Stocks Undercut by Hawkish Fed Despite 'Exploratory' U.S.-Russia Peace Talks

The S&P 500 Index ($SPX) (SPY) today is down -0.01%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.23%.  March E-mini S&P futures (ESH25) are up +0.12%, and March E-mini Nasdaq futures (NQH25) are down -0.06%. 

Stocks saw support today from hopes for an end to the Russian-Ukraine war after top US and Russian officials met in Saudi Arabia to discuss the war and normalizing relations between the US and Russia.  Meanwhile, Ukrainian President Zelenskiy said Ukraine won’t recognize “any agreements about us without us.”  US officials said the peace talks were “exploratory.”

However, stocks are being undercut by a +3.9 bp rise in the 10-year T-note yield and by hawkish Fed comments.  Fed Governor Waller on Monday said that the recent economic data supports keeping interest rates on hold until more progress is seen on inflation.   On the dovish side, he said that the CPI may be subject to seasonal adjustment problems and that if inflation behaves as it did in 2024, the Fed can get back to cutting “at some point this year.”  On the Fed front, the markets are awaiting comments by Fed officials Mary Daly and Michael Barr later today and the January 28-29 FOMC meeting minutes will be released on Wednesday.

Bullish sentiment is very strong and fund managers’ cash levels are at the lowest level since 2010, which might suggest a toppy market after the 60% rally in global stocks seen since late 2022.  A survey by Bank of America found that global stocks are the most popular asset class with Investors and that investors are willing to take the most risk in 15 years. The survey showed that 89% of respondents said that US equities are overvalued.

Today’s Feb Empire manufacturing index rose to 5.7 from -12.6 in Jan, substantially stronger than market expectations for a rise to zero.

The NAHB US homebuilder confidence index fell by -5 points to a 5-month low of 42.  Negative factors for homebuilders include expectations for higher construction costs due to inflation and tariffs and continued high mortgage rates.

The markets are discounting the chances at 2% for a -25 bp rate cut at the next FOMC meeting on March 18-19.

Overseas stock markets today are mixed.  The Euro Stoxx 50 today is up +0.33%, adding to Monday’s gain of +0.48%.  China’s Shanghai Composite Index on Tuesday closed down -0.93% after Monday’s rise of +0.27%.  Japan’s Nikkei Stock 225 on Tuesday closed up +0.25%, adding to Monday’s gain of +0.06%.

Interest Rates

March 10-year T-notes (ZNH25) today are down -9 ticks.  The 10-year T-note yield is up +3.9 bp at 4.515%.  March T-note prices are lower on hawkish Fed comments, which have dampened hopes for a near-term FOMC rate cut.  T-note prices are also being pressured by higher European bond yields, driven higher in part by ideas that European defense spending will need to rise to counter Russia.

European government bond yields are higher.  The 10-year German bund yield is up +0.4 bp at 2.493%, adding to Monday’s rise of +5.8 bp.  The 10-year UK gilt yield is up +2.5 bp at 4.552%, adding to Monday’s rise of +2.7 bp. 

Swaps are discounting the chances at 98% for a -25 bp rate cut by the ECB at the March 6 policy meeting.

US Stock Movers

Chip stocks are providing support for the broader market.  Intel (INTC) is up more than +9% and tops the Nasdaq 100 leaderboard on a report by the Wall Street Journal that TSMC and Broadcom are considering deals involving the breakup of Intel.  Bloomberg reported last week that the Trump administration is suggesting that TSMC take a controlling stake in Intel’s factories.  Micron Technology (MU) is up more than +4%, while NXP Semiconductors (NXPI) is up more than +3%.  Lam Research (LRCX), GlobalFoundries (GFS), and Microchip Technology (MCHP) are up more than +2%.

The Magnificent Seven are undercutting tech stocks.  Meta Platforms (META) is down more than -2%, and Amazon (AMZN) is down more than -1%.  Alphabet (GOOG) and Apple (AAPL) are trading mildly lower.  By contrast, Nvidia (NVDA), Tesla (TSLA), and Microsoft (MSFT) are trading higher.

Chinese stocks listed in the US are seeing support after Chinese President Xi Jinping met publicly with Chinese tech company leaders, including Alibaba co-founder Jack Ma, suggesting that Chinese officials have ended their regulatory crackdown on the tech sector and are now looking to support the sector as China faces a revived trade war with the US.  Alibaba (BABA) is up nearly +1%, and PDD Holdings (PDD) is up more than +1%.

Delta Airlines (DAL) is down -0.4% after a Delta jet flipped over on the runway in Toronto.

Medtronic (MDT) is down more than -7% after reporting a revenue miss for fiscal Q3. 

Southwest Airlines (LUV) is trading slightly lower despite saying it would cut 1750 management jobs to reduce expenses.

Conagra Brands (CAG) is down than -6% after management cut its fiscal 2025 guidance.

Earnings Reports (2/18/2025)

Expeditors International (EXPD), Vulcan Materials Co (VMC), Genuine Parts Co (GPC), Entergy Corp (ETR), Allegion plc (ALLE), Medtronic PLC (MDT), EQT Corp (EQT), Celanese Corp (CE), Devon Energy Corp (DVN), Occidental Petroleum Corp (OXY), Cadence Design Systems Inc (CDNS), International Flavors & Fragra (IFF), Arista Networks Inc (ANET), CoStar Group Inc (CSGP).