Stocks Stable Despite Hawkish Central Bankers and Possible New U.S. Chip Restrictions

What you need to know…

The S&P 500 Index ($SPX) (SPY) Wednesday fell -0.04%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.22%, and the Nasdaq 100 Index ($IUXX) (QQQ) rose +0.12%.

Stocks were undercut as central bank chiefs Wednesday kept up their 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 the BOE will do what is necessary to bring inflation down.

Nvidia (NVDA) and other chip stocks led the markets lower 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. 

In some good news released after Wednesday’s close, the Fed’s annual stress test results showed that all of Wall Street’s largest banks passed their respective stress tests, clearing the way for dividend payments to shareholders and stock buybacks.  The report bolstered confidence that the largest Wall Street banks are in good shape, even if regional banks remain under pressure from the recent run and from incoming losses from various credit sectors such as commercial real estate.  The stress tests did not cover mid-sized U.S. banks.  Fed Chair Powell has recently indicated that the Fed plans to raise capital requirements for U.S. banks in response to the recent runs.

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 reported Wednesday 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.

Wednesday’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 Wednesday fell -5.2 bp.  The markets are currently discounting the odds at 76% 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 Wednesday closed steady to higher. The Euro Stoxx 50 closed +0.92%.  China’s Shanghai’s Composite index closed unchanged. Japan’s Nikkei Stock Index closed up +2.0%.

Today’s stock movers…

Nvidia (NVDA) on Wednesday fell -1.81% 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, fell -0.20%.  WSJ reported that the Biden administration might extend restrictions to less powerful chips that don’t currently require export licenses. 

Other chip stocks also fell, with Qualcomm (QCOM) down -1.88%, Applied Materials (AMAT) down -1.72%, and Intel (INTC) down -1.55%.

U.S.-listed Chinese stocks fell 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) fell -2.69% and showed the largest loss of the Nasdaq 100 stocks.  PDD Holdings (PDD) fell -2.05%.

Netflix (NFLX) rallied +3.06% after Oppenheimer raised its price target on Netflix to $500 from $450 due to expectations for a larger number of subscribers stemming from its password crackdown campaign and the phase-out of its lowest-priced ad-free tier.

Delta (DAL) rallied +1.35% after Morgan Stanley reinstated research coverage as its top pick within its U.S. airline coverage.

Walgreens Boots Alliance (WBA) rose +1.54%, overcoming early weakness sparked by 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) rallied +3.86% 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) Wednesday closed up +13.5 ticks, and the 10-year T-note yield fell -5.2 bp to 3.712%.  T-note prices closed higher Wednesday due to strong demand for the 7-year T-note auction, which concluded this week’s T-note auction package.  Also, the 10-year breakeven inflation expectations rate fell by -1 bp to 2.18%.

T-note prices were able to shake off bearish factors, including Fed Chair Powell’s hawkish comments and supply overhang ahead of the Treasury’s auction of 7-year T-notes and 2-year floating-rate notes.

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