What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +2.28%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +2.13%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.78%.

Stocks on Friday rallied sharply, with the S&P 500 and Dow Jones Industrials posting 3-week highs.  A rally in bond prices Friday underpinned stocks as a slowdown in hourly wage growth outweighed a mostly robust U.S. Dec payrolls report.  Dec average hourly earnings eased to a 16-month low of +4.6% y/y, and were weaker than expectations of +5.0% y/y. 

Stock gains accelerated, and bond yields fell further, after the U.S. Dec ISM services report unexpectedly contracted at the steepest pace in 2-1/2 years.  Also, Nov factory orders posted their biggest decline in 2-1/2 years.

The weak U.S. economic reports knocked the 10-year T-note yield down to a 2-1/2 week low of 3.556%. 

U.S. stocks also garnered carry-over support Friday from a rally in European stocks to a 3-week high after economic news showed Eurozone Dec consumer prices rose less than expected and Eurozone Nov retail sales rose more than expected.  Also, a rally in China’s Shanghai Composite to a 3-week high gave equities a boost after China took additional steps to revive its ailing property market. 

Stock indexes initially moved lower in overnight trade on weakness in technology stocks, with Tesla down more than -2% after it announced another round of price cuts on its Model 3 and Y electric vehicles in China. 

U.S. Dec nonfarm payrolls rose +223,000, stronger than expectations of +203,000.  Also, the Dec unemployment rate unexpectedly fell -0.1 to 3.5%, matching a 53-year low and showing a stronger labor market than expectations of 3.7%.

U.S. Dec average hourly earnings rose +0.3% m/m and +4.6% y/y, weaker than expectations of +0.4% m/m and +5.0% y/y.  The +4.6% y/y gain was the smallest in 16 months.

The Dec ISM services index fell sharply by -6.9 points to a 2-1/2 year low of 49.6, and was weaker than expectations of 55.0.

U.S. Nov factory orders fell -1.8% m/m, weaker than expectations of -1.0% m/m and the biggest drop in 2-1/2 years.

Fed comments Friday were mainly hawkish and negative for stocks.  Atlanta Fed President Bostic said inflation is still too high, and that he favors raising the fed funds rate above 5% and holding it there into 2024. Also, Richmond Fed President Barkin said, "we still have work to do" to bring inflation down to the Fed's 2% goal.  Conversely, Fed Governor Cook said that although inflation is still too high, she sees signs of ebbing inflation, including a topping out of increases for new rentals and easing supply shortages of key materials.

Overseas markets Friday closed higher.  The Euro Stoxx 50 index closed up +1.47%.  The Shanghai Composite Stock index closed up by +0.08%, and Japan’s Nikkei Stock index closed up by +0.59%.

Today’s stock movers…

A sharp decline in T-note yields Friday fueled a rally in chip stocks.  Lam Research (LRCX), Broadcom (AVGO), Applied Materials (AMAT), and KLA Corp (KLAC) closed up more than +6%.  Qualcomm (QCOM), Microchip Technology (MCHP), and ASML Holding NV (ASML) closed up more than +5%.  Intel (INTC) closed up more than +4% to lead gainers in the Dow Jones Industrials.  Texas Instruments (TXN), Nvidia (NVDA), and Marvell Technology (MRVL) closed up more than +4%

Costco Wholesale (COST) closed up more than +7% to lead gainers in the Nasdaq 100 after reporting Dec total comparable sales rose +5.5%, stronger than expectations of +5.0%.

Freeport-McMoRan (FCX) closed up more than +6% as mining stocks rallied after gold prices jumped to a 6-1/2 month high.

Jacobs Solutions (J) closed up more than +4% after Baird upgraded the stock to outperform from neutral with a price target of $150.

Molson Coors (TAP) closed up more than +2% after Cowen upgraded the stock to outperform from market perform.

Baxter International (BAX) closed down more than -7% to lead losers in the S&P 500 after announcing plans to spin off its industry-leading kidney-care business into an independent publicly traded company within the next 12 to 18 months. 

Laboratory stocks declined Friday after a Cleveland Research report on the life science industry said that the 2023 outlook for instruments has become a bit more cautious.  Waters Corp (WAT) closed down more than -7%.  Also, Thermo Fisher Scientific (TMO) and PerkinElmer (PKI) closed down more than -3%.  In addition, Agilent Technologies (A), Bio-Rad Laboratories (BIO), and Mettler-Toledo International (MTD) closed down by more than -2%. 

U.S. defense stocks weakened Friday on news that the emerging deal Republican McCarthy is discussing to make him speaker of the House would propose a roughly $75 billion cut in defense spending. Triumph Group (TGI) closed down more than -5%.  Also, Northrup Grumman (NOC) closed down more than -1%, and Lockheed Martin (LMT) closed down -0.8%.

Danaher (DHR) closed down more than -1% after Credit Suisse on Thursday downgraded the stock to neutral from outperform, saying higher exposure to bioprocessing inventory reductions and diagnostics could pressure the company’s growth relative to peers. 

Across the markets…

March 10-year T-notes (ZNH23) on Friday closed up +1-6.5/32 points, and the 10-year T-note yield fell by -15.6 bp to 3.562%.  Mar T-notes Friday rallied to a 2-1/2 week high, and the 10-year T-note yield dropped to a 2-1/2 week low of 3.549%.  T-note prices rose after Friday’s U.S. Dec unemployment report showed average hourly earnings rose less than expected, even though payroll gains were more than expected.  Gains in T-notes accelerated after the U.S. Dec ISM services contracted by the most in 2-1/2 years, and Nov factory orders posted their biggest decline in 2-1/2 years. 

T-notes Friday also had carry-over support from rallies in 10-year German bunds and 10-year UK gilts to 2-1/2 week highs after Eurozone Dec CPI rose less than expected.  In addition, reduced inflation expectations supported T-notes after the 10-year breakeven inflation rate Friday dropped to a 2-1/2 week low of 2.186%.

More Stock Market News from Barchart

• China’s BYD is Surpassing Tesla in China
• Stocks Rally as Bond Yields Plunge on U.S. Reports
• Unusual Options Activity for Harley-Davidson (HOG) Points to a Contested Arena
• Markets Today: Stocks Jump as U.S. Wage Pressures Ease

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.