the job for the first time since 2008, and Moody’s Ratings placed the company’s debt rating on review for a potential downgrade to junk.

Garmin Ltd (GRMN) closed down more than -5% after Barclays downgraded the stock to underweight from equal weight with a price target of $133.

Norfolk Southern (NSC) closed down more than -3% after it fired CEO Shaw when an investigation found he violated company policies by engaging in a consensual relationship with its chief legal officer.

Moderna (MRNA) closed down more than -2%, adding to Thursday’s -12% plunge after JPMorgan Chase downgraded the stock to underweight from neutral with a price target of $70. 

Axon Enterprise (AXON) closed down more than -1% on signs of insider selling after an SEC filing showed CFO Bagley sold $1.64 million of shares on Thursday.

Earnings Reports (9/16/2024)

None.

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