Stocks Settle Higher on Improved Fed Rate Cut Prospects

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.42%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.53%.

US stocks Wednesday settled higher, with the S&P 500 posting a 1-month high, the Dow Jones Industrials posting a 2-1/2 week high, and the Nasdaq 100 posting a 4-week high.  Stocks rallied Wednesday after a large downward revision to US payrolls, and the dovish minutes of the July 30-31 FOMC meeting, knocked bond yields lower and bolstered the outlook for the Fed to cut interest rates next month. 

Positive corporate news also boosted stocks Wednesday, as Keysight Technologies closed up more than +13% after reporting stronger-than-expected Q3 adjusted EPS and forecasting Q4 adjusted EPS above consensus.  Also, Target closed up more than +10% after reporting better-than-expected Q2 adjusted EPS and boosting its full-year adjusted EPS estimate.  M&A activity also supported stocks Wednesday after JT Group agreed to buy Vector Group for about $2.4 billion, and Consol Energy agreed to buy Arch Resources for $2.3 billion.

The markets are awaiting the opening comments from Fed Chair Powell on Friday at the Fed’s annual symposium in Jackson Hole, Wyoming, for any fresh insights on the future course of Fed policy. 

The US Bureau of Labor Statistics (BLS) revised US payrolls down by -818,000 for the year through March, a bigger downward revision than expectations of -600,000 and the largest downward revision since 2009.  The report was dovish for Fed policy since it indicated a weaker US labor market than was initially reported.

The minutes of the July 30-31 FOMC meeting stated that "several" officials saw the case for cutting interest rates at the July meeting, but a "vast majority" of officials saw a rate cut in September as likely appropriate. 

US MBA mortgage applications fell -10.1% in the week ended August 16, with the purchase mortgage sub-index down -5.2% and the refinancing mortgage sub-index down -15.2%.  The 30-year fixed rate mortgage fell -4 bp to 6.50% from 6.54% in the prior week.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 40% for a -50 bp rate cut at that meeting.

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.57%.  China's Shanghai Composite closed down -0.35%.  Japan's Nikkei Stock 225 closed down by -0.29%.

Interest Rates

September 10-year T-notes (ZNU24) Wednesday closed up +10.5 ticks.  The 10-year T-note yield fell -2.5 bp to 3.782%.  Sep T-notes today rose to a 1-week high, and the 10-year T-note yield fell to a 2-week low of 3.760%.  T-note prices saw support Wednesday from the downward revision of US payrolls by the BLS for the year through March by 818,000 jobs, a larger revision than expectations of 600,000, and a sign of a weaker US labor market.  T-note raced to their highs Wednesday afternoon on the dovish minutes of the July 30-31 FOMC meeting that said a "vast majority" of officials saw a rate cut in September as likely appropriate. 

Gains in T-notes were limited Wednesday after the S&P 500 rallied to a 1-month high, curbing safe-haven demand for T-notes.  Also, slack demand for the Treasury’s $16 billion 20-year T-bond auction was negative for T-notes as the auction had a bid-to-cover ratio of 2.54, below the 10-auction average of 2.62.   

European government bond yields Wednesday moved lower.  The 10-year German bund yield fell -2.4 bp to 2.191%.  The 10-year UK gilt yield fell -2.5 bp to 3.891%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.

US Stock Movers

Keysight Technologies (KEYS) closed up more than +13% to lead gainers in the S&P 500 after reporting Q3 adjusted EPS of $1.57, stronger than the consensus of $1.35, and forecasting Q4 adjusted EPS of $1.53-$1.59, the midpoint above the consensus of $1.54. 

Target (TGT) closed up more than +10% after reporting Q2 adjusted EPS of $2.57, better than the consensus of $2.18.  Target also boosted its full-year adjusted EPS estimate to $9.00-$9.70 from a previous estimate of $8.60-$9.60, stronger than the consensus of $9.22.  Other retailers moved higher on the news, with Ross Stores (ROST) closing up more than +4% to lead gainers in the Nasdaq 100 and Ulta Beauty (ULTA) closing up more than +3%.

TJX Cos (TJX) closed up more than +5% after reporting that Q2 comparable sales rose +4%, above the consensus of +2.73%, and raising its full-year comparable sales forecast to +3% from a previous estimate of +2% to +3%, stronger than the consensus of +2.76%.

Take-Two Interactive Software (TTWO) closed up more than +3% after announcing its Borderlands 4 video game will be released next year.

Vector Group Ltd (VGR) closed up more than +7% after JT Group agreed to buy the company for about $2.4 billion, or $15 a share.

Texas Instruments (TXN) closed up more than +2% after Citigroup upgraded the stock to buy from neutral, with a price target of $235.   

Corning (GLW) closed up more than +2% after Mizuho Securities upgraded the stock to outperform from neutral with a price target of $47. 

Analog Devices (ADI) closed up more than +1% after reporting Q3 revenue of $2.31 billion, above the consensus of $2.28 billion, and forecasting Q4 revenue of $2.3 billion-$2.5 billion, the midpoint above the consensus of $2.38 billion. 

Franklin Resources (BEN) closed down more than -12% to lead losers in the S&P 500 after Ken Leech, co-chief investment officer of Western Asset Management, a part of Frankin Resources, is said to take an immediate leave of absence to focus on a SEC probe of the firm.

American Express (AXP) closed down more than -2% to lead losers in the Dow Jones Industrials after Bank of America Global Research downgraded the stock to neutral from buy. 

Palo Alto Networks (PANW) closed down more than -2% to lead losers in the Nasdaq 100 after President Capital Management downgraded the stock to neutral from buy.

Bank stocks were under pressure Wednesday, as KeyCorp (KEY), Citigroup (C), Wells Fargo (WFC), Discover Financial Services (DFS), and Capital One Financial (COF) closed down more than -1%.

Cogent Communications Holdings (CCOI) closed down more than -1% after Bank of America downgraded the stock to underperform from neutral with a p[rice target of $65.

Macy’s (M) closed down more than -13% after cutting its full-year net sales forecast to $22.1 billion-$22.4 billion from a previous estimate of $22.3 billion-$2.9 billion. 

Earnings Reports (8/22/2024)

Advance Auto Parts Inc (AAP), BILL Holdings Inc (BILL), BJ's Wholesale Club Holdings Inc (BJ), Cava Group Inc (CAVA), Intuit Inc (INTU), Ross Stores Inc (ROST), Williams-Sonoma Inc (WSM), Workday Inc (WDAY).

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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.