Stocks Higher as Inflation Expectations Fall

What you need to know…

The S&P 500 Index ($SPX) (SPY) this morning is up +0.30%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.29%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.26%. 

Stocks this morning are moderately higher.  A rally in bank stocks today is leading the overall market higher.  Also, a decline in T-note yields this morning is giving equities a boost, with the 10-year T-note yield down -0.8 bp at 3.256%.  Stocks also received a boost as the 10-year breakeven inflation expectations rate fell to a 6-week low today of 2.414%.

Comments today from Fed Chair Powell were hawkish and negative for stocks when he said the Fed would not stop raising interest rates until inflation is contained.  Stocks are also being undercut by the ECB’s sharp rate hike.  The 10-year German bund yield climbed to a 2-1/2 month high of 1.705% after the ECB raised its main refinancing rate by +75 bp to 1.25% and said it "expects to raise rates further.”

Today’s U.S. economic news was hawkish for Fed policy and bearish for stocks.  Weekly initial unemployment claims unexpectedly fell -6,000 to a 3-month low of 222,000, showing a stronger labor market than expectations of an increase to 235,000.

Fed Chair Powell said the Fed will not stop in its efforts to curb inflation "until the job is done."  He added that "the Fed has and accepts responsibility for price stability," and that history cautions against prematurely loosening monetary policy.

Today’s stock movers…

Bank stocks are climbing today and are a supportive factor for the overall market.  Fifth Third Bancorp (FITB) and Citizens Financial Group (CFG) are up more than +3%.  Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Comerica (CMA), and US Bancorp (USB) are up more than +2%.  JPMorgan Chase (JPM) is up more than +2% to lead gainers in the Dow Jones Industrials. 

Regeneron Pharmaceuticals (REGN) is up more than +14% today to lead gainers in the S&P 500 and Nasdaq 100 after the company said two global trials of its eye treatment aflibercept for patients with diabetic macular edema and wet age-related macular degeneration met their primary endpoints. 

Moderna (MRNA) climbed more than +2% in pre-market trading after Deutsche Bank upgraded the stock to buy from hold, citing a “solid” Q2 earnings beat and the “welcome” late-July news of additional fall 2022 orders from the U.S.

Advanced Micro Devices (AMD) is up more than +3% today after Stifel initiated coverage of the stock with a buy recommendation.

First Solar (FSLR) is up more than +3% today after Goldman Sachs upgraded the stock to buy from sell.

Food companies are falling today on concern that higher inflation will undercut company profits. Campbell Soup (CPB) and Kellogg (K) are down more than -3%.  Also, Kraft Heinz (KHC) and Conagra Brands (CAG) are down more than -2%.  In addition, General Mills (GIS), JM Smucker (SJM), Hormel Foods (HRL), and Hershey (HSY) are down more than -1%.

McCormick & Co (MKC) is down more than -7% today to lead losers in the S&P 500 after reporting Q3 preliminary Q3 adjusted EPS of 65 cents, weaker than the consensus of 83 cents, and then lowering its full-year adjusted EPS estimate to $2.63-$2.68 from $3.03-$3.08.

Williams Cos (WMB) is down more than -4% today after Goldman Sachs downgraded the stock to sell from neutral. 

NetEase (NTES) is down more than -3% today to lead losers in the Nasdaq 100 after JPMorgan Chase said the consensus view on the stock is too optimistic and rates the stock as neutral.

American Eagle Outfitters (AEO) is down more than -8% today after the company reported Q2 adjusted EPS of 4 cents, weaker than the consensus of 14 cents, and then paused its quarterly dividend. 

Across the markets…

Dec 10-year T-notes (ZNZ22) today are up +1 tick, and the 10-year T-note yield is down -0.8 bp at 3.256%. Dec T-notes are slightly higher on curve-flattening trades, as tough talk on inflation from Fed Chair Powell today pushed up short-term yields while holding down long-term yields.  The upside in T-notes was limited after the 10-year German bund yield climbed to a 2-1/2 month high today when the ECB raised interest rates.

The dollar index (DXY00) this morning is up +0.23% but remains below Wednesday’s 20-year high.  Comments today from Fed Chair Powell boosted the dollar when he warned against prematurely loosening monetary policy.  Also, today’s unexpected decline in U.S. weekly jobless claims to a 3-month low was hawkish for Fed policy and supportive of the dollar.

EUR/USD (^EURUSD) today is down -0.33%.  EUR/USD gave up an early advance and turned lower on comments today from ECB President Lagarde, who warned of risks to growth and higher unemployment as the economy slows.  The ECB today also raised its inflation outlook for this year and next year, and Lagarde noted that it might turn out higher than anticipated.  EUR/USD today initially moved higher after the ECB raised its main refinancing rate by 75 bp to 1.25% and said it "expects to raise rates further.”

The ECB raised its Eurozone 2022 GDP forecast to 4.1% from a prior estimate of 2.8% and raised its Eurozone 2022 inflation forecast to 8.1% from a previous forecast of 6.8%.  The ECB cut its Eurozone 2023 GDP forecast to 0.9% from a prior forecast of 2.1% and raised its 2023 inflation forecast to 5.5% from a prior view of 3.5%.

The ECB today raised its main refinancing rate by +75 bp to 1.25%, and its deposit facility rate by +75 bp to 0.75%, and said it "expects to raise rates further because inflation remains far too high and is likely to stay above target for an extended period."

USD/JPY (^USDJPY) today is up +0.23%.  The yen today is moderately lower but is holding above Wednesday’s 24-year low against the dollar.  Divergent central bank policies continue to pressure the yen after the ECB raised interest rates today, and Fed Chair Powell said the Fed would continue to raise rates to curb inflation.  The yen rose briefly today after Japan’s top currency official warned that he wouldn’t rule out any options should recent moves in the currency markets continue.

Today’s Japanese economic news was bullish for the yen.   Japan Q2 GDP was revised upward to +3.5% (q/q annualized) from +2.2%, stronger than expectations of +2.9%.  Also, the Japan Aug eco watchers outlook survey rose +6.6 to 49.4, stronger than expectations of 44.9.

October gold (GCV22) is down -7.3 (-0.42%), and December silver (SIZ22) is up +0.100 (+0.55%).  Precious metals this morning are mixed, with silver climbing to a 1-week high.  A stronger dollar today is bearish for metals prices. Gold is also under pressure after the ECB today raised interest rates, and Fed Chair Powell said the Fed would continue to raise rates.  Gold also suffers from continued long liquidation pressure after long gold positions in ETFs fell to a 7-month low Wednesday.  Silver prices are higher on signs of stronger industrial metals demand after Japan Q2 GDP was revised upward to +3.5% (q/q annualized) from +2.2%.

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