Stock Indexes Pull Back From This Morning's Record Highs

Rich Asplund - Barchart - Thu May 16, 10:22AM CDT

The S&P 500 Index ($SPX) (SPY) is down -0.03%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.02%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.09%.

US stock indexes are moderately lower this afternoon, after the S&P 500, Dow Jones Industrials, and Nasdaq 100 posted new record highs earlier this morning. Stocks hit highs this morning on speculation the Fed will be able to cut interest rates this year. Stocks and bonds found support after weekly initial unemployment claims fell less than expected, a dovish factor for Fed policy. Other weaker-than-expected economic reports included housing starts and manufacturing production.

However, stocks have pulled back on a rise in bond yields on signs of persistent price pressures after the Apr import price index ex-petroleum rose by the most in 16 months.

Dovish Fed comments today supported stocks. New York Fed President Williams said the softer tone of April's CPI is "kind of a positive development" and "the overall trend looks reasonably good" for a gradual slowdown in inflation pressures. He added that monetary policy is "restrictive" and "is in a good place," and he doesn't "see any need to tighten monetary policy today." Also, Richmond Fed President Barkin said he believes inflation is coming down, and the Fed needs a "little bit more time" to lower inflation to its 2% target, citing higher prices in the services sector.

US weekly initial unemployment claims fell -10,000 to 222,000, showing a slightly weaker labor market than expectations of 220,000.

US Apr housing starts rose +5.7% m/m to 1.36 million, weaker than expectations of 1.421 million. Apr building permits (a proxy for future construction) unexpectedly fell -3.0% m/m to a 15-month low of 1.44 million, weaker than expectations of 1.48 million.

The US May Philadelphia Fed business outlook survey fell -11.0 to 4.5, weaker than expectations of 7.8.

The US Apr import price index ex-petroleum rose +0.7% m/m, stronger than expectations of +0.1% m/m and the largest increase in 16 months.

US Apr manufacturing production unexpectedly fell -0.3% m/m, weaker than expectations of +0.1% m/m.

Generally positive Q1 earnings results are supportive of stocks. Q1 earnings are expected to climb +6.5% 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.

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 34% for the following meeting on July 30-31.

Overseas stock markets today are mixed. The Euro Stoxx 50 is down -0.47%. China's Shanghai Composite recovered from a 2-week low and closed up +0.08%. Japan's Nikkei Stock Index rose to a 1-month high and closed up +1.39%.

Interest Rates

June 10-year T-notes (ZNM24) this morning are down -2 ticks. The 10-year T-note yield is up +1.4 bp at 4.354%. June T-notes today fell back from a 5-week high, and the 10-year T-note yield rebounded from a 5-week low of 4.309% and is moving higher. Concern about persistent price pressures was bearish for T-notes after the Apr import price index ex-petroleum rose more than expected by the most in 16 months.

Losses in T-notes were contained after Apr housing starts rose less than expected and Apr building permits unexpectedly declined. Also, the May Philadelphia Fed business outlook survey fell more than expected. In addition, dovish comments today from New York Fed President Williams supported T-notes when he said he doesn't "see any need to tighten monetary policy today.”

European government bond yields today are mixed. The 10-year German bund yield recovered from a 1-month low of 2.399% and is up +1.3 bp at 2.436%. The 10-year UK gilt yield fell to a 5-week low of 4.041% and is down -1.2 bp at 4.054%.

ECB Governing Council member de Cos said the "central scenario" is for an interest-rate reduction by the ECB at its next meeting on June 6.

US Stock Movers

Walmart (WMT) is up more than +6% to lead gainers in the S&P 500 and Dow Jones Industrials after reporting Q1 total US comparable sales ex-gas rose +3.90%, stronger than the consensus of +3.42%. Other retailers also rallied on the Walmart news with Target (TGT), Dollar Tree (DLTR), Costco Wholesale (COST), and Dollar General (DG) up more than +2%.

Trade Desk (TTD) is up more than +4% to lead gainers in the Nasdaq 100 after several analysts said the company’s pact to help facilitate automated ad purchases for Netflix is a “huge positive” for the stock.

3M Co (MMM) is up more than +3% after Vertical Research upgraded the stock to buy from hold with a price target of $140.

Chubb (CB) is up more than +3% after Berkshire Hathaway unveiled a $6.7 billion stake in the company.

AI hardware providers are moving higher today. Marvell Technology (MRVL) is up more than +4%, and Advanced Micro Devices (AMD) is up more than +3%. Also, Intel (INTC) and Micron Technology (MU) are up more than +1%.

Yum! Brands (YUM) is up more than +2% after announcing a $2 billion stock buyback plan.

Deere & Co (DE) is down more than -2% after cutting its full-year profit forecast to about $7.0 billion from a prior view of $7.50 billion-$7.75 billion.

Homebuilders are under pressure on today’s weaker-than-expected reports on US Apr housing starts and building permits. As a result, DR Horton (DHI) and Lennar (LEN) are down more than -2%. Also, PulteGroup (PHM) and Toll Brothers (TOL) are down more than +1%.

Biogen (BIIB) is down more than -2% to lead losers in the Nasdaq 100 after it decided to terminate its development with Ionis of BIIB105, a treatment for amyotrophic lateral sclerosis, based on results from a Phase 1-2 study.

Civitas Resources (CIVI) is down more than -2% after holder Canada Pension Plan Investment Board offered 6.96 million shares via Bank of America Securities.

Meta Platforms (META) is down more than -1% after the European Union announced a probe of the company over concerns its algorithms are illegally exploiting the weakness of children to get them addicted to Facebook and Instagram.

Earnings Reports (5/16/2024)

Advanced Drainage Systems Inc (WMS), Applied Materials Inc (AMAT), Copart Inc (CPRT), Deere & Co (DE), Doximity Inc (DOCS), DXC Technology Co (DXC), Flowers Foods Inc (FLO), Globant SA (GLOB), Take-Two Interactive Software (TTWO), Under Armour Inc (UAA), Walmart Inc (WMT).

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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.