Stocks Rally After Favorable Inflation Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +1.23%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.84%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.60%.

Stocks rallied after Friday’s PCE deflator report was mildly favorable and could encourage the Fed to be less hawkish.  Stocks also saw support from Friday’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 Friday struck down President Biden’s plan to forgive student debt, which is a negative factor for consumer spending when student loan payments are due to restart in October. 

Friday’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 81% 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 discounting 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 closed mixed.  The Euro Stoxx 50 closed up +1.02%.  China’s Shanghai Composite index closed +0.62%.  Japan’s Nikkei Stock Index closed down -0.14%.

Today’s stock movers…

Market breadth was highly bullish Friday, with all but eight of the Nasdaq 100 components showing gains.  Nvidia (NVDA) showed a +3.63% gain, while notable stocks with rallies of more than +2.0% included Netflix (NFLX) and Airbnb (ABNB).  Meta (META) closed up +1.94%, Amazon.com (AMZN) closed up +1.92%, Tesla (TSLA) closed up +1.66%, and Microsoft (MSFT) closed up +1.64%. 

Apple (AAPL) rallied +2.31% and made Wall Street history by being the first company ever to exceed $3 trillion in market cap.

Chip stocks rallied Friday, led by the +3.63% gain in Nvidia (NVDA).  Semiconductor stocks with gains of more than +2% included Microchip Technology (MCHP), ON Semiconductor (ON), NXP Semiconductors (NXPI), Marvell Technology (MRVL), AMD (AMD), and Globalfoundaries (GFS). 

Carnival (CCL) rallied +9.73% after an upgrade by Jefferies to buy from hold.

XPeng (XPEV) rallied +13.44% after the company announced its new G6 electric SUV.

Citi initiated research coverage at a buy for Juniper Networks (JNPR), which closed up +1.46%, and for Keysight Technologies (KEYS), which closed up +1.28%.  Citi initiated coverage at neutral for Cisco Systems (CSCO) (up +1.03%) and Arista Networks (ANET) (up +1.74%).

Accolade (ACCD) closed up +6.57% after management issued stronger-than-expected guidance for Q2 revenue.

Across the markets…

September 10-year T-notes (ZNU23) Friday closed up +2 ticks, and the 10-year T-note yield rose +0.2 bp to 3.841%.  The 10-year T-note yield Friday closed little changed after soaring by +15 bp on Thursday due to Fed Chair Powell’s mention of the possibility of more than two rate hikes.  T-note prices Friday saw support from the generally favorable U.S. deflator report and the slightly weaker-than-expected U.S. personal spending report.

• Stocks Rally After Favorable Inflation Report
• Why ‘Undervalued’ Guess (GES) Really Lives Up to Its Name
• Will Fed Stay Hawkish After Today’s Deflator Report?
• Airbnb Stock Still Looks Attractive to Value Buyers, Given Its Massive Free Cash Flow