Stocks Edge Lower as T-note Yields Rise on Hawkish Fed Comments

The S&P 500 Index ($SPX) (SPY) Tuesday fell by -0.04%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.17%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -0.13%.  March E-mini S&P futures (ESH25) rose +0.05%, and March E-mini Nasdaq futures (NQH25) fell by -0.03%. 

Stocks saw support Tuesday 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 were undercut by a +7 bp rise in the 10-year T-note yield and by hawkish Fed comments.  Fed Governor Waller said on Monday 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.”

Meanwhile, San Francisco Fed President Mary Daly said on Tuesday that monetary policy needs to remain restrictive until there is more progress on inflation.  She said that inflation will continue to improve but will take longer than anyone wants.  She also said the Fed should take its time to assess any monetary policy changes until the net impact of the Trump administration’s policies becomes clearer.

On the Fed front, the markets are waiting for Wednesday’s release of the January 28-29 FOMC meeting minutes.  The FOMC at that meeting left its federal funds target range unchanged at 4.25-4.50%, standing pat after cutting the funds rate by a total of 100 bp in second half of 2024.

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.

Tuesday’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 continued high mortgage rates and expectations for higher construction costs due to inflation and tariffs.

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 Tuesday were mixed.  The Euro Stoxx 50 Tuesday closed up +0.25%, 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) Tuesday fell by -16.5 ticks.  The 10-year T-note yield rose by +7.4 bp to 4.550%.  March T-note prices fell on hawkish Fed comments, which dampened hopes for a near-term FOMC rate cut.  T-note prices were also 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 rose by +0.5 bp to 2.493%, adding to Monday’s rise of +5.8 bp.  The 10-year UK gilt yield rose by +3.1 bp to 4.558%, 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 Tuesday provided support for the broader market.  Intel (INTC) soared by more than +16% and topped 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) rose by more than +7%, GlobalFoundries (GFS) rose by more than +6%, Lam Research (LRCX) rose by more than +4%, and Microchip Technology (MCHP) rose by more than +3%.

Holding back tech stocks on Tuesday was the -3% decline in Meta Platforms (META) and -1% drop in Amazon (AMZN).  Alphabet (GOOG), Tesla (TSLA), and Apple (AAPL) all closed lower.  Of the Magnificent Seven stocks, only Nvidia (NVDA) and Microsoft (MSFT) closed higher.

Chinese stocks listed in the US saw 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.  PDD Holdings (PDD) was on the Nasdaq 100 leaderboard with a +3.5% rally.  Alibaba (BABA) closed up +1.74%. 

Delta Airlines (DAL) fell -1.61% after a Delta jet flipped over on the runway in Toronto.

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

Southwest Airlines (LUV) fell -1% despite saying it would cut 1750 management jobs to reduce expenses.

Conagra Brands (CAG) fell more than -5% after management cut its fiscal 2025 guidance.

Earnings Reports (2/19/2025)

Garmin Ltd (GRMN), Charles River Laboratories Int (CRL), Trimble Inc (TRMB), Analog Devices Inc (ADI), American Water Works Co Inc (AWK), CF Industries Holdings Inc (CF), Host Hotels & Resorts Inc (HST), ANSYS Inc (ANSS), Nordson Corp (NDSN), Texas Pacific Land Corp (TPL).