Stocks Mixed Despite Hawkish Central Bankers

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.01%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.23%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.5%.

Stocks are mixed despite central bank chiefs hawkish language at a policy panel at the ECB’s policy retreat in Sintra, Portugal. 

Fed Chair Powell said he won’t take two consecutive rate hikes off the table “at all.”  Powell also said, “Policy hasn’t been restrictive for very long.  So, we believe there’s more restriction coming.” 

Meanwhile, ECB President Lagarde said, in response to a question, that the ECB is not currently considering a pause in interest rate hikes.  She said another rate hike at their next meeting in July is very likely.  Bank of England (BOE) Governor Bailey said, “We have a job to do,” and that the BOE will do what is necessary to bring inflation down.

Nvidia (NVDA) and other AI chip stocks are in focus after the Wall Street Journal late Tuesday reported that the Biden administration is considering more restrictions on the export and sales of AI chips to China and may also restrict leasing of cloud services to Chinese AI firms. 

Blackrock, in a mid-year report, introduced a bullish call on AI, saying, “We implement an overweight to AI as a mega force.  New AI tools could analyze and unlock the value of the data gold mine that some companies may be sitting on.”

Bloomberg is reporting today that some hawkish ECB officials are weighing options for speeding up the reduction of the ECB’s balance sheet, including the slowdown of the reinvestment of maturing securities or even the sale of securities.  Bloomberg said that no decision is imminent, and there has been no formal discussion of such measures in the ECB Governing Council.  The ECB is currently reducing the size of its balance sheet by allowing an average of 15 billion euros worth of securities to roll off each month. The ECB plans to fully halt the reinvestment of maturing securities under its Asset Purchase Program next month.  The decline in the ECB’s balance sheet causes a reduction in reserves and liquidity for the Eurozone banking system, which is bearish for stocks.

Today’s Eurozone economic reports were mixed.  The July German GfK consumer confidence index fell by -1.0 point to -25.4, weaker than market expectations for an increase to -23.0.   The June French consumer confidence index rose +2 points to 85, slightly stronger than expectations for a +1 point increase to 84.  Italy’s June May EU-harmonized CPI eased to +6.7% y/y from May’s +8.0% y/y and was slightly weaker than expectations of +6.8% y/y.

The 10-year T-note yield this morning is down -1.7 bp.  The markets are currently discounting the odds at 72% for a +25 bp rate hike at the next FOMC meeting on July 25-26 and are fully anticipating that +25 bp rate hike by November.

Overseas stock markets steady to higher.  The Euro Stoxx 50 is up +0.72%.  China’s Shanghai’s Composite index today closed unchanged.  Japan’s Nikkei Stock Index today closed up +2.0%.

Today’s stock movers…

Nvidia (NVDA) is down -2.5% on the WSJ report that the Biden administration is considering increased export restrictions to China for AI-related chips and cloud services.  Nvidia gets about one-fifth of its revenue from China. AMD (AMD), the other major AI chip manufacturer, is down -2.3%.  WSJ reported that the Biden administration might extend restrictions to less powerful chips that don’t currently require export licenses. 

Other chip stocks are also lower today, with losses of more than -2% in Qualcomm (QCOM), Intel (INTC), and Applied Materials (AMAT).

U.S.-listed Chinese stocks are lower on the WSJ report about more U.S. restrictions on Chinese companies, which signals the Biden administration is expanding its “de-risking” strategy with China.  JD.com (JD) is down -3.8%, and PDD Holdings (PDD) is down -2.0%.

Netflix (NFLX) is up +3.3% after Oppenheimer raised its price target on Netflix to $500 from $450 due to expectations for a higher number of subscribers stemming from its password crackdown campaign and the phase-out of its lowest-priced ad-free tier.

Delta (DAL) is up +1.3% after Morgan Stanley reinstated research coverage as its top pick within its U.S. airline coverage.

Walgreens Boots Alliance (WBA) is down -1.0% on a downgrade by Deutsche Bank to hold from buy due to the company’s disappointing fiscal-year 2024 guidance released earlier this week.

Snowflake (SNOW) is up +8.0% after Wall Street analysts spoke positively about the company after it discussed new products and affirmed a revenue target.

Across the markets…

September 10-year T-notes (ZNU23) today are up +4.5 ticks, and the 10-year T-note yield is down -1.7 bp at 3.747%.  T-note prices are seeing support from weakness in stocks.  T-note prices are shaking off bearish factors, including Fed Chair Powell’s hawkish comments, today’s +0.7 bp rise in the 10-year inflation expectations rate, and supply overhang.  The Treasury today will wrap up this week’s note package by selling $35 billion of 7-year T-notes and $22 billion of 2-year floating rate notes.

The dollar index (DXY00) today is up +0.38% after two days of declines. EUR/USD (^EURUSD) is down -0.24%.  USD/JPY (^USDJPY) is up +0.21%.

August gold (GCQ3) today is down -0.18%, and July silver (SIN23) is down -0.74%.  Gold is being undercut by today’s hawkish central bank comments and the mildly higher dollar.

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