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Main U.S. indexes close higher, and chip index adds >3%
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Tech leads S&P 500 sector gainers; comm svcs weakest group
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Dollar barely up; crude adds >2%; gold slips, bitcoin off
~1%
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U.S. 10-Year Treasury yield falls to ~3.88%
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U.S. STOCKS END FLIP-FLOP SESSION HIGHER (1605 EST/2105 GMT) Wall Street's three major indexes closed Thursday higher with strong economic data keeping investors focused on how the Federal Reserve will react in its battle against inflation. Stocks were likely helped, however, by a decline in U.S. Treasury yields with some suggestion that fixed income investors had already priced in higher interest rates.
Also, the day's most noticeable outperformer, the Philadelphia semiconductor index finished up with Nvidia , its top performer, jumping 14% after its quarterly report and financial guidance late on Wednesday. It was the stock's biggest one-day percentage gain since Nov. 10 2022. In S&P sectors tech , with help from chips, was the biggest gainer followed by energy which rose with oil prices on expectations of steep cuts to Russian production next month which weighed against demand concerns. The Dow Jones industrial average closed higher, but its intraday trough was its lowest level in two months.
On Friday, key data releases include the monthly PCE price
index with economists expecting a year-over-year increase of
4.3% vs prior month's 4.4%, as per Refinitiv.
Here is your closing snapshot:
(Sinéad Carew)
*****
DEFENSE STOCKS: A YEAR INTO THE RUSSIA-UKRAINE WAR [1337 EST/1837 GMT] Defense stocks have in the U.S. and Europe have rallied sharply on expectations of fatter defense budgets since Russia invaded Ukraine this time last year. London-listed BAE Systems hit a record-high on Wednesday, following a near 50% jump in its shares since the start of the war last February as European nations beef up their military spending. For instance, Germany, which had been criticized for decades for thin defense spending, is poised to increase its budget by as much as 10 billion euros next year, according to a recent report from Bloomberg.
Germany's Rheinmetall has added an eye-popping 152% since last February. "With many governments raising their defense budgets amid escalating global tensions, the largest defense companies have continued to make gains this year," said Susannah Streeter, head of money and markets at Hargreaves Lansdown. "The upwards trajectory has been punctured by volatility as turbulent energy costs and potential supply chain issues are still trip hazards and the long-term nature of many contracts means that the related risks and costs can change over time." U.S. arms makers, however, have lagged their peers in Europe this year, as fears around the 2024 defense budget and the impact of debt ceiling negotiations weigh.
For instance, Lockheed Martin Corp is up over 20% since the start of the war but has receded a little from its all-time high in December.
Lockheed Martin has 75% exposure to defense spending, Goldman Sachs said in a note last month where it downgraded the weapons maker to "sell" from "neutral". Fears of large defense cuts are likely unfounded, according to Jefferies analysts.
"However, the risk of gridlock between the Democrats and
Republicans, and potentially even within the Republican Party
creates the risk that nothing gets done," they added.
The Administration's budget request is expected to be
released on March 9, where Jefferies sees a 4% growth from the
2023 budget.
(Bansari Mayur Kamdar)
*******
THE SHOW IS NOT OVER FOR HIGH DIVIDEND-YIELDING STOCKS (1257
EST/1757 GMT)
With interest rates likely to stay elevated for a while and
a potential recession on the horizon, owning high
dividend-yielding stocks doesn't seem like a bad idea, according
to UBS strategists.
High dividend-yielding stocks outperformed broader markets in
2022, with the ProShares S&P 500 Dividend Aristocrats ETF down 8.6% last year compared to a 19.4% drop in the
benchmark S&P 500 index .
While such stocks have lost momentum in 2023, they still
look attractive given their relative insulation from inflation,
stronger pricing power and discounted valuations, according to
UBS.
UBS strategists expect dividend growth to remain resilient
in 2023 even as a slowing economy hurts company earnings, thanks
to the 'defensive' nature and reliable income of high dividend
yielding stocks.
According to an analysis by UBS, sectors whose dividends are
least sensitive to a slowdown in earnings are energy, healthcare
equipment and services, semiconductor and transportation.
"High dividend yield stocks with strong quality are amongst
the less cyclical and should be less vulnerable to a
deceleration in economic activity," said the strategists in a
note.
UBS prefers sectors which yield reasonable dividend
currently and have strong dividend growth potential, such as
energy, transportation and semis.
The strategists also believe payout ratios are likely to
rise back towards average levels, giving another shot in the arm
to high dividend yielding stocks.
Pioneer Natural Resources and Coterra Energy are the highest dividend yielding stocks on the S&P
500, according to Refinitiv data.
(Amruta Khandekar)
*****
IRRATIONALITY MAKES ITS RETURN, RIGHT ON CUE (1204 EST/1704
GMT)
Many market players believe that today’s hostile monetary
backdrop arguably makes recent stock market exuberance
especially irrational.
However, according to Doug Ramsey, chief investment officer
at The Leuthold Group, we are in the middle of a special
seasonal window that’s witnessed more than its fair share of
irrationality.
As Ramsey sees it, years preceding presidential elections
tend to enjoy a very strong start. For example, he says that the
NASDAQ’s average gain in the first five weeks of such years has
been +7.6%, and this year it’s nearly double that.
"We should know better, though, than to dismiss the
presidential election cycle in the stock market as irrational,"
writes Ramsey in a note.
According to Ramsey, key measures of monetary and fiscal
policy tend to trace out four-year paths optimized for the
re-election of the president (or their party). Specifically,
monetary and fiscal stimulus is apt to ramp up during the
pre-election year, stoking the economic furnace for the
following year’s presidential campaign.
Ramsey also says that it's no surprise that the Leading
Economic Indicators show a similar pattern.
"The annualized six-month growth rate in the LEI has (on
average) been inclined to trough right around the mid-term
elections," says Ramsey. And "not coincidentally, that’s by far
the best time in the four-year cycle to get long stocks and hold
for the next six months (and usually longer)."
(Terence Gabriel)
*****
SEARCHING FOR SOFTNESS: GDP REVISED DOWN, CLAIMS DIP (1116
EST/1616 GMT)
Two sets of data released on Thursday did little to change
the "higher for longer" Fed narrative - the economy is still
fairly robust and the labor market remains surprisingly tight,
despite Powell & Co's restrictive stance.
The Commerce Department took a second stab at fourth-quarter
GDP , revising it down to a still-solid 2.7% on a
quarterly annualized basis.
The 20 basis point drop was mitigated by a sharp upgrade in
business investment, particularly inventories.
Exports and fixed investment - which includes construction spending - were detractors, together reducing the topline by a full percentage point. Quarterly headline and core inflation were jacked up to 3.7% and 4.3%, respectively, but market participants are willing to look past that, for now, because the less stale monthly PCE price index is due on Friday (at any rate, economists polled by Reuters expect core PCE prices to have grown by 4.3% year-on-year, signifying a modest cooldown). "The pace of expansion should slow in Q1," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "From the Fed's perspective, a slowdown in the economy is anticipated and will be welcome news."
The topline GDP downgrade was largely attributable to weaker-than-previously-stated consumer spending - slashed to 1.4% from 2.1% - a worrisome development, considering the consumer is burdened with about 70% of the U.S. economy. And services expenditures did all the lifting. Personal consumption of durable goods actually subtracted 0.2 percentage points from total GDP, while spending on non-durable merchandise contributed zilch. "With excess savings buffers contracting, income growth anticipated to slow, and credit demand poised to weaken, we expect that consumer spending will retrench later this year," says Oren Klachkin, lead U.S. economist at Oxford Economics (OE). Meanwhile, the number of U.S. workers filing first-time applications for unemployment benefits unexpectedly fell last week to 192,000, according to the Labor Department, or 8,000 fewer than analysts expected. The report marks the sixth straight week of initial claims south of the 200,000 level commonly associated with healthy labor market churn. The data stands as yet another reminder - as if we needed one in the wake of January's blowout employment report - that the labor market remains tighter than Fort Knox. Remember, that unemployment is at its lowest since 1969 and nearly two unfilled jobs for every jobless worker.
Employers aren't exactly in a rush to hand out pink slips, despite the recent spate of headline-grabbing layoff announcements from big tech.
That's worrisome for the Fed, as it keeps upward pressure on wage inflation. Ongoing claims , which are reported on a one-week lag and are symptomatic of the pace of hiring, slid by 2.2% to 1.654 million.
"We expect jobless claims to trend higher as the economy slows in response and eventually enters a mild recession later this year," says Nancy Vanden Houten, lead U.S. economist at OE. "But the rise may be muted compared to prior recessions as employers will be reluctant to lay off workers that have been difficult to find in the first place." "Given the strength of recent data, it will be more surprising if policymakers don't go even further than anticipated just a few months ago," says Jim Baird, chief investment officer at Plante Moran Financial Advisors.
"That could come in the form of larger rate hikes ... by
lifting short-term rates even higher than forecast, or by
holding them higher for longer."
After a solid start to the session Wall Street lost ground
with only the S&P 500 able to cling to a tiny gain. Chips were the clear star of the show, powered by Nvidia after its quarterly report.
(Stephen Culp)
*****
WALL STREET EQUITIES KICK OFF THE DAY WITH GAINS (1020
EST/1520 GMT)
Wall Street's three major indexes are advancing on Thursday
with the technology-heavy Nasdaq leading the charge with a
particular boost from semiconductors.
Equities had lost ground on Wednesday after the release of Federal Reserve meeting minutes.
The Philadelphia semiconductor index is up more than 2% with its biggest gains coming from Nvidia whose quarterly report late on Wednesday also put the rest of the sector in a good mood.
Nvidia's Q1 revenue forecast beat consensus as its CEO said use of its chips for artificial intelligence (AI) services like chatbots went "through the roof in the last 60 days." Still investors are watching economic data closely with their focus still on the Federal Reserve's rate hiking cycle.
The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, continuing to signal persistently tight labor market conditions. Also, a separate Commerce Department report confirmed the economy grew solidly in the fourth quarter, though much of the increase in output came from unsold goods at businesses. Only communication services and consumer discretionary are lower on Thursday. Technology is up more than 1% along with energy , which is being helped by rising oil prices.
Here is a market snapshot from just after 1015 EST:
(Sinéad Carew)
*****
S&P 500 ENERGY SECTOR STILL WELL-CAPPED BY RECORD HIGHS (0900 EST/1400 GMT) The S&P 500 energy sector has been the market's go to group. SPNY rocketed 59% in 2022, for its biggest yearly percentage rise ever. In fact, it was the only S&P 500 sector to post a gain in 2022, in a year that the benchmark index ended down nearly 20%. That said, energy failed to surpass its 2014 record high, and waning monthly momentum suggests caution: SPNY hit a high of 724.74 in November of last year, putting it within 2% of its 738.71 record-high recorded in June 2014. However, the monthly RSI failed to confirm the sector's rise late last year. A similar pattern of divergence developed into the group's 2008 top. Since its November peak, the sector has gyrated wildly, and now stands down 12% from that high. Year-to-date, the energy sector is off just over 5% vs an SPX rise of about 4%. SPNY is on track to end February above its rising 12-month moving average (MMA) for a 27th-straight month. If so, it will exceed the 26-month run into its 2014 high. The sector ended above its 12-MMA for 62-straight months into its 2008 top. In any event, with the 12-MMA now around 625, or less than 2% below Wednesday's 637.29 close, the group may need to quickly heat up again. Traders will be watching for a monthly close below the 12-MMA as it may confirm a significant break in SPNY's longer-term advance. Meanwhile, NYMEX crude futures have been on the back foot. The futures now around $75.00 are down more than 40% from their $130.50 March 2022 high, and a chart magnet still beckons for lower levels.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
