Stocks Surge as Inflation Eases and Earnings Beat Expectations

Market Recovery: S&P 500 and Nasdaq Hit New Highs

The S&P 500 Index ($SPX) (SPY) is climbing today, up +1.50%. The Dow Jones Industrials Index ($DOWI) (DIA) follows closely with a +1.51% increase, while the Nasdaq 100 Index ($IUXX) (QQQ) leads with a gain of +1.75%. March E-mini S&P futures (ESH25) are up +1.67%, with March E-mini Nasdaq futures (NQH25) rising +1.95%.

Stocks are experiencing a significant boost, driven by a favorable US December consumer price report that indicated an unexpected slowdown in core inflation. This news has raised hope that the Federal Reserve might still be able to lower interest rates this year. Moreover, major US banks, including Citigroup, JPMorgan Chase, BlackRock, Goldman Sachs, Bank of New York Mellon, and Wells Fargo, reported better-than-expected quarterly earnings, contributing further to market optimism.

Mortgage Applications Surge Amid Rising Rates

In recent data, US MBA mortgage applications surged by +33.3% for the week ending January 10. The purchase mortgage sub-index rose +26.9%, and the refinancing sub-index increased by +43.5%. Despite this, the average 30-year fixed-rate mortgage hit an 8-month high of 7.09%, a rise of 10 basis points from the previous week’s rate of 6.99%.

December’s Consumer Price Index (CPI) increased to +2.9% year-over-year, up from +2.7% in November, aligning with expectations. However, the core CPI, excluding food and energy, unexpectedly eased to +3.2%, down from +3.3% in November. This figure was better than forecasts that predicted no change.

The January Empire manufacturing survey reflected concerning news, showing general business conditions plummeting -14.7 points to an 8-month low of -12.6, contrary to the anticipated increase to 3.0.

Investors are keenly awaiting Thursday’s retail sales report to gauge if consumer spending remains robust, with expectations for December retail sales indicating a +0.6% rise month-over-month.

As earnings season kicks off this week, analysts forecast a 7.5% growth in S&P 500 earnings for Q4, marking the second-highest pre-season estimate in the last three years.

Market Expectations and Global Trends

The market currently anticipates only a 3% probability of a -25 basis point rate cut at the upcoming January 28-29 FOMC meeting. International markets have shown mixed responses today, with the Euro Stoxx 50 up +1.15%. Conversely, China’s Shanghai Composite Index and Japan’s Nikkei 225 saw declines of -0.43% and -0.08%, respectively.

Interest Rate Developments

March 10-year T-notes (ZNH25) have increased by +29 ticks, with yields dropping -13.9 basis points to 4.653%. The rise in T-notes follows the weaker-than-expected core CPI data, which reflects a dovish outlook for Fed policies. There is also support from the January Empire manufacturing survey, which indicated signs of US economic weakness. Furthermore, European government bonds experienced a rally after the UK’s December CPI also rose less than expected.

The yields on European government bonds fell today, with Germany’s 10-year bund yield decreasing -10 basis points to 2.552%, and the UK gilt yield down -16.4 basis points to 4.725%.

In the Eurozone, November industrial production matched expectations, rising +0.2% month-over-month, while ECB Vice President Guindos noted expectations to continue easing monetary policy due to diminishing economic momentum.

UK CPI Surprises with Declines

In the UK, December CPI unexpectedly eased to +2.5% year-over-year from +2.6% in November, against forecasts predicting no change. Core CPI also saw a decline, down to +3.2% from +3.5%, surpassing expectations.

Swaps are now predicting a 100% chance of a -25 basis point rate cut by the ECB at their January 30 policy meeting.

Key Stock Movements

Edison International (EIX) is a standout gainer in the S&P 500, appreciating by more than +7% after an upgrade from Ladenburg Thalmann from sell to neutral based on valuation. Citigroup (C) is climbing over +4% following its Q4 FICC sales and trading revenue of $3.48 billion, significantly above the consensus estimate of $2.94 billion.

Wells Fargo (WFC) also gained more than +3% after reporting Q4 net interest income of $11.84 billion, exceeding the consensus forecast of $11.70 billion.

Goldman Sachs (GS) led the Dow Jones Industrials with a +4% increase, reporting Q4 net revenue of $13.87 billion, well above estimates of $12.37 billion. Similarly, BlackRock (BLK) is up more than +4% after reporting Q4 adjusted EPS of $11.93, surpassing expectations of $11.46. Bank of New York Mellon (BK) saw an increase of more than +4% after reporting Q4 net interest revenue of $1.19 billion, above the consensus of $1.06 billion.

In the construction sector, builders are rising due to falling T-note yields, positively impacting housing demand. Builders FirstSource (BLDR) is up over +4%, with Lennar (LEN) gaining more than +3%.

Keros Therapeutics (KROS) fell more than -16% after halting a Phase 2 trial due to side effect concerns related to its treatment for a lung disorder.

Health insurance stocks are under pressure today, following a Federal Trade Commission announcement regarding inflated costs charged by CVS Health, Cigna Group, and UnitedHealth Group for specialty generic drugs. This has led Elevance Health (ELV) to decrease more than -2%, while UnitedHealth Group (UNH) fell more than -1%.

Earnings Reports (1/15/2025)

Upcoming earnings include Bank of New York Mellon Corp/T (BK), BlackRock Inc (BLK), Citigroup Inc (C), Goldman Sachs Group Inc/The (GS), JPMorgan Chase & Co (JPM), and Wells Fargo & Co (WFC).

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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