Stocks Close Higher as Fed Chair Powell Signals Rate Cuts

The S&P 500 Index ($SPX) (SPY) Friday closed up +1.15%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.18%.

US stocks rallied Friday, with the Dow Jones Industrials posting a 3-week high.  Comments from Fed Chair Powell Friday knocked bond yields lower and pushed stocks higher. Powell reinforced expectations that the Fed will cut interest rates at the Sep 17-18 FOMC meeting when he said cooling in the labor market conditions is "unmistakable," and his confidence has grown that inflation is on the path to 2%. Therefore, "the time has come for policy to adjust."

Dovish comments Friday from Atlanta Fed President Bostic also supported stocks when he said it is possible that more than one interest rate cut by the Fed may now be needed by year-end as inflation had slowed more than he had expected.

Friday’s fall in bond yields also fueled a rally in chip stocks, boosting the overall market.  In addition, positive corporate news was bullish for stocks as Workday closed up more than +12% after reporting better-than-expected Q2 adjusted EPS and saying it would sharply increase profitability over the next three years. 

US July new home sales rose +10.6% m/m to a 14-month high of 739,000, stronger than expectations of 623,000.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 36% for a -50 bp rate cut at that meeting.

Overseas stock markets Friday settled higher.  The Euro Stoxx 50 rose to a 1-month high and closed up +0.50%.  China's Shanghai Composite recovered from a 6-1/2 month low and closed up +0.40%.  Japan's Nikkei Stock 225 climbed to a 3-week high and closed up +0.40%.

Interest Rates

September 10-year T-notes (ZNU24) Friday closed up +13 ticks.  The 10-year T-note yield fell -5.1 bp to 3.801%.  Dovish comments Friday from Atlanta Fed President Bostic gave T-notes a boost when he said more than one interest rate cut by the Fed might be needed by year-end.  T-notes extended their gains Friday after Fed Chair Powell cemented expectations for a Fed rate cut next month when he said the time has come for the Fed to adjust policy. 

Friday’s stock rally and the stronger-than-expected US July new home sales report limited the upside in T-notes.  Also, an increase in inflation expectations was negative for T-notes after the 10-year breakeven inflation rate rose to a 2-week high Friday at 2.138%.

European government bond yields Friday moved lower.  The 10-year German bund yield fell -2.0 bp to 2.225%.  The 10-year UK gilt yield fell from a 1-1/2 week high of 3.964% and finished down -4.8 bp at 3.912%.

The ECB's Eurozone July 1-year inflation expectations indicator was unchanged from June at 2.8%, stronger than expectations of an easing to 2.7%.  Also, the July 3-year inflation expectations indicator unexpectedly rose to 2.4% from 2.3% in June, which was stronger than the expectations of no change at 2.3%.

ECB Governing Council member Vujcic said, "As long as data fall in line with our projections, which foresee inflation to fall to 2% in 2025, that increases confidence that we can gradually ease the restrictiveness of our monetary policy."

ECB Governing Council member Rehn said the slowdown in inflation alongside weakness in the Eurozone economy strengthened arguments for the ECB to lower borrowing costs next month.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 94% for the September 12 meeting.

US Stock Movers

Chip stocks are climbing today and are supporting gains in the broader market.  Nvidia (NVDA), Marvell Technology (MRVL), ARM Holdings Plc (ARM), and GlobalFoundries (GFS) closed up more than +4%.  Also, ON Semiconductor (ON), NXP Semiconductors NV (NXPI), and Texas Instruments (TXN) closed up more than +3%.  In addition, Intel (INTC), KLA Corp (KLAC), Analog Devices (ADI), Microchip Technology (MCHP), and Qualcomm (QCOM) closed up more than +2%

Lower T-note yields, and Friday’s better-than-expected US July new home sales report boosted home building stocks.  Builders FirstSource (BLDR) closed up more than +8% to lead gainers in the S&P 500.  Also, PulteGroup (PHM) and Toll Brothers (TOL) closed up more than +4%.  In addition, Lennar (LEN) and DR Horton (DHI) closed up more than +2%.

Cruise line operators rallied Friday on signs of stronger crude demand after Melius Research said cruise operators are the only part of the travel industry where analysts are raising their earnings estimates.  As a result, Carnival (CCL) and Norwegian Cruise Line Holdings (NCLH) closed up more than +7%, and Royal Caribbean Cruises (RCL) closed up more than +2%.

Workday (WDAY) closed up more than +12% to lead gainers in the Nasdaq 100 after reporting Q2 adjusted EPS of $1.75, above the consensus of $1.64, and said it would increase profitability over the next three years to enable strategic investments.

Cava Group (CAVA) closed up more than +18% after boosting its full-year restaurant comparable sales forecast to +8.5% to +9.5% from a previous estimate of +4.5% to +6.5%, well above the consensus of +6.05%.

Roku Inc (ROKU) closed up more than +11% after Guggenheim Securities upgraded the stock to buy from neutral with a price target of $75.

Moderna (MRNA) closed up more than +1% after the European Commission approved the company’s RSV vaccinee Mresvia for use in 27 EU member states.

Intuit (INTU) closed down more than -6% to lead losers in the S&P 500 and Nasdaq 100 after forecasting Q1 adjusted EPS of $2.33-$2.38, well below the consensus of $2.80. 

GE Vernova (GEV) closed down more than -1% after reports of a blade failure occurred at the Dogger Bank A offshore wind farm.

McKesson (MCK) closed down more than -1% on reports it is in advanced talks to buy a controlling stake in Florida Cancer Specialists & Research Institute for about $3.5 billion.

Las Vegas Sands (LVS) closed down more than -1% after UBS downgraded the stock to neutral from buy, noting the recovery in the company’s Macau business is getting more protracted. 

Bill Holdings (BILL) closed down more than -7% after forecasting 2025 adjusted EPS of $1.36-$1.61, well below the consensus of $2.23. 

Earnings Reports (8/26/2024)

Critical Metals Corp (CRML), HEICO Corp (HEI).

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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.