Stocks Finish Mostly Higher as Tame CPI Bolsters Fed Rate Cut Hopes

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.85%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.33%.

Stock indexes Wednesday settled mixed, with the S&P 500 and Nasdaq 100 posting new record highs.  Stocks rose as bond yields fell on signs that inflation is cooling.  The US May CPI report rose less than expected, bolstering expectations that the Fed will be able to cut interest rates later this year.

However, stocks fell back from their best levels, and the Dow Jones Industrials fell into negative territory after the FOMC projected only 25 bp of interest rate cuts this year, down from 75 bp of rate cuts projected in March.

US May CPI unexpectedly eased to +3.3% y/y from +3.4% y/y in Apr versus expectations of no change at +3.4% y/y.  Meanwhile, May CPI ex-food and energy eased to a 3-year low of +3.4% y/y, weaker than expectations of +3.5% y/y.

Weekly US MBA mortgage applications rose +15.6% in the week ended June 7.  The purchase mortgage sub-index rose +8.6%, and the refinancing mortgage sub-index rose +28.4%.  The average 30-year fixed rate mortgage fell -5 bp to 7.02% from 7.07% in the prior week.

As expected, the FOMC on Wednesday voted unanimously to keep the fed funds target range unchanged at 5.25%-5.50% and said it doesn't expect to cut rates "until it has gained greater confidence that inflation is moving sustainably toward 2%." 

The FOMC kept its US 2024 GDP forecast at 2.4%, unchanged from March, but raised its 2024 core PCE forecast to 2.8% from 2.6% in March. 

The FOMC forecast the fed funds rate at 5.1% at the end of 2024 versus a 4.6% forecast in March, signaling only one 25 bp rate cut this year compared to 75 bp of rate cuts projected in March. 

Fed Chair Powell said inflation has eased substantially but is still too high and the Fed is keeping its restrictive stance to lower demand versus supply.  He added that Wednesday's CPI report is "progress" but not enough to warrant loosening policy.

The markets are discounting the chances for a -25 bp rate cut at 8% for the July 30-31 FOMC meeting and 58% for the next meeting on September 17-18.

Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed up +1.40%.  China's Shanghai Composite closed up +0.31%.  Japan's Nikkei Stock 225 Index closed down -0.66%.

Interest Rates

September 10-year T-notes (ZNU24) Wednesday closed up +24.5 ticks.  The 10-year T-note yield fell -10.2 bp to 4.302%.  Sep T-note prices moved higher Wednesday, and the 10-year T-note yield fell to a 2-1/4 month low of 4.248%.  T-notes rallied after Wednesday’s US May CPI report rose less than expected, bolstering the outlook for Fed interest rate cuts.  Also, a plunge in inflation expectations boosted T-notes after the 10-year breakeven inflation rate Wednesday fell to a 4-month low of 2.229%. 

T-notes fell back from their best levels Wednesday afternoon when the FOMC cut its projection for rate cuts this year to 25 bp from 75 bp projected in March, and after Fed Char Powell said Wednesday's CPI report is "progress" but not enough to warrant loosening policy.

European government bond yields Wednesday moved lower.  The 10-year German bund yield fell -9.2 bp to 2.530%.  The 10-year UK gilt yield fell to a 3-week low of 4.119% and finished down -14.0 bp at 4.128%. 

ECB Executive Board member Schnabel said the Eurozone economy is recovering gradually, but the "last mile" of disinflation is proving bumpy.

ECB Governing Council member Patsalides said, "Further actions of the ECB on interest rates will depend on the data we will have." There is no specific direction to which the central bank is committed, and it retains its options.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 8% for the July 18 meeting and 49% for the September 12 meeting.

US Stock Movers

Oracle (ORCL) closed up more than +13% at a record high to lead gainers in the S&P 500 after announcing a cloud infrastructure partnership with Google Cloud, as well as one with Microsoft and OpenAI. 

Homebuilding stocks and suppliers are climbing today after the 10-year T-note yield tumbled to a 2-1/4 month low.  As a result, Builders FirstSource (BLDR) closed up more than +5%, and PulteGroup (PHM) closed up more than +3%.  Also, DR Horton (DHI), Home Depot (HD), and Toll Brothers (TOL) closed up more than +2%.  In addition, Lennar (LEN) closed up more than +1%.

Apple (AAPL) closed up more than +2% at a record high to lead gainers in the Dow Jones Industrials, adding to Tuesday's +7% surge, after introducing its new AI features, which includes updates to its operating systems and a new AI platform called Apple Intelligence.  Suppliers to Apple also rallied Wednesday as Skyworks Solutions (SWKS) closed up more than +6% and Qorvo (QRVO) closed up more than +4%. 

Autodesk (ADSK) closed up more than +5% after forecasting full-year adjusted EPS of $7.99-$8.21, the midpoint above the consensus of $8.07. 

Casey’s General Stores (CASY) closed up more than +16% after reporting Q4 EPS of $2.34, well above the consensus of $1.72. 

Ciena Corp (CIEN) closed up more than +5% after Morgan Stanley upgraded the stock to overweight from equal weight with a price target of $55.

Klaviyo (KVYO) closed up more than +3% after Barclays upgraded the stock to overweight from equal weight with a price target of $29. 

Defensive consumer stocks and food companies were under pressure Wednesday due to strength in the broader market.  As a result, General Mills (GIS), J M Smucker (SJM), Kroger (KR), and Kraft Heinz (KHC) closed down more than -2%.  Also, Kellanova (K), Procter & Gamble (PG), Church & Dwight (CHD), and Tyson Foods (TSN) closed down more than -1%.

Energy stocks and energy service providers moved lower, with Marathon Petroleum (MPC) and Valero Energy (VLO) closing down more than -3%.  Also, Chevron (CVX), Phillips 66 (PSX), Exxon Mobil (XOM), ConocoPhillips (COP), and Marathon Oil (MRO) closed down more than -1%. 

Accenture Plc (ACN) closed down more than -3% after Stifel cut its price target on the stock to $340 from $395. 

Salesforce (CRM) closed down more than -2% on signs of insider selling after an SEC filing showed CEO Benioff sold $3.63 million of shares on Monday. 

Earnings Reports (6/13/2024)

Adobe Inc (ADBE), AMMO Inc (POWW), Inhibrx Biosciences Inc (INBX), Iteris Inc (ITI), John Wiley & Sons Inc (WLY), Korn Ferry (KFY), Lovesac Co/The (LOVE), RH (RH), Seneca Foods Corp (SENEB), Signet Jewelers Ltd (SIG).

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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.