Stocks Finish Sharply Higher on a Surprise Slowdown in US Inflation

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +1.83%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.65%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.31%.  March E-mini S&P futures (ESH25) are up +1.80%, and March E-mini Nasdaq futures (NQH25) are up +2.20%. 

Stocks rallied sharply on Wednesday, with the S&P 500 and Nasdaq 100 posting 1-week highs and the Dow Jones Industrials posting a 2-1/2 week high. Stocks soared, and bond yields tumbled Wednesday after a Fed-friendly US December consumer price report showed an unexpected easing of core inflation.  The slowdown in consumer prices bolstered speculation that the Fed will still be able to cut interest rates this year.  Stocks added to their gains Wednesday afternoon on an upbeat Fed Beige Book that said economic activity increased "slightly to moderately" across the US in late November and December. 

Better-than-expected quarterly earnings results from big US banks Wednesday also boosted the overall market after Citigroup, JPMorgan Chase, Blackrock, Goldman Sachs, Bank of New York Mellon, and Wells Fargo all beat consensus estimates.

US MBA mortgage applications rose +33.3% in the week ended January 10, with the purchase mortgage sub-index up +26.9% and the refinancing mortgage sub-index +43.5%.  The average 30-year fixed rate mortgage rose +10 bp to an 8-month high of 7.09% from 6.99% in the prior week.

The US Dec CPI rose to +2.9% y/y from +2.7% y/y in Nov, right on expectations.  Dec CPI ex-food and energy unexpectedly eased to +3.2% y/y +3.3% y/y in Nov, better than expectations of no change at +3.3% y/y.

The US Jan Empire manufacturing survey of general business conditions unexpectedly fell -14.7 to an 8-month low of -12.6, weaker than expectations of an increase to 3.0.

The Fed Beige Book stated that data gathered on or before January 6 showed economic activity increased "slightly to moderately" across the US in late November and December, supported by strong holiday sales.

Fed comments Wednesday were slightly hawkish and bearish for stocks.  New York Fed President Williams said, "The process of disinflation remains in train.  But we are still not at our 2% goal, and it will take more time until we can achieve that on a sustained basis."  Also, Richmond Fed President Barkin said demand in the US economy is solid, and the Fed should remain restrictive to return inflation to 2%.

The markets are looking toward Thursday’s US retail sales report to see if consumer spending is holding up (Dec retail sales expected +0.6% m/m). 

Earnings season begins this week as companies start reporting Q4 earnings results.  According to Bloomberg Intelligence, analysts estimate S&P 500 earnings to grow 7.5% in Q4, the second-highest pre-season forecast in the past three years.

The markets are discounting the chances at 3% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed up +1.04%.  China’s Shanghai Composite Index closed down -0.43%.  Japan’s Nikkei Stock 225 fell closed down -0.08%.

Interest Rates

March 10-year T-notes (ZNH25) Wednesday closed up +31 ticks.  The 10-year T-note yield fell -13.5 bp to 4.657%.  Mar T-notes rallied sharply Wednesday after the US Dec core CPI rose less than expected, a dovish factor for Fed policy.  T-notes also found support on signs of US economic weakness after the Jan Empire manufacturing survey general business conditions unexpectedly fell to an 8-month low.  In addition, T-notes rose on positive carryover from rallies in European government bonds after the UK Dec CPI rose less than expected. 

T-notes fell from their highs Wednesday on hawkish comments from New York Fed President Williams and Richmond Fed President Barkin, who said the Fed should remain restrictive to return inflation to 2%.  Also, Wednesday’s sharp rally in stocks reduced safe-haven demand for T-notes.

European government bond yields Wednesday moved sharply lower.  The 10-year German bund yield fell -9.2 bp to 2.560%.  The 10-year UK gilt yield fell -15.9 bp to 4.731%.

Eurozone Nov industrial production rose +0.2% m/m, which is right on expectations.

ECB Vice President Guindos said, “We expect to continue to further reduce the restrictiveness of monetary policy as the latest information suggests that the economy is losing momentum.”

UK Dec CPI unexpectedly eased to +2.5% y/y from +2.6% y/y in Nov, better than expectations of no change at +2.6% y/y.  Dec core CPI eased to +3.2% y/y from +3.5% y/y in Nov, better than expectations of +3.4% y/y.

Swaps are discounting the chances at 99% for a -25 bp rate cut by the ECB at its January 30 policy meeting.

US Stock Movers

Strength in megacap technology stocks was supportive for the overall market Wednesday.  Tesla (TSLA) closed up more than +8% to lead gainers in the S&P 500 and Nasdaq 100.  Also, Alphabet (GOOGL), Nvidia (NVDA), and Meta Platforms (META) closed up more than +3%.  In addition, Microsoft (MSFT), Amazon.com (AMZN), and Netflix (NFLX) closed up more than +2%.

Intuitive Surgical (ISRG) closed up more than +7% after reporting preliminary Q4 revenue of $2.41 billion, better than the consensus of $2.21 billion.

Bank of New York Mellon (BK) closed up more than +8% after reporting Q4 net interest revenue of $1.19 billion, above the consensus of $1.06 billion. 

Goldman Sachs (GS) closed up more than +6% to lead gainers in the Dow Jones Industrials after reporting Q4 net revenue of $13.87 billion, well above the consensus of $12.37 billion.

Wells Fargo (WFC) closed up more than +6% after reporting Q4 net interest income of $11.84 billion, better than the consensus of $11.70 billion.

Citigroup (C) closed up more than +6% after reporting Q4 FICC sales and trading revenue of $3.48 billion, well above the consensus of $2.94 billion.

BlackRock (BLK) closed up more than +5% after reporting Q4 adjusted EPS of $11.93, stronger than the consensus of $11.46.

Edison International (EIX) closed up more than +4% after Ladenburg Thalmann upgraded the stock to neutral from sell, citing valuation. 

Home builders and building suppliers rallied on Wednesday after T-note yields fell sharply, a supportive factor for housing demand. Builders FirstSource (BLDR) closed up more than +4%, and Mohawk Industries (MHK), PulteGroup (PHM), and Home Depot (HD) closed up more than +3%.  Also, Lennar (LEN), Lowe’s (LOW), and Toll Brothers (TOL) closed up more than +2%.  In addition, DR Horton (DHI) and KB Home (KBH) closed up more than +1%. 

Keros Therapeutics (KROS) closed down more than -16% after terminating a Phase 2 trial of its experimental therapy for patients with a lung disorder, citing side effect concerns. 

Wednesday’s sharp rally in the broader market weighed on defensive pharmaceutical stocks and their suppliers.  Viatris (VTRS) and AbbVie (ABBV) closed down more than -2%.  Also, McKesson (MCK), Cencora (COR), and Abbott Laboratories (ABT) closed down more than -1%. 

Paramount Global (PARA) closed down more than -2% after a US Congressman called for a federal review of the merger between Paramount Global and Skydance Media due to the involvement of China’s Tencent Holdings.

Hormel Foods (HRL) closed down more than -1% after CFRA downgraded the stock to sell from hold. 

Earnings Reports (1/16/2025)

Bank of America Corp (BAC), JB Hunt Transport Services Inc (JBHT), M&T Bank Corp (MTB), Morgan Stanley (MS), PNC Financial Services Group I (PNC), UnitedHealth Group Inc (UNH), US Bancorp (USB).