S&P 500 and Nasdaq 100 Post Record Highs on Fed Easing Expectations

The S&P 500 Index ($SPX) (SPY) today is up +0.52%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.29%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.60%.  September E-mini S&P futures (ESU25) are up +0.51%, and September E-mini Nasdaq futures (NQU25) are up +0.59%. 

Stock indexes are climbing today, with the S&P 500 and Nasdaq 100 posting new all-time highs.  Falling bond yields are supportive for stocks ahead of the Tue/Wed FOMC meeting, when the Fed is expected to cut interest rates by 25 bp.  The 10-year T-note yield is down -3 bp to 4.03%.  Also, Tesla is up more than +5% to lead megacap technology stocks higher after Elon Musk bought nearly $1 billion in stock. 

Gains in stocks are limited due to some weakness in chipmakers, with Nvidia down more than -1% after China ruled that the company violated anti-monopoly laws after acquiring Mellanox Technologies in 2020.  Also, Texas Instruments is down more than -2% after China said it was launching an anti-dumping investigation targeting a type of semiconductor made by the company. 

Today's US economic news was bearish for stocks after the Sep Empire manufacturing survey general business conditions fell -20.6 to a three-month low of -8.7, weaker than expectations of 5.0.

Most major US benchmark indexes, including the S&P 500, the Dow Jones Industrials, and the Nasdaq 100, continue to post record highs, driven by expectations of Fed interest rate cuts.  Weak labor market news and relatively contained inflation reports bolstered expectations for at least a 25 bp rate cut by the Fed at the Tue/Wed FOMC meeting and a total of 75 bp of rate cuts by year's end. 

Weakness in Chinese economic news is negative for global growth prospects.  China's Aug industrial production rose +5.2% y/y, weaker than expectations of +5.6% y/y.  Also, China's Aug retail sales rose +3.4% y/y, weaker than expectations of +3.8% y/y. In addition, the China Aug surveyed jobless rate unexpectedly rose +0.1 to a 6-month high of 5.3%, showing a weaker labor market than expectations of no change at 5.2%.  Finally, China's Aug new home prices fell -0.3% m/m, the twenty-seventh consecutive month new home prices have declined.

Market focus this week will be on any new trade or tariff news.  On Tuesday, Aug retail sales are expected to climb +0.3% m/m, and retail sales ex-autos are expected to increase +0.4% m/m.  Also, Aug manufacturing production is expected to fall -0.3% m/m. Finally, on Tuesday, the Sep NAHB housing market index is expected to rise by +1 to 33.  On Wednesday, the FOMC is expected to cut the federal funds rate target by -25 bp to 4.00%-4.25% from 4.25%-4.50% and Fed Chair Powell will deliver post-FOMC meeting comments.  On Thursday, weekly initial unemployment claims are expected to fall -23,000 to 240,000.

The markets are pricing in a 100% chance of a -25 bp rate cut and a 5% chance of a -50 bp rate cut at the conclusion of the Tue/Wed FOMC meeting.  After the fully expected -25 bp rate cut at Wednesday's meeting, the markets are discounting an 86% chance of a second -25 bp rate cut at the Oct 28-29 meeting.  The markets are pricing in an overall -70 bp rate cut in the federal funds rate by year-end to 3.63% from the current 4.33% rate.

Overseas stock markets today are mixed.  The Euro Stoxx 50 climbed to a 3-week high and is up +0.96%.  China's Shanghai Composite closed down -0.26%.  Japan's Nikkei Stock 225 was closed for the Respect-for-the-aged Day holiday.

Interest Rates

December 10-year T-notes (ZNZ5) today are up +5 ticks.  The 10-year T-note yield is down by -3.3 bp to 4.032%.  Dec T-notes recovered from a 1-week low today and turned higher after the US Sep Empire manufacturing survey general business conditions fell more than expected to a three-month low, a dovish factor for Fed policy.  T-notes are also supported by expectations that the Fed will cut interest rates by at least 25 bp at the conclusion of the Tue/Wed FOMC meeting.  Strength in stocks today is limiting gains in T-note prices.

Concerns about Fed independence are negatively impacting T-note prices due to President Trump's attempt to fire Fed Governor Cook and Stephen Miran's intention to hold a Fed Governor position while remaining technically in his White House role on the Council of Economic Advisors.

European government bond yields today are moving lower.  The 10-year German bund yield is down -2.1 bp to 2.694%. The 10-year UK gilt yield is down -3.8 bp to 4.633%.

The German Aug wholesale price index fell -0.6% m/m, the biggest decline in a year.

ECB Governing Council member Kocher said the ECB interest rate cut cycle is at "or very close to" the end, and policy can remain on hold for the time being, provided there are no major shocks in data. 

Fitch Ratings late last Friday downgraded France's credit assessment to A+ from AA-, citing the country's rising public indebtedness and political instability.

Swaps are discounting a 3% chance for a -25 bp rate cut by the ECB at the October 30 policy meeting.

US Stock Movers

Strength in megacap technology stocks is a supportive factor for the overall market.  Tesla (TSLA) is up more than +5% to lead gainers in the Nasdaq 100 after an SEC filing showed Elon Musk purchased about $1 billion of the stock last Friday.  Also, Alphabet (GOOGL) is up more than +3% after Citigroup raised its price target on the stock to $280 from $225. In addition, Apple (AAPL) and Amazon.com (AMZN) are up more than +1%, Microsoft (MSFT) is up +0.44%, and Meta Platforms (META) is up +0.32%. 

Seagate Technology Holdings Plc (STX) is up more than +8% to lead gainers in the S&P 500 after Bank of America raised its price target on the stock to $215 from $170.

Western Digital (WDC) is up more than +5% after Bank of America raised its price target on the stock to $123 from $100.

TKO Group Holdings (TKO) is up more than +4% after announcing its board announced it will buy back $1 billion of Class A common shares.

Oracle (ORCL) is up more than +2% after President Trump hinted at a potential TikTok deal with China.

Eaton Corp Plc (ETN) is up more than +2% after Melius Research LLC upgraded the stock to buy from hold with a price target of $495. 

Smurfit WestRock Plc (SW) is up more than +1% after UBS initiated coverage on the stock with a buy recommendation and a price target of $60. 

Corteva (CTVA) is down more than -3% to lead losers in the S&P 500 after KeyBanc Capital Markets said the news of a potential breakup of the company's seed and pesticide business is negative and Bloomberg Intelligence said it undermines "product and financial logic."

Texas Instruments (TXN) is down more than -2% after China said it was launching an anti-dumping investigation targeting a type of semiconductor made by the company. 

AstraZeneca Plc (AZN) is down more than -2% to lead losers in the Nasdaq 100 after Handelsbanken downgraded the stock to hold from buy.

Nvidia (NVDA) is down more than -1% to lead losers in the Dow Jones Industrials after China ruled that the company violated anti-monopoly laws after acquiring Mellanox Technologies in 2020.  

Healthcare Realty Trust (HR) is down nearly -1% after Raymond James downgraded the stock to underperform from market perform. 

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