Stocks Close Slightly Lower as Fed Rate Cut Prospects Fade

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The S&P 500 Index ($SPX) (SPY) Friday closed down -0.11%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.22%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.11%.

Stock indexes Friday erased morning gains and settled slightly lower.  Stocks were under pressure Friday after bond yields jumped on the stronger-than-expected US May payroll report, which has dialed back expectations for Fed interest rate cuts.  May nonfarm payrolls rose more than expected, and May average hourly earnings unexpectedly accelerated, which are hawkish factors for Fed policy. 

Stocks recovered early losses and briefly moved higher Friday morning before retreating, with the S&P 500 and Nasdaq 100 posting new record highs and the Dow Jones Industrials posting a 2-week high. Stocks found support Friday from the US May nonfarm payroll report as the solid jobs report downplayed concerns about an economic slowdown that could hurt corporate profits.  Also, Friday’s payroll report shows a resilient US labor market that should underpin consumer spending and keep the economy growing.

US May nonfarm payrolls rose +272,000, stronger than expectations of +180,000.  The May unemployment rate unexpectedly rose +0.1 to 4.0% versus expectations of no change at 3.9%.

US May average hourly earnings rose +0.4% m/m and +4.1% y/y, stronger than expectations of +0.3% m/m and +3.9% y/y.

US Apr consumer credit rose +$6.053 billion, weaker than expectations of +$10.000 billion.  Also, Mar consumer credit was revised downward to a contraction of -$1.099 billion from the previously reported increase of +$6.274 billion.

China May exports rose +7.6% y/y, stronger than expectations of +5.7% y/y and the biggest increase in 4 months, a supportive factor for global growth. 

The markets are discounting the chances for a -25 bp rate cut at 1% for the June 11-12 FOMC meeting and 9% for the following meeting on July 30-31.

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 Friday settled mixed.  The Euro Stoxx 50 closed down -0.35%.  China’s Shanghai Composite recovered from a 6-week low and closed up +0.08%.  Japan’s Nikkei Stock 225 Index closed down -0.05%.

Interest Rates

September 10-year T-notes (ZNU24) Friday closed down -1-1.5/32 points.  The 10-year T-note yield rose +13.9 bp to 4.426%. Sep T-note prices retreated Friday and yields jumped on the stronger-than-expected US May payroll report, which dampened the outlook for the Fed to cut interest rates anytime soon. T-notes also had some negative carryover Friday from a slide in 10-year German bunds. 

European government bond yields on Friday moved higher.  The 10-year German bund yield rose +7.1 bp to 2.620%.  The 10-year UK gilt yield rose +8.7 bp to 4.262%.

The Eurozone Q1 compensation per employee, the ECB’s preferred measure of wages, rose +5.1% y/y, stronger than expectations of +4.6% y/y, and accelerated from +4.9% y/y in Q4.

ECB Executive Board member Schnabel said, “As the future inflation outlook remains uncertain, the ECB cannot pre-commit to a particular interest rate path.”

German Apr industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.2% m/m.

German trade news was better than expected after Apr exports rose +1.6% m/m, stronger than expectations of +1.1% m/m.  Also, Apr imports rose +2.0% m/m, stronger than expectations of +0.5% m/m.

The Bundesbank cut its German 2024 GDP forecast to +0.3% from a previous forecast of +0.4% and raised its German 2024 inflation forecast to +2.8% from a prior estimate of +2.7%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 21% for the July 18 meeting and 52% for the September 12 meeting.

US Stock Movers

Mining stocks were under pressure Friday after metals prices sold off sharply.  As a result, Newmont (NEM) and AngloGold (AU) closed down more than -5%.  Also, Freeport McMoRan (FCX) closed down more than -3%, and ArcelorMittal (MT) closed down more than -2%. 

DocuSign (DOCU) closed down more than -4% after forecasting Q2 billings of $715 million-$725 million, weaker than the consensus of $727.8 million. 

Gen Digital (GEN) closed down more than -2% after Morgan Stanley downgraded the stock to equal weight from overweight. 

Homebuilders retreating Friday after T-note yields rose sharply, a bearish factor for housing demand.  PulteGroup (PHM) and DR Horton (DHI) closed down more than -2%.  Also, Toll Brothers (TOL) and Lennar (LEN) closed down nearly -1%.

Samsara (IOT) closed down more than -11% despite reporting better-than-expected Q1 results after Morgan Stanley attributed the decline to the beat on revenue being below buy-side expectations and the average beat from last year. 

Biomea Fusion (BMEA) closed down more than -63% after saying the FDA placed a clinical hold on its ongoing Phase I/II trials of BMF-219 in type 1 and type 2 diabetes. 

Vail Resorts (MTN) closed down more than -9 % after reporting Q3 net revenue of $1.28 billion, below the consensus of $1.29 billion, and cutting its full-year total reported Ebitda forecast to $825 million-$845 million from a previous forecast of $847 million-$889 million, well below the consensus of $859.8 million. 

Air Products and Chemicals (APD) closed up more than +4% to lead gainers in the S&P 500 after TotalEnergies SE signed a 15-year contract to buy green hydrogen from the company.

3M Co (MMM) closed up more than +2% to lead gainers in the Dow Jones Industrials after Bank of America Global Research upgraded the stock to buy from neutral with a price target of $120. 

Skechers USA (SKX) closed up more than +3% after Bank of America Global Research upgraded the stock to buy from neutral with a price target of $87. 

Emerson Electric (EMR) closed up more than +2% after it said it reached an agreement to sell its stake in the Copeland joint venture to Blackstone for $3.5 billion.

Hewlett Packard Enterprise (HPE) closed up more than +2% after Argus Research upgraded the stock to buy from hold.

International Paper (IP) closed up more than +2% on a Bloomberg report that said Suzano SA, the world’s largest pulp producer, could borrow as much as $19 billion on top of its existing debt to boost its offer to acquire the company. 

United Rentals (URI) closed up more than +2% after JPMorgan Chase initiated coverage of the stock with an overweight recommendation and a price target of $780. 

Earnings Reports (6/10/2024)

Autodesk Inc (ADSK), Calavo Growers Inc (CVGW), Children’s Place Inc/The (PLCE), FuelCell Energy Inc (FCEL), Ocean Biomedical Inc (OCEA), Skillsoft Corp (SKIL), Uranium Energy Corp (UEC), Yext Inc (YEXT).

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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.