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Stocks Finish Higher on Dovish Fed Outlook

Barchart - Fri Dec 1, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +0.59%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.82%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.31%.

Stocks on Friday posted moderate gains, with the S&P 500 climbing to a 4-month high and the Dow Jones Industrials climbing to a 1-3/4 year high.  Stocks rallied after Friday’s weaker-than-expected U.S Nov ISM manufacturing index knocked bond yields lower and bolstered expectations that the Fed is finished raising interest rates.  Stocks rallied even after Fed Chair Powell said it was “premature” to speculate on when the Fed would begin cutting interest rates.

On the positive side, real estate investment trusts rallied Friday on expectations the Fed is done raising interest rates and would begin cutting rates as early as next year.  Also, Ulta Beauty closed up more than +10% after reporting stronger-than-expected Q3 net sales.  In addition, Paramount Global closed up more than +9% after the Wall Street Journal reported that Apple has discussed bundling its streaming services with Paramount at a discount.

On the negative side for stocks, Pfizer closed down more than -5 % after it dropped the development of its experimental weight loss drug danuglipron after a high rate of side effects appeared in a mid-stage study.  Also, Marvell Technology closed down more than -4% after forecasting Q4 net revenue below consensus.  In addition, Dell Technologies closed down more than -6% after reporting Q3 total net revenue below consensus and forecasting weaker-than-expected Q4 revenue. 

U.S. equity markets also have carryover support from Friday’s rally in the Euro Stoxx 50 to a 4-month high.  Friday’s jump in copper prices to a 3-month high fueled a rally in mining stocks to lead European equities higher.  Copper gained after Friday’s news showed an unexpected expansion in Chinese manufacturing activity last month.  European stocks extended their gains when the 10-year German bund yield tumbled to a 4-1/2 month low after ECB Governing Council member Villeroy de Galhau said, "Barring any shock, ECB rate hikes are over."

The U.S. Nov ISM manufacturing index was unchanged at 46.7, weaker than expectations of an increase to 47.8 and the 13th consecutive month of contraction in manufacturing activity.

U.S. Oct construction spending rose +0.6% m/m, stronger than expectations of +0.3% m/m.

Fed Chair Powell signaled the Fed will leave interest rates steady at the Dec 12-13 FOMC meeting when he said, "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease." 

Chicago Fed President Goolsbee said, "There's no evidence that inflation has stalled at 3%, and I think it's still on track to get to 2%."

The markets are discounting a 1% 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 73% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and have fully discounted (a 148% 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 moved lower. The 10-year T-note yield dropped to a 2-3/4 month low of 4.205% and finished down -10.4 bp at 4.222%.  The 10-year German bund yield dropped to a 4-1/2 month low of 2.348% and finished down -8.5 bp at 2.362%.  The 10-year UK gilt yield fell -3.6 bp at 4.140%. 

The China Nov Caixin manufacturing PMI rose +1.2 to 50.7, stronger than expectations of 49.6.

ECB Governing Council member Villeroy de Galhau said, "Barring any shock, ECB rate hikes are over," and we can look at rate cuts when the time comes in 2024.

Overseas stock markets on Friday settled mixed.  The Euro Stoxx 50 closed up +0.82%.  China’s Shanghai Composite Index closed up +0.06%. Japan’s Nikkei Stock Index closed down -0.17%.

Today’s stock movers…

Real estate investment trusts rallied Friday on expectations the Fed was done raising interest rates and would begin cutting rates as early as next year.  As a result, Boston Properties (BSX) closed up more than +10% to lead gainers in the S&P 500.  Also, Alexandria Real Estate Equities (ARE) closed up more than +7%, and Healthpeak Properties (PEAK) closed up more than +4%.  In addition, Kimco Realty (KIM), Essex Property Trust (ESS), and Simon Property Group (SPG) closed up more than +3%.   

Ulta Beauty (ULTA) closed up more than +10% to lead gainers in the S&P 500 after reporting Q3 net sales of $2.49 billion, stronger than the consensus of $2.47 billion.

Paramount Global (PARA) closed up more than +9% after the Wall Street Journal reported that Apple has discussed bundling their streaming services with Paramount at a discount. 

Regional bank stocks rallied Friday to lift the overall market.  Zions Bancorp (ZION) closed up more than +7%, and KeyCorp (KEY) and Comerica (CMA) closed up more than +6%.  Also, Fifth Third Bancorp (FITB) and Regions Financial (RF) closed up more than +5%.  In addition, Synchrony Financial (SYF) and Huntington Bancshares (HBAN) closed up more than +4%. 

UiPath (PATH) closed up more than +26% after reporting Q3 adjusted EPS of 12 cents, stronger than the consensus of 7 cents. 

Freeport-McMoRan (FCX) closed up more than +5% after gold prices rallied to a record high and copper prices rallied to a 3-month high. 

Norfolk Southern (NSC) closed up more than +3% after Bank of America Global Research upgraded the stock to buy from neutral with a price target of $248.

Pfizer (PFE) closed down more than -5% to lead losers in the S&P 500 after it dropped development of its experimental weight loss drug danuglipron after a high rate of side effects appeared in a mid-stage study. 

Marvell Technology (MRVL) closed down more than -5% to lead losers in the Nasdaq 100 after forecasting Q4 net revenue of $1.42 billion, below the consensus of $1.46 billion.

Dell Technologies (DELL) closed down more than -5% after reporting Q3 total net revenue of $22.25 billion, below the consensus of $22.98 billion, and forecasting Q4 revenue of $21.5 billion-$22.5 billion, weaker than the consensus of $23.79 billion.   

Eli Lilly (LLY) closed down more than -1% after the European Union’s drugs regulator asked the company for more information as it reviews the potential risk of suicidal thoughts associated with its new weight-loss medicines.

Across the markets…

March 10-year T-notes (ZNH24) Friday closed up +28 ticks, and the 10-year T-note yield fell -10.4 bp to 4.222%.  Mar T-note prices Friday rallied to a 3-month high, and the 10-year T-note yield fell to a 2-3/4 month low of 4.205%. T-notes moved higher Friday after the U.S. Nov ISM manufacturing index contracted more than expected.  T-notes extended their gains on dovish comments from Fed Chair Powell and Chicago Fed President Goolsbee, who signaled their support for the Fed to leave interest rates steady at the Dec 12-13 FOMC meeting. In addition, T-notes garnered carryover support from a rally in 10-year German bunds to a 4-1/2 month high after ECB Governing Council member Villeroy de Galhau said, "Barring any shock ECB rate hikes are over." 



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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.