Stocks Rally on Speculation the Pace of Fed Rate Hikes May Slow

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed up +1.21%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.92%. 

U.S. stock indexes on Thursday recovered from early losses and rallied moderately, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 posting 7-week highs.  Stock indexes Thursday extended Wednesday’s sharp gains on carry-over support from Wednesday afternoon’s comments from the Fed Chair that bolstered speculation the Fed may ease the pace of its interest rate increases. The 10-year T-note yield dropped to a 3-1/2 month low of 2.647% Thursday, which was a bullish factor for stocks. 

Also boosting sentiment in the overall market Thursday was a rally in renewable energy stocks after Senator Manchin and Senate Majority Leader Schumer, late Wednesday, struck a deal on a tax and energy bill that could provide $369 billion for "energy and climate change."   

Stock indexes Thursday morning initially moved lower on concern that the U.S. economy may have entered into recession after Thursday’s data showed that U.S. Q2 GDP unexpectedly contracted for a second quarter.  Stock indexes were already under pressure in overnight trade on weaker-than-expected quarterly earnings results from Qualcomm and Meta Platforms that led technology companies lower.  Qualcomm fell after forecasting a slowdown in revenue next quarter, and Meta Platforms dropped after reporting its first-ever quarterly sales decline. 

U.S Q2 GDP fell -0.9% (q/q annualized), weaker than expectations of a +0.4% increase.  The GDP decline in Q2 was the second consecutive quarter of contraction, which some consider to be a definition of a recession. Recessions are officially designated, well after the fact, by the National Bureau of Economic Research (NBER). Q2 personal consumption rose +1.0%, weaker than expectations of +1.2%.

U.S. Q2 core PCE slowed to +4.4% q/q from +5.2% q/q in Q1, right on expectations.  The lower inflation figure was positive for the stock and bond markets.

U.S. weekly initial unemployment claims fell -5,000 to 256,000, showing a weaker labor market than expectations of 250,000.

Today’s stock movers…

Renewable energy stocks surged Thursday after Senator Manchin and Senate Majority Leader Schumer late Wednesday struck a deal on a tax and energy bill that could provide $369 billion for "energy and climate change."   Constellation Energy (CEG) closed up more than +16% to lead gainers in the S&P 500 and Nasdaq 100.  SunPower (SPWR) closed up by more than +17%, and First Solar (FSLR) closed up by more than +14%.  In addition, Quanta Services (PWR) closed up more than +8%, Enphase Energy (ENPH) closed up more than +7%, and SolarEdge Technologies (SEDG) closed up more than +4%. 

The two largest U.S.-listed clean energy ETF closed sharply higher.  The iShares Global Clean Energy (ICLN) closed up +7.02% and the Invesco Solar ETF (TAN) closed up +7.51%.

Honeywell International (HON) closed up more than +3% Thursday after reporting Q2 sales of $8.95 billion, better than the consensus of $8.66 billion.

Etsy (ETSY) closed up more than +9% Thursday after reporting Q2 revenue of $585.1 million, above the consensus of $558.0 million.

Old Dominion Freight Line (ODFL) closed up more than +7% Thursday after reporting Q2 EPS of $3.30, stronger than the consensus of $3.15.

Ford Motor (F) closed up more than +6% Thursday after reporting Q2 adjusted EPS of +68 cents, above the consensus of +45 cents.

Stanley Black & Decker (SWK) closed down more than -16% Thursday to lead losers in the S&P 500 after reporting Q2 net sales of $4.40 billion, weaker than the consensus of $4.77 billion. 

Cincinnati Financial (CINF) closed down more than -13% after reporting Q2 adjusted operating EPS of 65 cents, well below the consensus of $1.05. 

Comcast (CMCSA) closed down more than -9% Thursday to lead losers in the Nasdaq 100 after reporting no new net customers in Q2, weaker than expectations of an +83,000 increase, and the first quarter that no new customers were added since 2005.

Meta Platforms (META) closed down more than -5% Thursday after reporting Q2 revenue of $28.82 billion, weaker than the consensus of $28.93 billion, and forecast Q3 revenue of $26.0-$28.5 billion, below the consensus of $30.32 billion. 

Qualcomm (QCOM) closed down more than -4% Thursday after forecasting Q4 revenue of $11.0 billion to $11.8 billion, below the consensus of $11.92 billion. 

Southwest Airlines (LUV) closed down more than -6% Thursday after saying it expects inflationary pressures and headwinds from operating at suboptimal levels will continue in the second half of 2022.

Across the markets…

Sep 10-year T-notes (ZNU22) on Thursday closed up +18 ticks, and the 10-year T-note yield fell -11.1 bp to 2.674%.  Sep T-notes Thursday rallied to a 3-1/2 month high, and the 10-year T-note yield dropped to a 3-1/2 month low of 2.647%.  Recession concerns fueled a rally in T-notes Thursday after U.S. Q2 GDP unexpectedly contracted for a second quarter.  Also, a rally in 10-year German bund prices to a 3-month high Thursday provided carry-over support to T-note prices.

T-note prices maintained moderate gains Thursday afternoon on strong demand for the Treasury’s $38 billion auction of 7-year T-notes.  The auction had a bid-to-cover ratio of 2.60, well above the 10-auction average of 2.39.

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