Stocks Finish Slightly Higher on Fed Optimism

The S&P 500 Index ($SPX) (SPY) Thursday closed up +0.09%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.19%.

Stock indexes recovered from early losses on Thursday and settled slightly higher.  Stocks found support on Thursday’s weaker-than-expected US economic reports that knocked bond yields lower and reinforced speculation the Fed will be able to cut interest rates this year. 

Stocks also garnered support on Thursday’s comments from Atlanta Fed President Bostic, who said, "The risks are becoming more balanced across the Fed's two mandates," and he expects one interest rate cut this year in the fourth quarter.

Stocks initially opened lower on Thursday due to some negative corporate news.  Micron Technology closed down more than -7% to lead chip stocks lower after Citigroup expressed disappointment with the company’s guidance.  Also, Walgreens Boots Alliance plunged -22% after reporting weaker-than-expected Q3 adjusted EPS and cutting its full-year adjusted EPS forecast.  In addition, International Paper closed down more than -7% after Suzano terminated its pursuit of the company.

The markets are awaiting Friday’s release of the US May core PCE deflator, the Fed’s preferred inflation gauge, to see if price pressures are abating, which could pave the way for the Fed to begin cutting interest rates.  The consensus is that the May core PCE deflator eased to +2.6% y/y from +2.8% y/y in April.

US weekly initial unemployment claims fell -6,000 to 233,000, showing a stronger labor market than expectations of 235,000.  However, weekly continuing claims unexpectedly rose +18,000 to a 2-1/2 year high of 1.839 million, showing a weaker labor market than expectations of no change at 1.828 million. 

US May capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, unexpectedly fell -0.6% m/m versus expectations of a +0.1% m/m increase.

US Q1 GDP was revised upward to +1.4% (q/q annualized) from +1.3%, right on expectations.  The Q1 core PCE price index was revised upward by 0.1 point to 3.7% from 3.6%.

US May pending home sales unexpectedly fell -2.1% m/m versus expectations of a +0.5% m/m increase.

The markets are discounting the chances for a -25 bp rate cut at 10% for the next FOMC meeting on July 30-31 and 60% for the following meeting on September 17-18.

Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +7.1% y/y, well above the pre-earnings season estimate of +3.8%.  According to data compiled by Bloomberg Intelligence, about 81% of reporting S&P 500 companies have beaten Q1 earnings estimates. 

Overseas stock markets Thursday settled lower.  The Euro Stoxx 50 closed down -0.27%.  China's Shanghai Composite closed down -0.90%.  Japan's Nikkei Stock 225 Index closed down -0.82%.

Interest Rates

September 10-year T-notes (ZNU24) Thursday closed up +6 ticks.  The 10-year T-note yield fell -3.9 bp to 4.290%.  Sep T-notes Thursday recovered from a 2-week low and posted moderate gains, and the 10-year T-note yield fell back from a 2-week high of 4.345%.  T-notes erased overnight losses and turned higher Thursday on weaker-than-expected US economic reports on jobless claims, May capital goods new orders nondefense ex-aircraft and parts, and US May pending home sales.  T-notes remained higher after Atlanta Fed President Bostic said he expects the Fed to cut interest rates in Q4.  Also, strong demand for Thursday’s $44 billion Treasury auction of 7-year T-notes was positive for T-notes as the auction had a bid-to-cover ratio of 2.58, above the 10-auction average of 2.54.

European government bond yields Thursday finished lower.  The 10-year German bund yield fell back from a 2-week high of 2.498% and finished down -0.4 bp to 2.448%.  The 10-year UK gilt yield fell back from a 2-week high of 4.172% and finished down -0.1 bp at 4.130%.

The Eurozone June economic confidence index unexpectedly fell -0.2 to 95.9 versus expectations of an increase to 96.1.

Eurozone May M3 money supply rose +1.6% y/y, stronger than expectations of +1.5% y/y and the biggest increase in 14 months.

ECB Governing Council member Kazimir said, "I still see a significant risk of rising inflation, which may not fully align with our expectations, so I think we could expect only one more ECB interest rate cut this year."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 9% for the July 18 meeting and 67% for the September 12 meeting.

US Stock Movers

Cybersecurity stocks rallied Thursday after Bloomberg Intelligence said it sees demand for cloud security expanding as more companies seek to train their own AI models.  As a result, Zscaler (ZS) closed up more than +5% to lead gainers in the Nasdaq 100.  Also, Palo Alto Networks (PANW) closed up more than +4%.  In addition, Fortinet (FTNT) closed up more than +3% and Crowdstrike Holdings (CRWD) closed up more than +1%.

Walgreens Boots Alliance (WBA) closed down -22% to lead losers in the S&P 500 and Nasdaq 100 after reporting Q3 adjusted EPS of 63 cents, weaker than the consensus of 68 cents, and cutting its full-year adjusted EPS forecast to $2.80-$2.95 from a previous estimate of $3.20-$3.35, below the consensus of $3.20. 

Micron Technology (MU) closed down more than -7% despite forecasting stronger-than-expected Q4 sales as Citigroup said the guidance was disappointing and failed to meet lofty expectations.  Other chip stocks weakened on the news, with Nvidia (NVDA) closing down more than -2% and Qualcomm (QCOM) and NXP Semiconductors NV (NXPI) closing down more than -1%. 

McCormick (MKC) closed up more than +4% after reporting Q2 net sales of $1.64 billion, better than the consensus of $1.63 billion. 

Arista Networks (ANET) closed up more than +3% after Citigroup raised its price target on the stock to $385 from $330.

Boeing (BA) closed up more than +2% after it said China’s safety regulator cleared it to resume delivering wide-body jets to China. 

Visa (V) closed down more than -2% to lead losers in the Dow Jones Industrials after a US District Court in New York rejected a $30 billion settlement proposal between Visa, Mastercard, and retailers to cap credit card swipe fees. 

Viking Therapeutics (VKTX) closed up more than +7% after Morgan Stanley initiated coverage of the stock with an overweight rating and a price target of $105.   

Cargo Therapeutics (CRGX) closed up more than +7% after Piper Sandler initiated coverage of the stock with an overweight rating and a price target of $37.   

Cencora (COR) closed down more than -3% after Walgreens, Cencora’s largest customer, said it is shutting down a significant share of its US stores. 

International Paper (IP) closed down more than -7% after Brazilian paper producer Suzano said it was terminating its pursuit of the company. 

Levi Strauss (LEVI) closed down more than -15% after reporting Q2 net revenue of $1.44 billion, below the consensus of $1.45 billion. 

Stellantis NV (STLA) closed down more than -4% after HSBC cut its price target on the stock and said the first half of the year could be tougher than consensus expects. 

Earnings Reports (6/28/2024)

DZS Inc (DZSI), Inhibrx Biosciences Inc (INBX), NET Lease Office Properties (NLOP).

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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.