Stocks Finish Lower as Sticky Price Pressures Dampen Rate Cut Hopes

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed down -0.48%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.37%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.90%.

Stocks on Friday posted moderate losses.  Stocks were under pressure after Friday’s stronger-than-expected Jan producer price report added to evidence that inflation remains persistent, bolstering speculation the Fed will be in no hurry to cut interest rates. Also, Friday’s U.S. housing news was weaker than expected after Jan housing starts and Jan building permits unexpectedly declined.  Stocks recovered from their worst levels after the University of Michigan U.S. Feb consumer sentiment index rose to a 2-1/2 year high.

U.S. Jan PPI final demand eased to +0.9% y/y from +1.0% y/y in Dec, stronger than expectations of +0.6% y/y.  Also, Jan PPI ex-food and energy unexpectedly increased to +2.0% y/y from +1.7% y/y in Dec, stronger than expectations of an easing to +1.6% y/y. 

U.S. Jan housing starts unexpectedly fell -14.8% m/m to a 5-month low of 1.331 million, weaker than expectations of no change at 1.460 million.  Also, Jan building permits, a proxy for future construction, unexpectedly fell -1.5% m/m to 1.470 million, weaker than expectations of an increase to 1.512 million.

The University of Michigan U.S. Feb consumer sentiment index rose +0.6 to a 2-1/2 year high of 79.6, although weaker than expectations of 80.0. 

The University of Michigan U.S. Feb 1-year inflation expectations unexpectedly increased to +3.0% from +2.9% in Jan, stronger than expectations of no change at 2.9%.  Also, Feb 5-10 year inflation expectations were unchanged from Jan at 2.9%, stronger than expectations of an easing to 2.8%.   

Fed comments were hawkish and negative for stocks and bonds.  Richmond Fed President Barkin said the hotter-than-expected inflation figures this week underscore why policymakers want to see more data before cutting interest rates.  Also, Atlanta Fed President Bostic said there's no rush to cut interest rates with the U.S. labor market and economy still strong, and it may "take some time" before inflation is heading sustainably toward the Fed's 2% target.

Strength in overseas equity markets is a positive factor for U.S. stocks after the Euro Stoxx 50 rallied to a new 23-year high Friday, and the Nikkei Stock Index rose to a new 34-year high.

Bank of America reported that EPFR Global data showed U.S. equity funds had $11 billion of inflows in the week through February 14, the most in seven weeks.  However, the breadth of the S&P 500 is currently the weakest since 2009, as the top five stocks in the index have fueled 75% of its gain so far this year.

ECB Executive Board member Schnabel said, "The recent long period of high inflation suggests that, to avoid being forced into adopting a stop-and-go policy akin to that of the 1970s, we must be cautious not to adjust our policy stance prematurely."

The markets are discounting the chances for a -25 bp rate cut at 12% for the March 19-20 FOMC meeting and 37% for the following meeting on April 30-May 1.

U.S. and European government bond yields on Friday moved higher. The 10-year T-note yield rose +6.7 bp to 4.297%.  The 10-year German bund yield climbed to a 2-1/2 month high of 2.423% and finished up +4.3 bp at 2.402%.  The 10-year UK gilt yield rose +5.4 bp to 4.108%.   

Overseas stock markets on Friday settled higher.  The Euro Stoxx 50 closed up +0.47%.  China’s Shanghai Composite Index was closed for a holiday.  Japan’s Nikkei Stock Index closed up +0.86%.

Today’s stock movers…

Digital Realty (DLR) closed down more than -8% to lead losers in the S&P 500 after reporting Q4 FFO per share of $1.63, weaker than the consensus of $1.65, and forecast full-year FFO per share of $6.60-$6.75, below the consensus of $6.84.

Nike (NKE) closed down more than -2% to lead losers in the Dow Jones Industrials after Oppenheimer downgraded the stock to perform from outperform.

DoorDash (DASH) closed down more than -8% to lead losers in the Nasdaq 100 after forecasting a full-year marketplace gross order value of $74 billion-$78 billion, the midpoint below the consensus of $76.54 billion.   

Roku (ROKU) closed down more than -23% after forecasting Q1 adjusted Ebitda of $0, weaker than the consensus of $12.5 million. 

Dropbox (DBX) closed down more than -23% after reporting Q4 paying users at 18.12 million, below the consensus of 18.21 million.

TreeHouse Foods (THS) closed down more than -15% after reporting Q4 net sales of $910.8 million, below the consensus of $925 million. 

Yelp Inc (YELP) closed down more than -14% after forecasting a full-year adjusted Ebitda of $315 million-$335 million, weaker than the consensus of $342.4 million. 

Carvana (CVNA) closed down more than -8% after Raymond James downgraded the stock to underperform on valuation concerns.

Applied Materials (AMAT) closed up more than +6% to lead gainers in the S&P 500 after reporting Q4 net sales of $6.71 billion, better than the consensus of $6.48 billion and forecast Q2 net sales of $6.1 billion-$6.9 billion, the midpoint above the consensus of $6.32 billion.

Trade Desk (TTD) closed up more than +17% to lead gainers in the Nasdaq 100 after reporting Q4 revenue of $606 million, above the consensus of $582.1 million, and forecasting Q1 revenue of at least $478 million, stronger than the consensus of $451.2 million.

Vulcan Materials (VMC) closed up more than +5% after reporting Q4 adjusted EPS continuing operations of $1.46, above the consensus of $1.40.

Eli Lilly (LLY) closed up more than +3% after Morgan Stanley raised its price target on the stock to $950 from $805. 

Bio-Rad Laboratories (BIO) closed up more than +3% after reporting Q4 adjusted EPS of $3.10, stronger than the consensus of $2.82.

Toast (TOST) closed up more than +16% after reporting Q4 revenue of $1.04 billion, better than the consensus of $1.02 billion, and forecasting full-year adjusted Ebitda of $200 million-$220 million, well above the consensus of $170.2 million.

United Parcel Service (UPS) closed up more than +2% after Baird upgraded the stock to outperform from neutral with a price target of $170. 

Ingersoll Rand (IR) closed up more than +1% after reporting Q4 adjusted Ebitda of $500.5 million, better than the consensus of $471.5 million, and forecast full-year adjusted Ebitda of $1.92 billion-$1.98 billion, stronger than the consensus of $1.89 billion.

Across the markets…

March 10-year T-notes (ZNH24) on Friday closed down by -13.5 ticks, and the 10-year T-note yield rose by +6.7 bp to 4.297%. Mar T-notes fell to a 2-1/2 month low on Friday’s stronger-than-expected U.S. Jan PPI report.  Also, hawkish comments from Atlanta Fed President Bostic and Richmond Fed President Barkin undercut T-note prices when they said there's no rush to cut interest rates.  In addition, rising inflation expectations are bearish for T-note prices after the 10-year breakeven inflation rate Friday rose to a 3-1/2 week of 2.342%. 

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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.