Stocks Close Mildly Higher as 10-year T-note Yield Edges Lower

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +0.24%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.16%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.05%.  March E-mini S&P futures (ESH25) rose +0.13%, and March E-mini Nasdaq futures (NQH25) fell -0.03%. 

Stocks recovered from earlier losses as the 10-year T-note yield turned lower on the afternoon release of the FOMC minutes.  The FOMC minutes indicated a rate-cut pause, but members discussed slowing or halting the 3-year process of reducing the Fed’s balance sheet (quantitative tightening) until a debt ceiling hike is resolved.  The debt ceiling could cause problems in the money market that would be worsened if the Fed keeps reducing its balance sheet. 

The debt ceiling has already been hit and the Treasury has already used more than 70% of the extraordinary measures available to avoid breaching the limit.  Goldman Sachs estimates that the so-called “X-date,” or drop dead date, for a debt ceiling hike is in late Q2 or Q3 2025.  If there is no debt ceiling hike by the X-date, then the Treasury will begin defaulting on some of its obligations since it cannot borrow more money and will not have enough cash to meet all its obligations.  That would raise the possibility of a sovereign debt default by the US on Treasury securities, a calamity with potentially massive implications for the global financial system.

The minutes from the Jan 28-29 FOMC meeting, released Wednesday afternoon, indicated that the FOMC has paused its rate-cut regime until inflation improves.  The minutes said, “Participants indicated that, provided that the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.”  The minutes also said, “many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.”  The FOMC at the Jan 28-29 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.  The market is currently discounting a total rate cut of -37 bp by the end of 2025.

Stocks were undercut early Wednesday after President Trump said Tuesday night that he will likely impose tariffs of around 25% on US auto, semiconductor, and pharmaceutical imports by April 2.  Mr. Trump said the sector tariffs would be delayed until April 2 to give companies time to move production into the US so they would not be affected by the new import tariffs.  These new tariffs would add to the previously announced 25% tariffs on steel and aluminum that take effect in March, and “reciprocal tariffs” on a country-by-country basis that will be calculated and take effect by April 1.  Mr. Trump has also announced a 10% import tariff on US imports from China, and 25% tariffs on Canada and Mexico although those have been deferred until at least March 4.

US Jan housing starts fell -9.8% to 1.366 million, weaker than expectations for a decline to 1.390 million.  That followed a revised +16.1 surge in December to 1.515 million units. Meanwhile, Jan building permits rose +0.1% to 1.483 million, stronger than expectations of a decline to 1.460 million.

In hawkish comments released Wednesday, ECB Executive Board Member Isabel Schnabel suggested the ECB is nearing the point of pausing or halting its rate cuts.  She said ECB officials at their next meeting, where the ECB is expected to cut rates by another -25 bp, should debate whether to drop the language from their post-meeting statement that implies leaning towards another rate cut.

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 on Wednesday closed mixed.  The Euro Stoxx 50 closed down -1.31% on President Trump’s new tariff threat, which could hit some European companies hard.  China’s Shanghai Composite Index closed up +0.81%. Japan’s Nikkei Stock 225 closed -0.27%.

Interest Rates

March 10-year T-notes (ZNH25) Wednesday rose by +4 ticks.  The 10-year T-note yield fell by -1.8 bp to 4.533%.  March T-note prices were undercut early in the session by new tariff threats, which are perceived as inflationary.  However, T-note prices recovered later in the day after the FOMC minutes indicated that the FOMC might slow or halt its quantitative tightening process until the debt ceiling is raised.  T-note prices also found support from the weaker-than-expected US housing starts report.

European government bond yields moved higher on Wednesday.  The 10-year German bund yield rose +6.3 bp to 2.557%.  The 10-year UK gilt yield rose +5.3 bp to 4.611%.

Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at the March 6 policy meeting.

US Stock Movers

Analog Devices (ADI) rallied +9.74% after an above-consensus earnings report, providing some support for the overall chip sector.  Microchip Technology (MCHP) showed an even larger gain of +9.90%.  Other chip stocks showed sharp gains of between +5% and +7%, including NXP Semiconductors (NXPI), ON Semiconductors (ON), and Texas Instruments (TXN).

Intel (INTC) fell -6.10%, giving back part of Tuesday’s +16% surge that was driven by the report that TSMC and Broadcom are considering deals involving the breakup of Intel. 

Meta Platforms (META) on Wednesday fell -1.76%, adding to Tuesday’s drop of -2.56%.  Other Magnificent Seven stocks that closed lower included Nvidia (NVDA) and Amazon (AMZN).  On the plus side, Tesla (TSLA) rallied by +1.82%, and Microsoft (MSFT) rallied by +1.25%.  Apple (AAPL) and Alphabet (GOOG) also closed higher.

Palantir Technologies (PLTR) fell -10% on concern about reduced US defense spending.

Cadence Design Systems (CDNS) fell by -8.78% after delivering disappointing management guidance.

Arista Networks (ANET) fell more than -6% after disappointing earnings results.

Toll Brothers (TOL) fell more than -5% after reporting revenue and unit home sales that were below the market consensus.  Other homebuilders also fell on the negative Toll Brothers results and on general concern about sticky mortgage rates.  DR Horton (DHI) and KB Home (KBH) both closed down more than -2%.  Lennar (LEN) closed down more than -1%.

Etsy (ETSY) fell more than -10% after reporting a sales miss.

Earnings Reports (2/20/2025)

EPAM Systems Inc (EPAM), Builders FirstSource Inc (BLDR), Quanta Services Inc (PWR), LKQ Corp (LKQ), Hasbro Inc (HAS), Targa Resources Corp (TRGP), CenterPoint Energy Inc (CNP), Baxter International Inc (BAX), Pool Corp (POOL), Walmart Inc (WMT), Southern Co/The (SO), Alliant Energy Corp (LNT), Booking Holdings Inc (BKNG), Newmont Corp (NEM), Insulet Corp (PODD), Consolidated Edison Inc (ED), VICI Properties Inc (VICI), Akamai Technologies Inc (AKAM), Live Nation Entertainment Inc (LYV), Copart Inc (CPRT).