Stocks Rally After Favorable Inflation Report

The S&P 500 Index ($SPX) (SPY) today is up +1.15%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.78%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.74%.

Stocks are higher after this morning’s PCE deflator report was mildly favorable and could encourage the Fed to be less hawkish.  U.S. stocks have some carry-over support from today’s +1.2% rally in European stocks.  Stocks are seeing support from today’s small -0.2 bp decline in the 10-year T-note yield. Stocks are also seeing support from today’s +0.5 point upward revision in the University of Michigan’s U.S. consumer sentiment index to a 4-month high.

The U.S. Supreme Court today struck down President Biden’s plan to forgive student debt, which is a negative factor for consumer spending through year-end. 

Today’s May PCE deflator, the Fed’s preferred inflation measure, rose +0.1% m/m and +3.8% y/y, which was in line with market expectations.  The May core PCE deflator rose +0.3% m/m, which was in line with market expectations, but the May core PCE deflator on a year-on-year basis rose by +4.6%, which was slightly weaker than market expectations of +4.7%.

The deflator report showed that inflation is going in the right direction, with the headline deflator easing to +3.8% y/y from April’s revised +4.3%, and the core deflator easing to +4.6% y/y from April’s +4.7%.  Still, the Fed will remain worried about sticky core inflation, with the core deflator still at a very high +4.6% y/y, far above the Fed’s +2% inflation target.

May U.S. personal income rose +0.4% m/m, slightly stronger than expectations of +0.3%, although April was revised lower to +0.3% m/m from +0.4%. May U.S. personal spending rose by +0.1% m/m, slightly weaker than expectations of +0.2%, and April was revised lower to +0.6% m/m from +0.8%.  May real personal spending was unchanged m/m after a revised +0.2% m/m increase in April.

The final-June University of Michigan U.S. consumer sentiment index was revised higher by +0.5 points to a 4-month high of 64.4, stronger than expectations for no revision.  The revision left the index up by +5.2 points from May’s level of 59.2.

The markets are discounting the odds at 84% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The markets are anticipating a peak funds rate of 5.42% by November, which indicates that the market is expecting an overall rate hike of +33 bp through November from the current effective federal funds rate of 5.07%.

China’s PMI reports overnight were roughly in line with market expectations but reinforced the view that China’s economy is losing steam after an initial post-Covid boom.  China’s June manufacturing PMI rose +0.2 points to 49.0, which was in line with market expectations but remained below the expansion-contraction level of 50. China’s June non-manufacturing PMI fell -1.3 points to 53.2, weaker than market expectations for a decline to 53.5.

The June Eurozone CPI report of +0.3% m/m was in line with market expectations.  The June CPI on a year-on-year basis eased to +5.5% y/y from May’s +6.1% y/y and was slightly weaker than market expectations of +5.6%.  The June core CPI rose slightly to +5.4% y/y from May’s +5.3% but was slightly weaker than market expectations of +5.5% y/y.

The May Eurozone unemployment rate was unchanged from April at 6.5%, in line with market expectations.

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +1.24%.  China’s Shanghai Composite index today closed +0.62%.  Japan’s Nikkei Stock Index today closed down -0.14%.

Today’s stock movers…

Market breadth is highly positive today, with all but nine of the Nasdaq 100 components trading higher.  Notable leaders include Nvidia (NVDA) with a gain of +4.0%, and Airbnb (ABNB) with a gain of +3.9%.  Other leaders with gains of more than +2.0% include Netflix (NFLX), Meta Platforms (META), Tesla (TSLA), Amazon.com (AMZN), and Microsoft (MSFT).

Chip stocks are mostly trading on the upside today with gains of more than 2% in Nvidia (NVDA), Globalfoundaries (GFS), Microchip Technology (MCHP), AMD (AMD), and NXP Semiconductors (NXPI).

Nike (NKE) is down -2.0% after issuing disappointing earnings and guidance, although its sales figures were better than expected.

Carnival (CCL) is up +5.5% after an upgrade by Jefferies to buy from hold.

XPeng (XPEV) is up more than +9% after the company announced its new G6 electric SUV.

Citi initiated research coverage at a buy for Juniper Networks (JNPR), which is up +1.6%, and for Keysight Technologies (KEYS), which is up +1.3%.  Citi initiated coverage at neutral for Cisco Systems (CSCO) (up +0.9%) and Arista Networks (ANET) (up +1.9%).

Accolade (ACCD) is up +9% after management issued stronger-than-expected guidance for Q2 revenue.

Across the markets…

September 10-year T-notes (ZNU23) today are up 3 ticks, and the 10-year T-note yield is down -0.2 bp at 3.837%.  The 10-year T-note yield today has fluctuated near unchanged after the 10-year T-note yield soared by +15 bp on Thursday due to Fed Chair Powell’s mention of the possibility of more than two rate hikes. T-note prices today are seeing support from the generally favorable U.S. deflator report and the slightly weaker-than-expected U.S. personal spending report.

The dollar index (DXY00) today is down -0.54% on the slightly softer-than-expected U.S. deflator and personal spending reports.  EUR/USD (^EURUSD) is up +0.52%.  USD/JPY (^USDJPY) is down -0.35% as Japanese officials continue to threaten FX intervention to address the yen’s chronic weakness.

August gold (GCQ3) today is up +6.6 (+0.34%), and Sep silver (SIU23) is up +0.127 (+0.56%).  Precious metals prices saw some support from the slightly dovish U.S. deflator report. Silver saw support from the rise in the U.S. consumer sentiment index to a 4-month high.

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