Stocks Regain Footing on Dovish PCE Inflation Report

The S&P 500 Index ($SPX) (SPY) today is up +1.02%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +1.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.08%.  March E-mini S&P futures (ESH25) are up +1.03%, and March E-mini Nasdaq futures (NQH25) are up +1.01%.

Stocks turned higher today on the dovish US PCE report, which allowed the market to reverse overnight losses that were caused by the threat of a government shutdown and concern about today’s triple-witching date.  Today’s PCE report sparked ideas that the sharp stock market sell-off seen after Wednesday’s FOMC meeting may have been overdone.  Stock market breadth has turned positive today with all but seven of the Nasdaq 100 stocks showing gains.

Stocks are being undercut by the threat of a US government shutdown this weekend if Congress cannot pass a stop-gap funding bill by midnight tonight. Also, the fact that the Republican-controlled House could not pass the Trump-approved funding bill yesterday did not bode well for Republican cooperation next year in trying to pass Trump legislative initiatives when they will control the presidency and Congress.

Reports are emerging that House Speaker Johnson later today will now try to pass a so-called clean stop-gap funding bill that funds the government at current levels, jettisons items designed to attract Democratic support, and drops Mr. Trump's demand for a debt-ceiling suspension.

The stock market remains on guard about incoming-President Trump's tariff policy after Mr. Trump today threatened the EU with tariffs if it doesn't buy more US oil and gas. 

Stock investors were encouraged by today’s weaker than expected PCE inflation report, which could give the FOMC a bit more leeway to cut interest rates.  The Nov PCE price index rose +0.1% m/m and +2.4% y/y, a bit weaker than expectations of +0.2% m/m and +2.5% y/y.  The Nov core PCE price index rose +0.1% m/m and +2.8% y/y, a bit weaker than expectations of +0.2% m/m and +2.9% y/y.

Today's headline Nov PCE price index report of +2.4% y/y was up from Oct's +2.3% y/y, while the Nov core price index report of +2.8% y/y was unchanged from October.  Both measures remained above the Fed's +2.0% inflation target and their respective 3-3/4 year lows of +2.1% y/y (nominal) and +2.6% y/y (core) posted earlier this year.

Today's Nov personal income report of +0.3% m/m was slightly weaker than the consensus of +0.4% but Oct was revised slightly higher to +0.7% from +0.6%. Today's Nov personal spending report of +0.4% m/m was slightly weaker than expectations of +0.5%, and Oct was revised slightly lower to +0.3% from +0.4%.

The University of Michigan’s final-Dec US consumer sentiment index was left unrevised at an 8-month high of 74.0, which was a bit weaker than expectations for a +0.2 point upward revision to +74.2.  The consumer sentiment index has now increased for five straight months.

Stocks fell sharply on Wednesday and Thursday after the FOMC's hawkish pivot at this week's meeting when the FOMC's new dot-plot forecasted only -50 bp of rate cuts in 2025 versus -100 bp of rate cuts at the previous meeting.

The markets are on guard for increased volatility with today's quarterly triple-witching date. 

The markets are discounting the chances at 11% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets are lower.  The Euro Stoxx 50 today is down -0.4%, adding to Thursday's decline of -1.58%.  China's Shanghai Composite Index today closed -0.06%, adding to Thursday's -0.36% decline. Japan's Nikkei Stock 225 today closed down -0.29%, posting its sixth consecutive session loss.

Interest Rates

March 10-year T-notes (ZNH25) today are up +16 ticks and recovered a bit from Thursday's 6-1/2 month low.  The 10-year T-note yield is down -5.6 bp at 4.506%, falling back from Thursday's 6-1/2 month high of 4.592%.  T-note prices are seeing support today from the slightly weaker-than-expected PCE price index report and personal spending report.  T-note prices previously fell on Wednesday and Thursday after the FOMC at its meeting on Wednesday signaled only -50 bp of rate cuts next year, down from -100 bp of rate cuts projected in September. 

European government bond yields today are lower.  The 10-year German bund yield is down -2.3 bp at 2.283%. The 10-year UK gilt yield is down -5.8 bp at 4.520%.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its January 30 policy meeting and a 12% chance for a -50 bp rate cut at the same meeting.

US Stock Movers

Crypto-stocks are trading higher today, with bitcoin (^BTCUSD) recovering by +1% today after plunging by an overall -10% on Wednesday and Thursday after the hawkish FOMC meeting outcome.  Microstrategy (MSTR) is up +8%, while Coinbase (COIN), Riot Platform (RIOT), and Bit Digital (BTBT) are up +2% or more.  Mara Holdings (MARA) is up +0.4%,

FedEx (FDX) is up more than +3% after announcing plans to spin off its freight division into a separate publicly traded company.

Nike (NKE) is down -1% after management guidance for a decline in revenue in the current quarter in the low double digits, more than last quarter's -7.7% drop.

US Steel (X) is down -3% after management warned of weaker Q4 earnings due to weak steel prices and weak demand in Europe.

Eli Lilly (LLY) is up more than +5% after its competitor Novo Nordisk A/S (NOVOB DC) announced disappointing results from its experimental weight loss drug, CagriSema, which prompted a plunge of about -20% in Novo Nordisk in Copenhagen trading.

Occidental Petroleum (OXY) is up more than +5% after news that Berkshire Hathaway increased its stake in Occidental.

Earnings Reports (12/20/2024)

Carnival Corp (CCL), PACS Group Inc (PACS), Winnebago Industries Inc (WGO).