Stocks Finish Lower as Rate Cut Hopes Recede on Hawkish Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed down -0.32%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.71%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.17%.

Stocks on Monday settled moderately lower.  Stocks were under pressure Monday as bond yields rose on hawkish Fed comments and stronger-than-expected economic news.  Fed Chair Powell pushed back against hopes of a Fed rate cut next month, and Minneapolis Fed President Kashkari said a higher neutral rate gives the Fed room to wait on interest rate cuts.  Also, Chicago Fed President Goolsbee said he wants to see more progress on reducing inflation before the Fed starts cutting rates. Stocks extended their losses as bond yields rose even higher on Monday’s stronger-than-expected Jan ISM services index.

Losses in the Nasdaq 100 were limited on strength in chip stocks as ON Semiconductor rallied more than +9% after reporting Q4 adjusted EPS above consensus, and Nvidia closed up more than +4% after Goldman Sachs raised its price target on the stock.

Fed Chair Powell Sunday evening said in an interview on “60 Minutes” that the Fed is wary of cutting interest rates too soon and reiterated that a March rate cut is unlikely.

Minneapolis Fed President Kashkari said today that the neutral policy rate has possibly risen.  That "gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery."

Chicago Fed President Goolsbee said, "We need to see more data showing inflation progress" before the Fed starts lowering interest rates.

The U.S. Jan ISM services index rose +2.9 to a 4-month high of 53.4, stronger than expectations of 52.0.  Also, the Jan ISM services prices paid sub-index unexpectedly rose +7.3 to an 11-month high of 64.0, stronger than expectations of a decline to 56.7.

The markets are discounting the chances for a -25 bp rate cut at 17% at the March 19-20 FOMC meeting and 74% for that -25 bp rate cut at the following meeting April 30-May 1.

U.S. and European government bond yields on Monday moved higher. The 10-year T-note rose to a 1-week high of 4.175% and finished up +14.4 bp at 4.164%.  The 10-year German bund yield rose to a 1-week high of 2.335% and finished up +7.5 bp at 2.316%.  The 10-year UK gilt yield rose to a 1-week high of 4.040% and finished up +9.0 bp at 4.007%.   

The China Jan Caixin services PMI unexpectedly fell -0.2 to 52.7, weaker than expectations of an increase to 53.0.

ECB Governing Council member Vujcic said the ECB "needs to have patience at the moment before getting into an easing cycle to make sure that wage costs aren't translating into sustained wage pressure."

The Eurozone Dec PPI fell -10.6% y/y, weaker than expectations of -10.5% y/y.

The Eurozone Feb Sentix investor confidence index rose +2.9 to a 10-month high of -12.9, stronger than expectations of -15.0.

Overseas stock markets on Monday settled mixed.  The Euro Stoxx 50 closed up +0.02%.  China’s Shanghai Composite Index closed down -1.02%. Japan’s Nikkei Stock Index closed up +0.54%.

Today’s stock movers…

Air Products and Chemicals (APD) closed down more than -15% to lead losers in the S&P 500 after reporting Q1 adjusted EPS of $2.82 billion, weaker than the consensus of $3.01 billion, and cutting its full-year adjusted EPS forecast to $12.20-$12.50 from a previous estimate of $12.80-$13.10, below the consensus of $12.98. 

Archer-Daniels-Midland (ADM) closed down more than -4% after the U.S. Attorney’s Office in Manhattan launched an investigation into the company's accounting practices. 

Charter Communications (CHTR) closed down more than -4% after Wells Fargo Securities downgraded the stock to equal weight from overweight.

Humana (HUM) closed down more than -4% after it said the proposed rate update for Medicare Advantage benchmark funding is 160 basis points worse than its expectations for a flat rate, potentially reducing profit margins. 

Globalfoundries (GFS) closed down more than -6% to lead losers in the Nasdaq 100 after JPMorgan downgraded the stock to neutral from overweight.

Zscaler (ZS) closed down more than -5% after COO Rajic unexpectedly resigned last Friday. 

McDonald’s (MCD) closed down more than -3% to lead losers in the Dow Jones Industrials after reporting Q4 comparable sales of +3.4%, weaker than the consensus of +4.79%.

Tesla (TSLA) closed down more than 3% after Handelsblatt reported that German company SAP is removing Tesla from its list of car suppliers.

Estee Lauder (EL) closed up more than +12% to lead gainers in the S&P 500 after saying it’s cutting as many as 3,000 positions as part of a restructuring plan.

ON Semiconductor (ON) closed up more than +9% to lead gainers in the Nasdaq 100 after reporting Q4 adjusted EPS of $1.25, better than the consensus of $1.21. 

Catalent (CTLT) closed up more than +9% after Novo Holdings agreed to buy the company for $16.5 billion or $63.50 per share. 

IDXX Laboratories (IDXX) closed up more than +8% after reporting Q4 revenue of $901.6 million, stronger than the consensus of $890.3 million. 

Nvidia (NVDA) closed up more than +4% after Goldman Sachs raised its price target on the stock to $800 from $625, citing robust AI demand.

Caterpillar (CAT) closed up more than +2% to lead gainers in the Dow Jones Industrials after reporting Q4 adjusted operating income of $3.23 billion, stronger than the consensus of $3.10 billion. 

Tyson Foods (TSN) closed up more than +2% after reporting Q1 sales of $13.32 billion, better than the consensus of $13.27 billion. 

AbbVie (ABBV) closed up more than +2% as analysts raised their price targets on the stock by an average of +5% since the company reported earnings results last Friday.  

Across the markets…

March 10-year T-notes (ZNH24) on Monday closed down -28 ticks, and the 10-year T-note yield rose by +14.4 bp to 4.164%. Mar T-notes Monday dropped to a 1-week low, and the 10-year T-note yield climbed to a 1-week high of 4.175%.  Hawkish Fed comments today from Fed Chair Powell, Minneapolis Fed President Kashkari, and Chicago Fed President Goolsbee reduced the chances of a Fed interest rate cut at the March FOMC meeting.  T-notes extended their losses Monday after the Jan ISM services index rose more than expected, and the Jan ISM services price paid sub-index unexpectedly rose +7.3 to 64.0, the fastest pace of increase in 11 months and a sign of rising price pressures in the service sector.

Supply pressures are bearish for T-notes, with ten corporate bond offerings expected to be between $25 billion and $30 billion this week.  Also, this week, the Treasury’s February refunding auctions of $121 billion in T-notes and T-bonds begins on Tuesday with a $54 billion auction of 3-year T-notes.

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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.