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Stocks Rally as Bond Yields Plunge on U.S. Reports

Rich Asplund -Barchart - Fri Jan 6, 10:36AM CST

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.47%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +1.52%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.41%.

Stock indexes this morning are sharply higher, with the Dow Jones Industrials climbing to a 3-week high. A rally in bond prices today is underpinning stocks as a slowdown in hourly wage growth outweighed a mostly robust U.S. Dec payrolls report. Dec average hourly earnings rose +4.6% y/y, weaker than expectations of +5.0% y/y and the slowest pace of increase in 16 months.

Stock gains accelerated, and bond yields fell further, after the U.S. Dec ISM services report unexpectedly contracted at the steepest pace in 2-1/2 years. Also, Nov factory orders posted their biggest decline in 2-1/2 years.

The weak U.S. economic reports knocked the 10-year T-note yield down to a 2-1/2 week low of 3.588%.

U.S. stocks also garnered carry-over support today from a rally in European stocks to a 3-week high after today’s news that Eurozone Dec consumer prices rose less than expected and Eurozone Nov retail sales rose more than expected. Also, a rally in China’s Shanghai Composite to a 3-week high gave equities a boost after China took additional steps to revive its ailing property market.

Stock indexes initially moved lower in overnight trade on weakness in technology stocks, with Tesla down more than -2% after it announced another round of price cuts on its Model 3 and Y electric vehicles in China.

U.S. Dec nonfarm payrolls rose +223,000, stronger than expectations of +203,000. Also, the Dec unemployment rate unexpectedly fell -0.1 to 3.5%, matching a 53-year low and showing a stronger labor market than expectations of 3.7%.

U.S. Dec average hourly earnings rose +0.3% m/m and +4.6% y/y, weaker than expectations of +0.4% m/m and +5.0% y/y. The +4.6% y/y gain was the weakest in 16 months.

The Dec ISM services index fell -6.9 to 49.6, weaker than expectations of 55.0 and the steepest pace of contraction in 2-1/2 years.

U.S. Nov factory orders fell -1.8% m/m, weaker than expectations of -1.0% m/m and the biggest drop in 2-1/2 years.

Overseas markets today are higher. The Euro Stoxx 50 index is up +1.34%. The Shanghai Composite Stock index closed up by +0.08%, and Japan’s Nikkei Stock index closed up by +0.59%.

Today’s stock movers…

Costco Wholesale (COST) is up more than +6% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Dec total comparable sales rose +5.5%, stronger than expectations of +5.0%.

Energy producers and energy service providers are moving higher, with the price of WTI crude up more than +1%. Valero Energy (VLO), Diamondback Energy (FANG), and Haliburton (HAL) are up more than +3%. Also, Marathon Oil (MRO), Phillips 66 (PSX), Baker Hughes (BKR), Occidental Petroleum (OXY), Marathon Petroleum (MPC), ConocoPhillips (COP), and Schlumberger (SLB) are up more than +2%.

Jacobs Solutions (J) is up more than +3% after Baird upgraded the stock to outperform from neutral with a price target of $150.

Molson Coors (TAP) is up more than +2% after Cowen upgraded the stock to outperform from market perform.

Lululemon Athletica (LULU) is up nearly +2% after Wells Fargo Securities upgraded the stock to overweight from equal weight.

Tesla (TSLA) is down nearly -2% to lead losers in the Nasdaq 100 after it announced another round of price cuts on its Model 3 and Y electric vehicles in China.

Baxter International (BAX) is down more than -5% after announcing plans to spin off its industry-leading kidney-care business into an independent publicly traded company within the next 12 to 18 months.

Danaher (DHR) is down more than -3% after Credit Suisse on Thursday downgraded the stock to neutral from outperform, saying higher exposure to bioprocessing inventory reductions and diagnostics could pressure the company’s growth relative to peers.

Across the markets…

March 10-year T-notes (ZNH23) today are up +1-4/32 points, and the 10-year T-note yield is down -12.1 bp at 3.597%. Mar T-note prices this morning rallied to a 2-week high, and the 10-year T-note yield dropped to a 2-1/2 week low of 3.588%. T-notes rose after this morning’s U.S. Dec payroll report showed average hourly earnings rose less than expected, even though job gains were more than expected. Gains in T-notes accelerated after the U.S. Dec ISM services report dropped to a 2-1/2 year low. T-notes also have carry-over support from a rally in 10-year German bunds to a 2-1/2 week high as price pressures eased after Eurozone Dec CPI rose less than expected.

The dollar index (DXY00) today is down by -0.57%. The dollar index today fell back from a 1-month high and sold off after T-note yields plunged when the U.S. Dec ISM services report showed the service sector contracted at the steepest pace in 2-1/2 years. The dollar initially rallied in overnight trade on weakness in EUR/USD, which fell to a 4-week low after Eurozone Dec CPI rose less than expected. Also, the yen fell to a 2-1/2 week low against the dollar after Japan’s Nov real cash earnings fell by the most since 2014, which is dovish for BOJ policy. This morning’s U.S. Dec payroll report was mixed for the dollar as it showed job gains rose more than expected, but wage growth slowed more than expected.

EUR/USD (^EURUSD) today is up by +0.85%. The euro today rebounded from a 4-week low and is moderately higher as the dollar sold off on a weak U.S. Dec ISM services report. EUR/USD initially fell to a 4-week low in overnight trade after Eurozone Dec CPI rose less than expected, which is dovish for ECB policy.

Eurozone Dec economic confidence rose +1.8 to a 4-month high of 95.8, stronger than expectations of 94.7.

Eurozone Dec CPI eased to 9.2% y/y from 10.1% y/y in Nov, weaker than expectations of +9.5% y/y. However, Dec core CPI rose to 5.2% y/y, stronger than expectations of +5.1% y/y.

Eurozone Nov retail sales rose +0.8% m/m, stronger than expectations of +0.6% m/m.

German Nov factory orders fell -5.3% m/m, weaker than expectations of -0.5% m/m and the biggest decline in 13 months.

USD/JPY (^USDJPY) today is down by -0.71%. The yen today recovered sharply from a 2-1/2 week low against the dollar after T-note yields plunged on a weak U.S. Dec ISM services report. The yen initially came under pressure in overnight trade on news that showed Japan’s Dec real cash earnings contracted at the steepest pace in 8-1/2 years, which is dovish for BOJ policy. Also, the action by the BOJ today to boost bond purchases weighed on the yen.

Today’s Japanese economic news was bearish for the yen. Japan Nov real cash earnings fell -3.8% y/y, weaker than expectations of -2.8% y/y and the biggest decline in 8-1/2 years. Also, the Japan Dec Jibun Bank services PMI was revised downward by -0.6 to 51.1 from the initially reported 51.7.

The BOJ today announced additional bond purchases for the fifth time in the last six sessions, buying an additional 300 billion yen ($2.2 billion) of five-to-10 year notes.

February gold (GCG3) this morning is up +27.0 (+1.47%), and March silver (SIH23) is up +0.516 (+2.20%). Precious metals prices this morning are moderately higher. A reversal in the dollar today boosted metals prices as the dollar index retreated from a 1-month high and turned sharply lower. Also, a drop in global government bond yields today is bullish for gold prices.

https://www.barchart.com/story/news/13077292/stocks-rally-as-bond-yields-plunge-on-us-reports