What you need to know…
The S&P 500 Index ($SPX) (SPY) on Friday closed +0.12%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.05%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.09%.
Stocks closed generally higher on a larger-than-expected decline in the U.S. PCE deflator report, which was dovish for Fed policy. Also, Friday’s -12.2% decline in U.S. new home sales was dovish for Fed policy. However, two U.S. economic reports were hawkish for Fed policy, including durable goods and U.S. consumer sentiment.
Stocks were undercut Friday after China surprised the markets with new restrictions on video game makers. Also, Nike (NKE) fell -12% after noting a weak sales outlook, which was negative for other sportswear manufacturers and retailers.
China’s gaming regulator issued new rules that seek to limit players’ time and money spent on online video gaming. The markets had hoped that the Chinese government was done cracking down on China’s big tech companies. Instead, Friday’s action suggested that the Chinese government still has a strong appetite for trying to control tech.
Chinese video-game-related stocks took a heavy hit on Friday’s news. Tencent Holdings (700 Hong Kong) closed down -12.7% in Hong Kong trading, while NetEase’s U.S. ADR (NTES) closed down -16% in U.S. trading. Prosus NV (PRX Amsterdam) fell -13.5% in European trading due to its large holding in Tencent. Unity Software (U) fell -1.64% and Electronic Arts (EA) fell -0.25%, but Roblox (RBLX) rallied +3.35%.
Friday’s U.S. Nov PCE deflator fell to a 2-3/4 year low of +2.6% y/y from Oct’s revised +2.9% y/y and was weaker than expectations of +2.8%. The Nov core PCE deflator eased to a 2-3/4 year low of +3.2% y/y from Oct’s revised +3.4% and was weaker than expectations of +3.3%. On a 3-month annualized basis, the nominal deflator rose by +1.4%, and the core deflator rose by +2.2%, which were much more compatible figures with the Fed’s +2% inflation target.
U.S. Nov personal income rose +0.4% m/m, in line with market expectations. Nov personal spending rose by +0.2% m/m, slightly weaker than expectations of +0.3%.
U.S. Nov durable goods orders rose sharply by +5.4% m/m, more than reversing Oct’s revised -5.1% decline and stronger than expectations of +2.3%. Nov durable goods ex-transportation rose +0.5% m/m, stronger than expectations of +0.1%. Nov capital goods orders ex aircraft and defense, a proxy for capital spending, rose +0.8% m/m, stronger than expectations of +0.1%.
U.S. Nov new home sales fell -12.2% m/m to 590,000, much weaker than expectations for a report of 690,000.
The final-Dec U.S. consumer sentiment index from the University of Michigan was revised +0.3 points higher to a 5-month high of 69.7, stronger than market expectations for an unrevised report of 69.4. The revision left the consumer sentiment index up sharply by +8.4 points from the Nov level of 61.3. The University of Michigan’s 5-10 year inflation expectations indicator of +2.9% was revised slightly higher from +2.8%, while the 1-year inflation expectation was unrevised at +3.1%.
The markets are discounting the chances for a -25 bp rate cut at 16% for the next FOMC meeting on Jan 30-31 and at 100% for the following meeting on March 19-20.
Overseas stock markets closed mixed. The Euro Stoxx 50 closed -0.07%. China’s Shanghai Composite Index closed down -0.13%. Japan’s Nikkei Stock Index closed up +0.09%.
Today’s stock movers…
Nike (NKE) fell -11.83% after releasing a weak sales forecast and saying it is looking for $2 billion in cost savings. The news prompted Cowen to downgrade its rating on Nike. The Nike news sparked carry-over weakness for American and European sportswear makers and retailers.
Bristol Myers Squibb (BMY) rallied +2.01%, and Karuna Therapeutics (KRTX) rallied +47.6%, after Bristol Myers agreed to buy Karuna for $14 billion.
Rocket Lab (RKLB) rallied +23% after winning a $15 million U.S. government contract, which doubled the backlog for its space business.
Cummins (CMI) fell -2.9% after saying it sees a $2.04 billion Q4 charge from its preliminary agreement with regulators regarding its emissions certification and compliance process for pick-up truck engines.
Coinbase (COIN) rallied +4.41% after Mizuho raised its price target on the stock to $54 from $35.
Friday’s weak new home sales report was bearish for U.S. home builders, which closed narrowly mixed. DR Horton (DHI) fell -0.3%, Lennar (LEN) fell -0.3%, Pulte Group (PHM) closed unchanged, and KB Home (KBH) rose +0.1%
Across the markets…
March 10-year T-notes (ZNH24) on Friday closed -2.5 ticks, and the 10-year T-note yield rose by +0.7 bp to 3.895%. Mar T-note prices saw early support from the larger-than-expected decline in the U.S. PCE deflator, the Fed’s preferred inflation measure. The favorable deflator report helped push the 10-year breakeven inflation expectations rate down -0.4 bp to 2.199%.
T-note prices also saw support from the sharp -12.2% decline in new home sales. However, T-note prices were undercut by stronger-than-expected U.S. durable goods orders and U.S. consumer sentiment reports.
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.
