Stocks Rally on Dovish PCE Inflation Report

The S&P 500 Index ($SPX) (SPY) on Friday closed up +1.30%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.23%.  March E-mini S&P futures (ESH25) rose +1.08%, and March E-mini Nasdaq futures (NQH25) rose +0.86%.

Stocks turned higher Friday 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 Friday's triple-witching date.  Friday'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 was very positive Friday, with about 80% of the Nasdaq 100 stocks showing gains.

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

House Speaker Johnson planned to hold a vote on another stop-gap funding bill later Friday.  Any extended US government shutdown would have negative consequences for US economic growth.

The stock market was undercut by President-elect Trump's threat on Friday to slap the EU with tariffs if it doesn't engage in large purchases of US oil and gas. 

Stock investors were encouraged by Friday'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.

Friday'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.

Friday'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%.  Friday’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.

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

Overseas stock markets on Friday closed lower.  The Euro Stoxx 50 Friday closed down -0.34%, adding to Thursday's decline of -1.58%.  China's Shanghai Composite Index closed -0.06%, adding to Thursday's -0.36% decline. Japan's Nikkei Stock 225 closed down -0.29%, posting its sixth consecutive session loss.

Interest Rates

March 10-year T-notes (ZNH25) on Friday rose by +12 ticks, partially recovering from Thursday's 6-1/2 month low.  The 10-year T-note yield fell -4.0 bp to 4.452%, moving lower from Thursday's 6-1/2 month high of 4.592%.  T-note prices saw support from the slightly weaker-than-expected PCE price index report and personal spending report.  T-note prices previously fell sharply on Wednesday and Thursday after the FOMC at its meeting on Wednesday signaled only -50 bp of rate cuts next year, less than -100 bp of rate cuts projected in September. 

European government bond yields on Friday moved lower.  The 10-year German bund yield fell -2.1 bp to 2.285%.  The 10-year UK gilt yield fell -6.9 bp to 4.510%.

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

Chip stocks were leaders in the Nasdaq 100 index on Friday with Micron Technology (MU) and NVIDIA (NVDA) showing gains of more than +3%.

Crypto-stocks closed mixed on Friday, with bitcoin (^BTCUSD) closing the day little changed but stabilizing after the overall -10% plunge seen on Wednesday and Thursday after the hawkish FOMC meeting outcome.  Microstrategy (MSTR) on Friday rallied by +11%.  Riot Platform (RIOT) rallied 3.01%, while Coinbase (COIN) rallied +1.54%.  On the negative side, Mara Holdings (MARA) fell -2.21%, and Bit Digital (BTBT) fell -1.38%. 

FedEx (FDX) gave up early gains on plans to spin off its freight division into a separate publicly traded company and closed the day slightly lower by -0.26%.

Nike (NKE) fell -0.41% 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) fell by -5.17% after management warned of weaker Q4 earnings due to weak steel prices and weak demand in Europe.

Eli Lilly (LLY) closed up +1.14% after its competitor Novo Nordisk A/S (NOVOB DC) announced disappointing results from its experimental weight loss drug, CagriSema, which prompted a plunge of -20% in Novo Nordisk in Copenhagen trading.

Occidental Petroleum (OXY) rallied +3.69% 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).