S&P 500 Climbs to a Record High on Expectations of Easing US Inflation

The S&P 500 Index ($SPX) (SPY) Wednesday closed up by +0.71%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up by +1.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up by +0.80%.

Stocks rallied Wednesday, with the S&P 500 posting a new record high, the Dow Jones Industrials posting a 1-1/2 week high, and the Nasdaq 100 posting a 2-3/4 month high.  Positive comments from Fed Vice Chair Jefferson boosted stocks when he said the US economy is growing at a "solid pace."  Stocks also rose on Wednesday on speculation that Thursday’s US consumer price report will show easing price pressures.

On the negative side, Boeing closed down more than -3% after negotiations to end an almost month-long workers’ strike collapsed.  Also, Alphabet closed down more than -1% after the US Justice Department told a federal judge that it was considering recommending that Google be forced to sell off parts of its operations to remedy an antitrust suit.

Middle East tensions continue to be a negative factor for stocks.  In addition to Gaza, Israel is waging a ground and air offensive in Lebanon to combat Hezbollah.  The Israel Defense Force (IDF) said Tuesday that it deployed a fourth division of troops in southern Lebanon while maintaining airstrikes in Beirut’s southern suburbs.  The markets are also awaiting Israel’s response to last Tuesday’s missile barrage from Iran.

US MBA mortgage applications fell -5.1% in the week ended Oct 4, with the purchase mortgage sub-index down -0.1% and the refinancing mortgage sub-index down -9.3%.  The average 30-year fixed rate mortgage rose +22 bp to 6.36% from 6.14% the prior week.

The minutes of the Sep 17-18 FOMC meeting stated that "almost all" officials agreed that the upside risks to inflation have diminished, while downside risks to employment have increased.  Also, a "substantial majority" of Fed officials backed the decision to cut interest rates by 50 bp, but "some" said they would have preferred a 25 bp cut.

Tuesday evening, Fed Vice Chair Jefferson said the US economy is growing at a "solid pace" even as the labor market has slowed from an overheated state.  He added that inflation is much closer to the Fed's 2% target and should continue to cool toward it.

Today, Dallas Fed President Logan said, "Following last month's half-percentage point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals."

The markets are awaiting US consumer price news on Thursday to see if the trend toward easing prices will continue.  The consensus is for Sep CPI to ease to +2.3% y/y from +2.5% y/y in Aug.  Sep CPI ex-food and energy is expected to remain unchanged from Aug at +3.2% y/y.  Also, Q3 earnings season begins on Friday as big US banks report results. 

The markets are discounting the chances at 83% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 0% for a -50 bp rate cut at that meeting.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.68%.  China's Shanghai Composite closed down sharply by -6.62%.   Japan's Nikkei Stock 225 closed up by +0.87%.

Interest Rates

December 10-year T-notes (ZNZ24) Wednesday closed down -8.5 ticks.  The 10-year T-note yield rose +4.7 bp to 4.077%.  Dec T-notes Wednesday dropped to a 2-1/2 month low, and the 10-year T-note yield climbed to a 2-1/2 month high.  Wednesday’s rally in the S&P 500 to a record high reduced safe-haven demand for T-notes.  Also, rising inflation expectations are bearish for T-notes after the 10-year breakeven inflation rate rose to a 2-1/2 month high Wednesday at 2.303%.  T-notes dropped to their lows Wednesday afternoon on weak demand for the Treasury’s $39 billion auction of 10-year T-notes with a bid-to-cover ratio of 2.48, below the 10-auction average of 2.52.   

European government bond yields on Wednesday were mixed.  The 10-year German bund yield rose by +1.4 bp to 2.257%.  The 10-year UK gilt fell by -0.4 bp to 4.180%.

German trade news today was mixed.  Aug exports unexpectedly rose +1.3% m/m, versus expectations of a decline of -1.0% m/m.  Conversely, Aug imports fell -3.4% m/m, weaker than expectations of -2.0% m/m.

ECB Governing Council member Villeroy de Galhau said an interest rate cut by the ECB next week "is very probable, and it won't be the last, but the following pace will simply depend on the evolution of the fight against inflation."

ECB Governing Council member Kazaks said interest rates must be lowered further due to the weakening economy in the Eurozone.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 94% for the Oct 17 meeting.

US Stock Movers

Cruise line operators rallied Wednesday, led by Norwegian Cruise Line Holdings (NCLH), which closed up more than +10% to lead gainers in the S&P 500 after Citigroup upgraded the stock to buy from neutral with a price target of $30.  Also, Carnival (CCL) closed up more than +7%, and Royal Caribbean Cruises Ltd (RCL) closed up more than +5%. 

Chip stocks moved higher and supported gains in the broader market. Broadcom (AVGO), KLA Corp (KLAC), ASML Holding NV (ASML), Lam Research (LRCX), Applied Materials (AMAT), and Qualcomm (QCOM) closed up more than +2%.  Also, Analog Devices (ADI), Microchip Technology (MCHP), NXP Semiconductors NV (NXPI), and Texas Instruments (TXN) closed up more than +1%.  

Pfizer (PFE) closed up more than +3% after the Financial Times reported that CEO Bourla will meet with activist investor Starboard Value.

Globe Life (GL) closed up more than +3% after TD Cown initiated coverage on the stock with a buy recommendation and a price target of $150.

Fortinet Inc (FTNT) closed up more than +3% after TD Cowen raised its price target on the stock to $90 from $75.

Raymond James Financial (RJF) closed up more than +2% after JMP Securities upgraded the stock to outperform from market perform with a price target of $146.

Astera Labs (ALAB) closed up more than +15% after the company announced a new portfolio of fabric switches purpose-built for artificial intelligence workloads.  Morgan Stanley viewed this as a reason to buy the stock with a price target of $74. 

Helen of Troy Ltd (HELE) closed up more than +18% after reporting Q2 net sales of $474.2 million, better than the consensus of $458.8 million, and forecast 2025 net sales of $1.89 billion-$1.94 billion, the midpoint above the consensus of $1.91 billion.   

Gitlab (GTLB) closed up more than +7% after Morgan Stanley initiated coverage on the stock with an overweight recommendation and a price target of $70. 

Boeing (BA) closed down more than -3% to lead losers in the Dow Jones Industrials after negotiations to end an almost month-long workers’ strike collapsed. 

Alphabet (GOOGL) closed down more than -1% after the US Justice Department told a federal judge it is considering recommending that Google be forced to sell off parts of its operations to remedy an antitrust suit.

PDD Holdings (PDD) closed down more than -2% on carryover weakness from today’s -6% plunge in China’s Shanghai Composite Stock Index.

Mosaic (MOS) closed down more than -2% on concern Hurricane Milton will hit the company’s phosphate-production hub in Tampa, Florida and cut fertilizer revenue. 

Earnings Reports (10/10/2024)

Aehr Test Systems (AEHR), Delta Air Lines Inc (DAL), Domino's Pizza Inc (DPZ), Neogen Corp (NEOG), NexPoint Diversified Real Estate Trust (NXDT), Oil-Dri Corp of America (ODC).

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