Stocks Soar on Speculation Fed Rate Hikes May Ending

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.06%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.82%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.54%.

Stocks this morning rallied, with the S&P 500 at a 14-1/2 month high, the Dow Jones Industrials at a 3-1/2 week high, and the Nasdaq 100 at a 17-month high.  Speculation the Fed may be nearing the end of its interest rate hiking campaign is fueling gains in stocks today after U.S. June consumer prices slowed more than expected. While today’s CPI report is unlikely to dissuade the Fed from raising interest rates by +25 bp later this month, it increases the chances that this month’s rate hike could be the last in this cycle. 

The June U.S. CPI eased to +3.0% y/y from +4.0% y/y in May, better than expectations of +3.1% y/y and the smallest increase in 2-1/4 years. Also, the June CPI ex-food and energy eased to +4.8% y/y from +5.3% y/y in May, better than expectations of +5.0% y/y and the smallest increase in 1-1/2 years.

Richmond Fed President Barkin said even though U.S. inflation slowed in June, "it is still too high.  Our target is 2%.  If you back off too soon, inflation comes back strong, which then requires the Fed to do even more."

The markets are discounting the odds at 89% 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 is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields are lower.  The 10-year T-note yield is down -9.3 bp at 3.877%.  The 10-year German bund yield is down -6.7 bp at 2.583%. The 10-year UK Gilt yield is down -14.2 bp at 4.520%. 

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +1.80%.  China’s Shanghai Composite Index today closed down -0.78%.  Japan’s Nikkei Stock Index today closed down -0.81%.

Today’s stock movers…

Domino’s Pizza (DPZ) is up more than +9% to lead gainers in the S&P 500 on an agreement allowing U.S. customers to order Domino’s products through the Uber Eats marketplace.

Lower T-note yields today have sparked a rally in mega-cap technology.  Nvidia (NVDA) is up more than +3%.  Also, Microsoft (MSFT) is up more than +2% to lead gainers in the Dow Jones Industrials.  Alphabet (GOOGL) and Meta Platforms (META) are up more than +2%, and Apple (AAPL) is up more than +1%. 

Bank stocks are moving higher today and supporting gains in the broader market.  Comerica (CMA), KeyCorp (KEY), and Zions Bancorp (ZION) are up more than +3%.  Also, Goldman Sachs (GS), Morgan Stanley (MS), Franklin Resources (BEN), and Truist Financial (TFC) are up more than +2%.

U.S.-listed Chinese stocks are climbing today after Chinese Premier Li Qiang met with senior executives from the country’s leading technology firms and vowed more support for the economy.  As a result, PDD Holdings (PDD) is up more than +4% to lead gainers in the Nasdaq 100.  Also, JD.com (JD) and NetEase (NTES) are up more than +3%.  Alibaba Group Holding (BABA) and Baidu (BIDU) are up more than +2%. 

TJX Cos (TJX) is up more than +1% after Loop Capital Markets upgraded the stock to buy from hold with a price target of $95.

Centene (CNC) is down more than -3% to lead losers in the S&P 500 after Wolfe Research downgraded the stock to peer perform from outperform.

Health insurance companies are falling today ahead of Q2 earnings on concern whether they are adequately prepared for an unexpected rise in medical-care usage that United Health and Humana recently said they saw emerge in Q2.  As a result, Cigna Group (CI) is down more than -3%, and Molina Healthcare (MOH) is down more than -2%.  Also, Humana (HUM) and UnitedHealth Group (UNH) are down more than -1%. 

Cisco Systems (CSCO) is down more than -1% to lead losers in the Dow Jones Industrials after Bank of America downgraded the stock to neutral from buy.

Lucid Group (LCID) is down more than -11% to lead losers in the Nasdaq 100 after it reported Q2 vehicle deliveries of 1,404, well below the consensus of 1,873.

WW Grainger (GWW) is down more than -2% after UBS downgraded the stock to neutral from buy, citing valuation. 

Elevance Health (ELV) is down more than -3% after Wolfe Research downgraded the stock to peer perform from outperform.

Across the markets…

September 10-year T-notes (ZNU23) today are up +25 ticks, and the 10-year T-note yield is down -9.3 bp at 3.877%.  Sep T-notes today rallied to a 1-week high on positive inflation news after U.S. June CPI fell to a 2-1/2 year low.  T-notes fell back from their best levels on hawkish comments from Richmond Fed President Barkin, who said even though the pace of inflation slowed in June, it is still “too high.” Supply pressures are also a negative factor for T-notes as the Treasury today will auction $32 billion 10-year T-notes as part of this week’s $90 billion auction package of T-notes and T-bonds.

The dollar index (DXY00) today is down by -1.07% and dropped to a 14-1/2 month low.  The dollar is sinking on speculation that today’s weaker-than-expected U.S. June CPI report will prompt the Fed to end its rate hike campaign sooner than expected. Also, lower T-note yields today are weighing on the dollar, and strength in stocks has reduced the liquidity demand for the dollar.   

EUR/USD (^EURUSD) today is up by +0.95% and posted a 15-month high. A slump in the dollar today is bullish for the euro.  Also, positive comments today from ECB Governing Council member Vukcic gave EUR/USD a boost when he said he saw slight positive economic growth for the Eurozone in Q2.

USD/JPY (^USDJPY) is down -1.34%.  The yen today rallied to a 1-month high against the dollar.  Lower T-note yields today are bullish for the yen. Also, speculation about a possible change in policy from the BOJ later this month has pushed government bond yields higher and supported the yen after the 10-year JGB bond yield climbed to a 2-1/2 month high today at 0.478%. 

Today’s Japanese economic news was bearish for the yen.  Japan Jun PPI eased to +4.1% y/y from +5.1% y/y in May, better than expectations of +4.4% and the smallest increase in over two years. Also, May core machine orders unexpectedly fell -7.6% m/m, weaker than expectations of +1.0% m/m and the biggest decline in 15 months.

August gold (GCQ3) today is up +25.5 (+1.32%), and Sep silver (SIU23) is up +0.899 (+3.88%). Precious metals prices this morning are moderately higher, with gold and silver posting 3-week highs.  A decline in the dollar index today to a 3-month low is bullish for metals.  Also, lower global bond yields today are supportive of metals prices.  In addition, metals are gaining on expectations that today’s weaker-than-expected U.S. June CPI report will prompt the Fed to end its rate hiking campaign.  On the negative side is the ongoing fund liquidation of gold as holdings in gold ETFs fell to a 4-month low Tuesday.  Also, stock strength today has reduced the safe-haven demand for precious metals. 

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