Stocks Rally as Bond Yields Fall Before FOMC Meeting

The S&P 500 Index ($SPX) (SPY) on Monday closed up +0.47%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.84%.  September E-mini S&P futures (ESU25) rose +0.43%, and September E-mini Nasdaq futures (NQU25) rose +0.80%. 

Stock indexes rallied on Monday, 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 fell -2 bp to 4.04%.  Also, megacap technology stocks and chip makers moved higher on Monday to provide support to the overall market. 

Trade concerns with China weighed on some chip makers on Monday. Texas Instruments closed down more than -2% after China said it was launching an anti-dumping investigation targeting a type of semiconductor made by the company.  Also, China ruled that Nvidia violated anti-monopoly laws after acquiring Mellanox Technologies in 2020.

Monday's US economic news was bearish for stocks after the Sep Empire manufacturing survey of 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 70 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 Aug 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 80% chance of a second -25 bp rate cut at the Oct 28-29 meeting.  The markets are pricing in an overall -68 bp rate cut in the federal funds rate by year-end to 3.65% from the current 4.33% rate.

Overseas stock markets on Monday settled mixed.  The Euro Stoxx 50 climbed to a 3-week high and closed up +0.92%.  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) on Monday closed up +6 ticks.  The 10-year T-note yield fell by -2.8 bp to 4.036%.  Dec T-notes recovered from a 1-week low on Monday 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 on Monday limited 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 moved lower on Monday.  The 10-year German bund yield fell -2.4 bp to 2.691%. The 10-year UK gilt yield fell -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. 

ECB Executive Board member Schnabel said the ECB should maintain its current level of interest rates, as "upside risks to inflation dominate, with tariffs, services inflation, food inflation, and fiscal policy as potential drivers."

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 on Monday was a supportive factor for the overall market.  Alphabet (GOOGL) rose more than +4% after Citigroup raised its price target on the stock to $280 from $225. Also, Tesla (TSLA) closed up more than +3% after an SEC filing showed Elon Musk purchased about $1 billion of the stock last Friday.  In addition, Amazon.com (AMZN) closed up more than +1% to lead gainers in the Dow Jones Industrials.  Finally, Meta Platforms (META), Microsoft (MSFT), and Apple (AAPL) closed up more than +1%.

Chip makers rallied on Monday.  ASML Holding NV (ASML) closed up more than +6% to lead gainers in the Nasdaq 100.  Also, Intel (INTC) closed up more than +3% and KLA Corp (KLAC) closed up more than +2%.  In addition, Applied Materials (AMAT), Lam Research (LRCX), GlobalFoundries (GFS), ARM Holdings Plc (ARM), Advanced Micro Devices (AMD), and Broadcom (AVGO) closed up more than +1%.

Seagate Technology Holdings Plc (STX) closed up more than +7% 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) closed up more than +4% after Bank of America raised its price target on the stock to $123 from $100.

Oracle (ORCL) closed up more than +3% after President Trump hinted at a potential TikTok deal with China.

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

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

Corteva (CTVA) closed down more than -5% 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) closed down more than -2% after China said it was launching an anti-dumping investigation targeting a type of semiconductor made by the company. 

Builders FirstSource (BLDR) closed down more than -2% after Wedbush downgraded the stock to neutral from outperform. 

AstraZeneca Plc (AZN) closed down more than -1% after Handelsbanken downgraded the stock to hold from buy.

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

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