Market Overview
The S&P 500 index rose by 0.47% and closed higher on Monday, while the Dow Jones Industrial Average gained 0.11%. The Nasdaq 100 saw an increase of 0.84%. E-mini S&P Futures and E-mini Nasdaq futures also experienced gains of 0.43% and 0.80%, respectively. This climb in stock indexes was marked by the S&P 500 and Nasdaq 100 reaching unprecedented highs, largely due to declining bond yields, which bolstered market sentiment ahead of the upcoming FOMC meeting expected to result in a 25 basis point interest rate hike. Notably, T-note yields over ten years decreased by 4.04% after dipping by 2 basis points. Additionally, major technology stocks and chip manufacturers contributed positively to the overall market trend.
However, there were concerns related to trade tensions with China that adversely affected some chipmakers. For instance, Texas Instruments saw a drop of over 2% after China launched an investigation into certain semiconductors the company produces. Furthermore, Nvidia was flagged for violating regulations following its acquisition of Mellanox technology in 2020.
On the economic front, the U.S. reported disappointing inventory news, with the September Empire manufacturing survey revealing a decline to -20.6, which was significantly lower than the expected figure of 5.0.
Most key U.S. benchmark indexes are still setting record highs, influenced by anticipated interest rate cuts from the Federal Reserve. Weak labor market signals and relatively subdued inflation reports suggest the Fed might lower rates by at least 25 basis points during the FOMC meeting on Tuesday/Wednesday, with expectations for a total reduction of 70 basis points by year’s end.
The disheartening economic reports from China are adding to the global growth apprehension. China’s industrial production rose by only 5.2% year-over-year in August, below the expected 5.6%. Similarly, retail sales in China increased by 3.4% year-over-year, falling short of the 3.8% forecast. The national unemployment rate unexpectedly edged up to 5.3%, indicating a weaker labor market, and new home prices in China continued to slide for the 27th consecutive month with a 0.3% month-over-month decrease.
This week’s market will closely watch any new developments regarding trade or tariffs. Analysts expect retail sales to rise by 0.3% month-over-month in August, with auto sales anticipated to increase by 0.4%. Additionally, production is projected to dip by 0.3% month-over-month. On Tuesday, the September NAHB Housing Market Index is expected to increase by one point to 33, while the FOMC is anticipated to cut the federal funding rate target by 25 basis points. Initial weekly unemployment claims are expected to decrease by 23,000, landing between 240,000 and 245,000.
The market is fully pricing in a 100% chance of a 25 basis point reduction, with a slight 5% chance of a more significant 50 basis point drop during the FOMC meeting. Following the expected cut, there is an 80% chance of a second 25 basis point reduction during the October meeting, adjusting the projected overall reduction to 68 basis points by year’s end, targeting a funding rate of 3.65% from the current 4.33%.
Internationally, stock markets were mixed on Monday. The Euro Stoxx 50 reached a three-week high with a gain of 0.92%, while the Shanghai Composite in China dropped by 0.26%. The Japanese Nikkei 225 was closed in observance of a local holiday.
Interest Rates and T-Notes
The December 10th T-note saw a modest gain of 6 ticks on Monday, with yields decreasing by 4.036%. The recovery in business conditions in the U.S. Empire manufacturing survey, although still low, was significant enough to impact Fed policy. T-Notes are also being supported by expectations of an interest rate cut of at least 25 basis points at the upcoming FOMC meeting. Despite strong stock performance on Monday limiting profits in T-Note prices, apprehensions about the Fed’s autonomy have put downward pressure on T-note prices following Stephen Milan’s stated intentions regarding his roles.
European government bond yields also dipped on Monday. German yields decreased by 2.691%, and U.K. yields fell by 4.633%.
In September, Germany’s wholesale price index fell by 0.6% month-over-month, marking the largest annual decline. ECB officials mentioned that the cycle for interest rate reductions is potentially “very close” and that they can hold current policy unless data shows significant shifts. There’s also caution regarding inflation as various factors could drive prices higher.
Recently, Fitch downgraded France’s credit rating from AA to A+, attributing the decision to rising national debt and political instability.
Swaps suggest a low probability—3%—for a 25 basis point cut during the ECB’s policy meeting on October 30th.
Stock Movements
The uptick in megacap tech stocks on Monday underpinned the broader market. For instance, Alphabet surged more than 4% after Citigroup raised its price target significantly. Tesla also rose by over 3% following news of Elon Musk’s substantial share purchase. Meanwhile, Amazon and several other tech giants like Meta, Microsoft, and Apple enjoyed gains exceeding 1%.
The semiconductor sector performed well, with ASML Holding leading the NASDAQ 100 by closing over 6% higher. Other notable performers included Applied Materials and AMD, each seeing gains of over 1%.
Seagate Technology surged more than 7% following an upgrade in its stock target by Bank of America. Western Digital also saw an increase of over 4% on a similar upgrade. Oracle rose more than 3% after discussions regarding a potential Tiktok deal.
On the flip side, Corteva experienced a drop of 5% after news related to potential cuts to its seed and pesticide business. Texas Instruments also fell by over 2% in the wake of the semiconductor investigation by China.
Other companies experienced mixed fortunes, with Builders FirstSource and AstraZeneca both seeing downgrades affecting their stock prices, while Eaton Corp enjoyed positivity after an upgrade.
Overall, the markets are navigating through a mix of encouraging developments and cautious trends as they wait for key announcements.
