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Rich Asplund

Stocks Mixed as Weak ADP Report Bolsters the Outlook for Fed Rate Cuts

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.11%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.15%.

Stocks are mixed after a smaller-than-expected increase in Nov ADP employment bolstered speculation the Fed is done raising interest rates and will begin cutting them next year.  Stocks found some support earlier on today’s reports that showed U.S. Q3 nonfarm productivity was revised higher and Q3 unit labor costs were revised lower, dovish factors for Fed policy. 

On the positive side for stocks, Campbell Soup is up more than +6% after reporting Q1 adjusted EPS above consensus.  Also, airline stocks are moving higher after the International Air Transport Association (IATA) forecasted airline industry profits to reach $23.5 billion this year, more than double the prediction made in June.  In addition, SentinelOne is up more than +18% after reporting Q3 revenue above consensus and raising its 2024 revenue forecast.

On the negative side, energy stocks are falling today, with the WTI crude price down more than -3% at a 5-month low. Also, Brown-Forman is down more than -10% after reporting weaker-than-expected Q2 EPS and cutting its full-year organic net sales forecast.  In addition, Box Inc is down more than -9% after reporting weaker-than-expected Q3 adjusted EPS and cutting its 2024 adjusted EPS forecast. 

The U.S. Nov ADP employment change rose +103,000, weaker than expectations of +130,000.

U.S. Q3 nonfarm productivity was revised upward to 5.2% from 4.7%, better than expectations of 4.9% and the highest in three years.  Q3 unit labor costs were revised downward to -1.2% from the previously reported -0.8%, a bigger decline than expectations of -0.9%.

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 70% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are more than fully discounting (141%) that -25 bp rate cut at the April 30-May 1, 2024, FOMC meeting. 

U.S. and European government bond yields today are lower. The 10-year T-note yield dropped to a 3-month low of 4.110% and is down -4.4 bp at 4.121%.  The 10-year German bund yield fell to a 6-3/4 month low of 2.203% and is down -3.5 bp at 2.212%.  The 10-year UK gilt yield fell to a 6-1/2 month low of 3.948% and is down -6.8 bp at 3.957%. 

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.78%.  China’s Shanghai Composite Index closed down -0.11%.  Japan’s Nikkei Stock Index closed up +2.04%.

Today’s stock movers…

Campbell Soup (CPB) is up more than +6% to lead gainers in the S&P 500 after reporting Q1 adjusted EPS of 91 cents, stronger than the consensus of 88 cents. 

Airline stocks are moving higher today after the International Air Transport Association (IATA) forecasted that airline industry profits will reach $23.5 billion this year, more than double the prediction made in June.  As a result, American Airlines Group (AAL), Delta Air Lines (DAL), United Airlines Holdings (UAL), Alaska Air Group (ALK), and Southwest Airlines (LUV) are up more than +4%.   

Airbnb (ABNB) is up more than +3% after Argus Research raised its price target on the stock to $155 from $141. 

Citigroup (C) is up more than +4% after it presented at the Goldman Sachs U.S. Financial Services Conference and analysts said Citigroup’s commentary of lower expenses for 2024 was bullish for the stock. 

SentinelOne (S) surged more than +18% in pre-market trading after reporting Q3 revenue of $164.2 million, better than the consensus of $156 million, and raising its 2024 revenue forecast to $616 million from a prior estimate of $605 million, stronger than the consensus of $605.4 million.

Avis Budget Group (CAR) is up more than +8% after it declared a special cash dividend of $10 per share.

Discover Financial Services (DFS) is up more than +5% after Bank of America Global Research upgraded the stock to buy.

Toll Brothers (TOL) is up more than +3% after reporting Q4 revenue of $3.02 billion, stronger than the consensus of $2.78 billion, and forecasting 2024 home deliveries between 9,850-10,350, above the consensus of 9,705. 

Brown-Forman (BF/B) is down more than -10% to lead losers in the S&P 500 after reporting Q2 EPS of 50 cents, weaker than the consensus of 51 cents, and cutting its full-year organic net sales forecast to +3% to +5 from a prior forecast of +5% to +7%.

Old Dominion Freight Line (ODFL) is down more than -3% to lead losers in the Nasdaq 100 after reporting November less-than-truckload (LTL) tons per day fell -2.3% y/y.

Energy stocks and energy service providers are falling today, with the price of WTI crude down more than -2% at a 5-month low. As a result, Diamondback Energy (FANG), Marathon Petroleum (MPC), ConocoPhillips (COP), Marathon Oil (MRO), and Valero Energy (VLO) are down more than -1%.

Asana (ASAN) is down more than -15% after HSBC downgraded the stock to reduce from hold with a price target of $18. 

Box Inc (BOX) is down more than -9% after reporting Q3 adjusted EPS of 36 cents, weaker than the consensus of 38 cents, and cut its 2024 adjusted EPS forecast to $142-$1.43 from a previous forecast of $1.46-$1.50, below the consensus of $1.49. 

Palantir Technologies (PLTR) is down more than -4% after an SEC filing showed president and co-founder Cohen sold $13 million of shares last Friday and Monday. 

Cboe Global Markets (CBOE) is down more than -2% after reporting U.S. equities on-exchange average daily volume in November fell -10.5% y/y.

Across the markets…

March 10-year T-notes (ZNH24) this morning are up +4 ticks, and the 10-year T-note yield is down -4.4 bp at 4.121%.  Mar T-note prices this morning rallied to a 3-month high, and the 10-year T-note yield fell to a 3-month low of 4.110%.  T-notes opened higher on signs of weakness in the U.S. labor market after the Nov ADP employment change rose less than expected. T-notes extended their gains after Q3 productivity was revised higher and Q3 unit labor costs were revised lower, dovish factors for Fed policy.  T-notes have carryover support from today’s rally in 10-year German bunds to a 6-3/4 month high.  Finally, a fall in inflation expectations is supportive of T-note prices after the 10-year U.S. breakeven inflation rate dropped to a 5-3/4 month low today at 2.162%. 

The dollar index (DXY00) today is down by -0.15%.  The dollar today fell back from a 2-week high and is slightly lower. A decline in T-note yields today is undercutting the dollar.  Also, today’s Fed-friendly U.S. economic reports on Nov ADP employment and Q3 nonfarm productivity undercut the dollar.  In addition, today’s rally in stocks has reduced the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.02% and dropped to a 3-week low.  The euro today is under pressure from weaker than expected economic reports on Eurozone Oct retail sales and German Oct factory orders.  EUR/USD recovered most of its losses on hawkish comments from ECB Governing Council member Kazaks, who said there's no need for ECB rate cuts in the first half of 2024. 

Eurozone Oct retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German Oct factory orders unexpectedly fell -3.7% m/m, weaker than expectations of +0.2% m/m.

The German Nov S&P construction PMI fell -2.1 to 36.2, the weakest level since the data series began in 2020.

ECB Governing Council member Kazaks said given the current economic outlook and medium-term projection baseline, there's no need for ECB rate cuts in the first half of 2024.

Swaps tied to ECB meeting dates have now priced in a 79% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting.

USD/JPY (^USDJPY) today is down by -0.01%.  The yen today is little changed.  Today’s decline in T-note yields is bullish for the yen.  On the negative side was today’s +2% rally in the Nikkei Stock Index, which curbed safe-haven demand for the yen.  Also, dovish comments today from BOJ Deputy Governor Himino weighed on the yen when he said the BOJ will patiently continue its easy monetary policy until a stable inflation target is in sight.   

February gold (GCG4) today is up +8.1 (+0.40%), and Mar silver (SIH24) is down -0.111 (-0.45%).  Gold and silver this morning are mixed.  A weaker dollar today is supportive of metals.  Also, today’s decline in global bond yields is bullish for precious metals. Silver prices are under pressure today on the weaker-than-expected U.S. ADP employment and German factory orders reports, which signaled weak demand for industrial metals.  Also, a slump in the 10-year breakeven inflation rate today to a 5-3/4 month low has curbed demand for gold as an inflation hedge.  In addition, hawkish comments today from ECB Governing Council member Kazaks were bearish for precious metals when he said there's no need for ECB rate cuts in the first half of 2024.

More Stock Market News from Barchart

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.
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