Stocks Led Higher by Chip Stocks

Rich Asplund - Barchart - Fri Jan 19, 10:25AM CST

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.30%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.21%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.66%.

Stocks this morning are moderately higher, with the Nasdaq 100 posting a new record high. A rally in chip stocks for a second day is boosting technology stocks and the overall market after Taiwan Semiconductor Manufacturing Co gave an upbeat outlook for this year, bolstering hopes for a recovery in chip sales.

Today’s U.S. economic news was mixed after existing home sales fell to a 13-year low and Jan consumer sentiment climbed to a 2-1/2 year high. However, U.S. inflation expectations, as measured by the University of Michigan, retreated this month, bolstering hopes for the Fed to engineer a soft landing of the economy.

An easing of political risks is supporting stocks after Congress passed a continuing resolution late Thursday night to fund the government into March and avoid a shutdown on Saturday. The interim measure would fund some U.S. agencies through March 1 and others through March 8.

On the negative side for stocks is higher bond yields as the 10-year T-note yield climbed to a 5-week high today of 4.171%. Also, iRobot plunged more than -30% after Bloomberg reported the European Union’s antitrust watchdog is planning to block Amazon.com’s planned acquisition of the company.

The University of Michigan U.S. Jan consumer sentiment index rose +9.1 to a 2-1/2 year high of 78.8, stronger than expectations of 70.1.

The University of Michigan U.S. Jan 1-year inflation expectations unexpectedly fell -0.2 points to a 3-year low of 2.9% versus expectations of no change at 3.1%. Also, the Jan 5-10-year inflation expectations unexpectedly fell -0.1 to 2.8%, better than expectations of an increase to 3.0%.

U.S. Dec existing home sales unexpectedly fell -1.0% m/m to a 13-year low of 3.78 million versus expectations of a +0.3% m/m increase to 3.83 million.

The markets are discounting the chances for a -25 bp rate cut at 3% at the next FOMC meeting on Jan 30-31 and 54% for that same -25 bp rate cut for the following meeting on March 19-20.

U.S. and European government bond yields today are mixed. The 10-year T-note yield rose to a 5-week high of 4.196% and is up +1.7 bp at 4.159%. The 10-year German bund yield is down -1.1 bp at 2.339%. The 10-year UK gilt yield is down -0.1 bp at 3.929%.

Overseas stock markets are mixed. The Euro Stoxx 50 is down -0.17%. China’s Shanghai Composite Index closed down -0.47%. Japan’s Nikkei Stock Index closed up +1.40%.

Today’s stock movers…

Travelers (TRV) is up more than +5% to lead gainers in the S&P 500 and Dow Jones Industrials after reporting Q4 net premiums written of $9.99 billion, above the consensus of $9.93 billion.

State Street (STT) is up more than +3% after reporting Q4 adjusted EPS of $2.04, above the consensus of $1.84.

Texas Instruments (TXN) is up more than +3% to lead gainers after UBS upgraded the stock to buy from neutral with a price target of $195.

Schlumberger (SLB) is up more than +2% after reporting Q4 revenue of $8.99 billion, stronger than the consensus of $8.94 billion.

Chip stocks are climbing for a second day after Taiwan Semiconductor Manufacturing Co said it expects a return to solid growth this quarter. As a result, Applied Materials (AMAT), Broadcom (AVGO), Micron Technology (MU), and Qualcomm (QCOM) are up more than +2%. Also, Nvidia (NVDA), KLA Corp (KLAC), Marvell Technology (MRVL), Advanced Micro Devices (AMD), Analog Devices (ADI), and Lam Research (LRCX) are up more than +1%.

Wayfair (W) is up more than +8% after cutting 1,650 employees, or about 13% of its global workforce.

International Business Machines (IBM) is up more than +1% after Evercore ISI upgraded the stock to outperform from in line with a price target of $200.

iRobot (IRBT) is down more than -28% after Bloomberg reported that the European Union’s antitrust watchdog plans to block Amazon.com’s planned acquisition of the company.

Duolingo (DUOL) is down more than -6% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $160.

Airline stocks are under pressure today after Delta Air Lines said it would cancel all flights to Tel Aviv through April 30. As a result, Delta Air Lines (DAL) is down more than -3%. Also, American Airlines Group (AAL and United Airlines Holdings (UAL) are down more than -2%, and Southwest Airlines (LUV) is down more than -1%.

PPG Industries (PPG) is down more than -1% after forecasting Q1 adjusted EPS of $1.80-$1.87, weaker than the consensus of $1.97.

Cummins (CMI) is down more than -1% after Bank of America Global Research downgraded the stock to underperform from neutral.

Across the markets…

March 10-year T-notes (ZNH24) this morning are down -5 ticks, and the 10-year T-note yield is up +1.7 bp at 4.159%. Mar T-note prices today fell to a 5-week low, and the 10-year T-note yield climbed to a 5-week high of 4.196%. Strength in stocks today has reduced the safe-haven demand for T-notes. Also, rising inflation expectations are bearish for T-notes as today's 10-year breakeven inflation rate rose to a 2-month high of 2.355%. T-notes fell to their lows after this morning’s report on the University of Michigan’s U.S. Jan consumer sentiment index rose more than expected to a 2-1/2 year high.

The dollar index (DXY00) today is down -0.16%. The dollar today is moderately lower as strength in stocks has curbed liquidity demand for the dollar. Also, today’s report that showed U.S. Dec existing home sales unexpectedly fell to a 13-year low was bearish for the dollar. However, the dollar recouped most of its losses as bond yields rose after U.S. Jan consumer sentiment climbed to a 2-/12-year high.

EUR/USD (^EURUSD) is up slightly by +0.10%. Dollar weakness today is helping the euro to post modest gains. Also, expectations for the ECB to cut interest rates have faded and are supporting EUR/USD as swaps markets now show the chance of an ECB rate cut at the March meeting falling to 16% from more than 50% at the beginning of the month. However, the upside in the euro is limited after the German Dec PPI fell more than expected, a dovish factor for ECB policy.

German Dec PPI fell -1.2% m/m and -8.6% y/y, weaker than expectations of -0.4% m/m and -8.0% y/y.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 16% for the following meeting on March 7.

USD/JPY (^USDJPY) is up by +0.16%. The yen erased overnight gains and fell to a fresh 1-1/2 month low against the dollar. Strength in U.S. bond yields is weighing on the yen after the 10-year T-note yield rose to a 5-week high. Another bearish factor for the yen was today’s Japan Dec CPI report that showed consumer prices rising at the slowest pace in 1-1/2 years, which was dovish for BOJ policy. The yen today initially moved higher on strength in Japanese government bond yields after the 10-year JGB bond yield rose to a 1-month high of 0.673%.

Japan’s Dec national CPI eased to +2.6% y/y from +2.8% y/y in Nov, the slowest pace of increase in 1-1/2 years. Dec national CPI ex-fresh food and energy eased to +3.7% y/y from +3.8% y/y in Nov, the slowest pace of increase in 10 months.

The Japan Nov tertiary index unexpectedly fell -0.7% m/m, weaker than expectations of +0.2% m/m.

February gold (GCG24) today is up +5.7 (+0.28%), and Mar silver (SIH24) is down -0.142 (-0.624%). Gold and silver prices this morning are mixed. A weaker dollar today is supportive of metals. Gold also has support as an inflation hedge after the 10-year breakeven inflation rate rose to a 2-month high today. In addition, gold has safe-haven support from geopolitical risks in the Middle East as Houthi rebels continue to attack ships in the Red Sea off the Yemen coast. Higher T-note yields today and strength in stocks are limiting gains in precious metals. Silver is also under pressure after today’s report showed U.S. Dec existing home sales unexpectedly fell to a 13-year low, indicating weakened demand for industrial metals.

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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.