Stocks Move Higher Despite Central Bank Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.16%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.16%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.65%.

U.S. stocks have overcome early losses and are trading mildly higher on leadership from some mega-cap tech stocks. 

Stocks were on the defensive early today after the Bank of England surprised the markets with a +50 bp rate hike to 5.00% to address the rise in the UK May CPI to +8.7% y/y.  The markets had been fully expecting a +25 bp BOE rate hike, but only a modest chance of a +50 bp rate hike.  In addition, Norway’s central bank raised its benchmark rate by +50 bp to 3.75% and said the rate will “most likely be raised further in August.”  The Swiss central bank raised its key rate by +25 bp to 1.75%.

The markets are taking in the second day of Fed Chair Powell’s semi-annual testimony before Congress as he appears before the Senate Banking Committee.  Mr. Powell today delivered the same prepared statement, but he will answer different questions from panel members, meaning he might say something a little different than he did in his appearance yesterday before the House Financial Services Committee.

Mr. Powell’s comments Wednesday were broadly in line with his comments last week after the FOMC meeting.  Mr. Powell said the Fed believes that higher interest rates will be needed to curb inflation.  He said the Fed remains “strongly committed to bringing inflation back down to our 2% goal.” However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed for the next meeting.

The FOMC last week left its funds rate target unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes.  However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%.  The markets are discounting the odds at 72% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, up from 69% odds late Wednesday.

Consistent with the Fed’s main theme, Fed Governor Michelle Bowman today said, “I believe that additional policy-rate increases will be necessary to bring inflation down to our target over time.” 

Today’s U.S. economic reports were mixed but T-note prices were undercut by the stronger-than-expected existing home and leading indicator reports. The 10-year T-note yield today is up +6.2 bp in a bearish factor for stocks.

Today’s U.S. initial unemployment claims report was slightly weaker than expectations, with the initial claims series remaining unchanged from last week’s revised 1-3/4 year high of 264,000.  That showed a slightly weaker labor market than expectations for a small decline to 259,000.  Meanwhile, continuing claims fell -13,000 to 1.759 million, which showed a stronger labor market than expectations for an increase to 1.785 million.

The May U.S. existing home sales report of +0.2% to 4.30 million units was stronger than expectations for a decline to 4.25 million units. Existing home sales remain generally weak due to a lack of homes available for sale.  Redfin on Wednesday reported that the number of homes for sale in the U.S. fell to a record low in May.

The May U.S. leading economic indicator report of -0.7% m/m was slightly stronger than expectations of -0.8% m/m but was weaker than April’s decline of -0.6%.

The U.S. Q1 current account deficit of -$219.3 billion was slightly wider than expectations of -$218.0 billion and widened from the revised Q4 level of -$216.2 billion.

Today’s June French confidence report was a bit stronger than expected.  The French June business confidence index was unchanged at 100, in line with market expectations and unchanged from May.  The French June manufacturing confidence index rose +2 points to 101 from 99 in May and was slightly stronger than market expectations of 98.  The French production outlook indicator rose by +1 point to -9 from -10 in May, which was stronger than expectations for a decline to -11.

Overseas stock markets are lower.  The Euro Stoxx 50 is down -0.48% for the fourth consecutive daily loss this week.  Japan’s Nikkei Stock Index today closed down -0.92%.  China’s stock market was closed today and will be closed for a second day on Friday for public holidays. 

Today’s stock movers…

Some mega-cap tech stocks have moved higher today, helping the Nasdaq 100 to move into positive territory and overcoming some of the gloom from Fed Chair Powell’s hawkish testimony.  Amazon (AMZN) is up +3.2%, Microsoft (MSFT) is up +1.1%, and Apple (AAPL) is up +1.0%.  Also, semiconductor stocks are seeing support after yesterday’s sell-off, with Lam Research (LRCX) up +3.0%, Micron (MU) up +1.2%, and AMD (AMD) up +1.0%.

Tesla (TSLA) recovered from pre-market losses of -3% and is currently up +0.6%, recovering some of Wednesday’s loss of -5.95%.  Tesla was lower in pre-market trading after Morgan Stanley downgraded the stock to equal-weight from overweight, saying that the stock’s rally on AI optimism has “brought the stock to fair valuation.”   Today’s downgrade from Morgan Stanley followed Barclay’s downgrade on Wednesday to equal-weight from overweight on the analyst’s opinion that Tesla has moved “too far, too fast.”

Boeing (BA) is down -2.2% after its biggest supplier, Spirit AeroSystems (SPR), was forced to suspend its production due to a strike, which will disrupt the production of Boeing’s 737 Max jet.  Spirit AeroSystems (SPR) is down -11.3% on the unexpected strike vote.

Alcoa (AA) is down -5.3% after a downgrade by Morgan Stanley to underweight from equal-weight.

Kellogg (K) is up +0.8% on an upgrade by Bernstein to market-perform from under-perform based on the analyst’s opinion that Kellogg’s valuation is cheap.

DigitalOcean (DOCN) is down -3.9% on a downgrade by Piper Sandler to underweight from neutral.

Root (ROOT) is up sharply by +42% on carry-over from Wednesday’s report by the Wall Street Journal that Embedded Insurance plans to launch an acquisition offer for the car-insurance startup of $19.34 a share.  Root rallied by +59% on Wednesday on the report.

Across the markets…

September 10-year T-notes (ZNU23) today are down -13.5 ticks, and the 10-year T-note yield is up +6.2 bp at 3.781%.  T-notes prices are lower as the Fed’s drumbeat for higher rates continues this morning with Fed Chair Powell’s second day of testimony and Fed Governor Bowman’s hawkish comments about the need for higher rates.

T-note prices were also undercut by today’s surprise +50 bp rate hike by the Bank of England, although the 10-year UK gilt yield is currently down -1.3 bp at 4.392%.   Today’s U.S. economic reports on balance were slightly bearish for T-note prices.  There is also supply overhang ahead of the Treasury’s sale later today of $21 billion of 5-year TIPS.

The dollar index (DXY00) today is up +0.12% on support from higher T-note yields.  EUR/USD (^EURUSD) is slightly lower by -0.04%.  USD/JPY (^USDJPY) is up +0.38%.  GBP/USD is down -0.09% despite today’s larger-than-expected BOE rate hike of +50 bp.

August gold (GCQ3) today is down -15.3 (-0.79%), and July silver (SIN23) is down -0.400 (-1.75%).  Precious metals prices today are lower on the Fed’s hawkish bias and the BOE’s +50 bp rate hike.  Silver is lower on concern about the lackluster global economic outlook.

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