Stocks Eke Out Modest Gains on Expectations Fed Tightening is Done

November 18th, 2023

What you need to know…

The S&P 500 Index SPY Friday closed up +0.13%, the Dow Jones Industrials Index DIA closed up +0.01%, and the Nasdaq 100 Index QQQ closed up +0.03%.

Stocks on Friday wavered between modest gains and losses and finally settled slightly higher. The broader market initially moved lower when bond yields rose after Friday’s U.S. economic news showed Oct housing starts and building permits unexpectedly rose, a hawkish factor for Fed policy. However, bond yields fell back from early highs and finished little changed, allowing stocks to recover. Bond yields have fallen sharply this week after better-than-expected U.S. inflation news and weekly jobs data pointing to a slowing labor market have bolstered expectations that the Fed is done tightening monetary policy.

Stocks had support on some positive corporate news. The Gap surged more than +29% after reporting Q3 adjusted EPS well above consensus. Also, Ross Stores rose more than +7% after reporting stronger-than-expected Q3 sales. In addition, Hubbell rose more than +3% after JPMorgan Chase upgraded it to overweight.

U.S. Oct housing starts unexpectedly rose +1.9% m/m to 1.372 million, stronger than expectations for a decline to 1.350 million. Also, Oct building permits, a proxy for future construction, unexpectedly rose +1.1% to 1.487 million, stronger than expectations of a decline to 1.450 million.

Fed comments Friday were mixed for stocks. On the positive side, comments from San Francisco Fed President Daly suggest she favors maintaining a pause in Fed rate hikes when she said, “When uncertainty is high, and risk to our objectives are more balanced, we need to practice gradualism.” Conversely, Boston Fed President Collins said, “In order to get back down to a 2% inflation rate in a reasonable amount of time, we need to be patient and resolute, and I wouldn’t take additional monetary firming off the table.”

According to Bank of America, EPFR Global data showed global stock funds attracted $23.5 billion of inflows in the week through Nov 15, the second-biggest inflows this year.

The markets are discounting a 0% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and a 0% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024. The markets are then discounting a 28% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and a 76% chance for that same -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting.

U.S. and European government bond yields Friday were mixed. The 10-year T-note yield recovered from a 1-3/4 month low of 4.377% and rose +0.1 bp to 4.437%. The 10-year German bund yield dropped to a 2-1/2 month low of 2.517% and fell -0.2 bp at 2.588%. The 10-year UK gilt yield dropped to a 5-3/4 month low of 4.029% and fell -4.7 bp to 4.104%.

ECB Governing Council member and Bundesbank President Nagel said borrowing costs “have to remain at a high level for a sufficient period,” and an ECB rate cut anytime soon is “highly improbable.”

ECB Governing Council member Holzmann said it would be “too soon” for the ECB to begin cutting interest rates in Q2 of next year, and market expectations for a rate reduction are premature.

Overseas stock markets Friday settled higher. The Euro Stoxx 50 closed up +0.89%. China’s Shanghai Composite Index closed up +0.11%. Japan’s Nikkei Stock Index closed up +0.48%.

Today’s stock movers…

Ross Stores ROST closed up more than +7% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q3 sales of $4.92 billion, stronger than the consensus of $4.84 billion.

Expedia Group EXPE closed up more than +5% after Evercore ISI upgraded the stock to outperform from inline with a price target of $200.

Hubbell Inc HUBB closed up more than +3% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $335.

Energy stocks rallied Friday after crude prices jumped more than +4%. As a result, Marathon Oil MRO closed up more than +3%. Also, APA Corp APA, Exxon Mobil XOM, Phillips 66 PSX, Diamondback Energy FANG, Devon Energy DVN, ConocoPhillips COP, and Haliburton HAL, closed up more than +2%.

The Gap GPS closed up more than +29% after reporting Q3 adjusted EPS of 59 cents, well above the consensus of 19 cents.

Globant SA GLOB closed up more than +11% after forecasting Q3 non-IFRS adjusted EPS of at least $1.60, better than the consensus of $1.58.

Tenet Healthcare Corp THC closed up more than +9% after Novant Health bought three Tenet hospitals and affiliated operations in South Carolina.

Warner Music Group WMG closed up more than +1% after reporting Q4 revenue of $1.59 billion, above the consensus of $1.57 billion.

Analog Devices ADI closed up more than +1% after Mogan Stanley upgraded the stock to overweight from equal weight with a price target of $225.

Applied Materials AMAT closed down more than -4% to lead losers in the S&P 500 and Nasdaq 100 after Reuters reported the company faces a U.S. criminal investigation for allegedly violating export restrictions to China.

TransDigm TDG closed down more than -2% on signs of insider selling after an SEC filing showed Co-COO Reiss sold $2.98 million of shares on Wednesday.

Managed healthcare stocks were under pressure Friday. As a result, Molina Healthcare MOH closed down more than -3%. Also, Humana HUM closed down more than -2%, and UnitedHealth Group UNH closed down -0.65%.

Microsoft MSFT closed down more than -1% to lead losers in the Dow Jones Industrials after Open AI said CEO Murati is departing.

Progressive Corp PGR closed down more than -1% after reporting a combined ratio for October of 91.7% versus 95.9% y/y.

Gitlab GTLB closed down more than -3% after Barclays downgraded the stock to equal weight from overweight.

Alphabet GOOGL closed down more than -1% after the Information reported the company is delaying the release of its Gemini AI language model from this month to Q1 of next year.

Air Products & Chemicals APD closed down more than -1% after Redburn double-downgraded the stock to sell from buy with a price target of $240.

Across the markets…

December 10-year T-notes (ZNZ23) Friday closed down -3.5 ticks, and the 10-year T-note yield rose +0.1 bp to 4.437%. Dec T-notes Friday fell back from a 1-3/4 month high and posted modest losses, and the 10-year T-note rose from a 1-3/4 month low of 4.377%. T-notes came under pressure Friday after economic news showed U.S. Oct housing starts and building permits unexpectedly increased. T-note prices Friday initially moved higher on positive carryover from a rally in 10-year UK gilts to a 5-3/4 month high after UK Oct retail sales unexpectedly declined.

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.