What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday rose by +0.37%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.01%, and the Nasdaq 100 Index ($IUXX) (QQQ) rose by +1.18%.

U.S. stocks saw support Thursday from a rally in key mega-cap tech stocks.  Stocks were able to overcome hawkish commentary by Fed Chair Powell and +50 bp rate hikes in the UK and Norway.  In addition, the 10-year T-note yield rose by +7.4 bp.

The Bank of England on Thursday surprised the markets with a +50 bp rate hike to 5.00% to address the rise in the UK May CPI to +8.7% y/y.  The markets had been fully expecting a +25 bp BOE rate hike, but only a modest chance of a +50 bp rate hike.  In addition, Norway’s central bank raised its benchmark rate by +50 bp to 3.75% and said the rate will “most likely be raised further in August.”  The Swiss central bank raised its key rate by +25 bp to 1.75%.

The second day of Fed Chair Powell’s semi-annual testimony before Congress was generally uneventful.  Mr. Powell reiterated that the Fed believes higher interest rates will be needed to curb inflation.  However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed for the next meeting.

The FOMC, at its meeting last week, left its federal funds rate target range unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes.  However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%.  The markets are discounting the odds at 74% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, up from 69% odds late Wednesday.

Consistent with the Fed’s main theme, Fed Governor Michelle Bowman Thursday said, “I believe that additional policy-rate increases will be necessary to bring inflation down to our target over time.” 

Thursday’s U.S. initial unemployment claims report was slightly weaker than expectations, with the initial claims series remaining unchanged from last week’s revised 1-3/4 year high of 264,000.  That showed a slightly weaker labor market than expectations for a small decline to 259,000.  Meanwhile, continuing claims fell -13,000 to 1.759 million, which showed a stronger labor market than expectations for an increase to 1.785 million.

The May U.S. existing home sales report of +0.2% to 4.30 million units was stronger than expectations for a decline to 4.25 million units.  Existing home sales remain generally weak due to a lack of homes available for sale.  Redfin on Wednesday reported that the number of homes for sale in the U.S. fell to a record low in May.

The May U.S. leading economic indicator report of -0.7% m/m was slightly stronger than expectations of -0.8% m/m but was weaker than April’s decline of -0.6%.

The U.S. Q1 current account deficit of -$219.3 billion was slightly wider than expectations of -$218.0 billion and widened from the revised Q4 level of -$216.2 billion.  The report was slightly bearish for the dollar.

Thursday’s June French confidence report was a bit stronger than expected and was supportive of the euro.  The French June business confidence index was unchanged at 100, in line with market expectations and unchanged from May.  The French June manufacturing confidence index rose +2 points to 101 from 99 in May and was slightly stronger than market expectations of 98.  The French production outlook indicator rose by +1 point to -9 from -10 in May, which was stronger than expectations for a decline to -11.

Overseas stock markets are lower.  The Euro Stoxx 50 closed -0.42% for the fourth consecutive daily loss this week.  Japan’s Nikkei Stock Index today closed down -0.92%.  China’s stock markets are closed on Thursday and Friday for public holidays.

Today’s stock movers…

Key mega-cap tech stocks moved higher Thursday, supporting the overall market and offsetting some of the gloom from Fed Chair Powell’s hawkish testimony.  Amazon (AMZN) rose +4.26%, Alphabet (GOOG) rose +2.16%, Microsoft (MSFT) rose +1.84%, Apple (AAPL) rose +1.65%, and Meta (META) rose +1.15%. 

Also, some semiconductor stocks saw strength after Wednesday’s sell-off, with Lam Research (LRCX) rising +2.32%, NXP Semiconductors (NXPI) rising +0.71%, and Micron (MU) rising +0.68%.

Tesla (TSLA) recovered from pre-market losses of -3% and closed the day up +1.98%, recovering some of Wednesday’s loss of -5.95%.  Tesla was lower in pre-market trading after Morgan Stanley downgraded the stock to equal-weight from overweight, saying that the stock’s rally on AI optimism has “brought the stock to fair valuation.”   Today’s downgrade from Morgan Stanley followed Barclay’s downgrade on Wednesday to equal-weight from overweight on the analyst’s opinion that Tesla has moved “too far, too fast.”

Boeing (BA) fell -3.05% after its biggest supplier, Spirit AeroSystems (SPR), was forced to suspend its production due to a strike, which will disrupt the production of Boeing’s 737 Max jet.  Spirit AeroSystems (SPR) fell -9.43% on the unexpected strike vote.

Alcoa (AA) fell -4.30% after a downgrade by Morgan Stanley to underweight from equal-weight.

Kellogg (K) rose +0.48% on an upgrade by Bernstein to market-perform from under-perform based on the analyst’s opinion that Kellogg’s valuation is cheap.

DigitalOcean (DOCN) fell -5.65% on a downgrade by Piper Sandler to underweight from neutral.

Root (ROOT) closed sharply by +29%, adding to Wednesday’s +59% rally, which was driven by Wednesday’s report by the Wall Street Journal that Embedded Insurance plans to launch an acquisition offer for the car-insurance startup of $19.34 a share.

Across the markets…

September 10-year T-notes (ZNU23) Thursday closed down -17.5 ticks, and the 10-year T-note yield rose by +7.4 bp to 3.793%.  T-notes prices fell on Fed Chair Powell’s continued drumbeat on the need for higher rates.  Fed Governor Bowman Thursday also called for higher rates.

T-note prices were also undercut by Thursday’s surprise +50 bp rate hike by the Bank of England and the +50 bp rate hike by Norway’s central bank.  Thursday’s U.S. economic reports were slightly bearish for T-note prices overall.  There was also supply overhang from the Treasury’s sale of $21 billion of 5-year TIPS.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.