Stocks Gain as Easing Price Pressures May End Fed Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.50%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.18%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.95%.

Stocks this morning extended Wednesday’s gains, with the S&P 500 at a 14-1/2 month high and the Nasdaq 100 at a 1-1/2 year high.  Stocks are moving higher on optimism that the moderation of U.S. price pressures will allow the Federal Reserve to end its interest rate hiking campaign soon.  This morning’s news showed U.S. producer prices in June rose less than expected. Stock indexes today rose even after weekly jobless claims unexpectedly fell, a sign of a resilient U.S. labor market. 

While this week’s CPI and PPI reports are 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 rate hike in this cycle. 

U.S. Jun PPI final demand eased to +0.1% y/y from +0.9% y/y in May, better than expectations of +0.4% y/y and the smallest pace of increase in 2-3/4 years.  Also, Jun PPI ex-food and energy eased to +2.4% y/y from +2.6% y/y in May, better than expectations of +2.6% y/y and the smallest pace of increase in almost 2-1/2 years.

U.S. weekly initial unemployment claims unexpectedly fell -12,000 to 237,000, showing a stronger labor market than expectations of an increase to 250,000.

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 fell to a 1-week low of 3.797% and is down -4.7 bp at 3.810%.  The 10-year German bund yield fell to a 1-week low of 2.470% and is down -7.5 bp at 2.502%.  The 10-year UK Gilt yield fell to a 1-week low of 4.426% and is down -6.5 bp at 4.449%.  

Overseas stock markets are higher.  The Euro Stoxx 50 is up +0.92%.  China’s Shanghai Composite Index today closed up +1.26%.  Japan’s Nikkei Stock Index today closed up +1.49%.

Today’s stock movers…

Alphabet (GOOGL) is up more than +4% to lead gainers in the S&P 500 after the company said it released its Bard chatbot to users in the European Union and Brazil, and the tool can generate responses in more than 40 languages.

U.S.-listed casino stocks that operate in Macau are climbing today on signs of strength in Macau airport traffic after the Macau International Airport reported that the number of airport passengers reached 431,000 in June, up +11.3% from May and the highest level this year.  As a result, MGM Resorts International (MGM) is up more than +3%.  Also, Las Vegas Sands (LVS) and Wynn Resorts (WYNN) are up more than +2%. 

Palo Alto Networks (PANW) is up more than +3% after JMP Securities raised its price target on the stock to $300 from $255.

APA Corp (APA) is up more than +3% after Benchmark Company LLC initiated coverage of the stock with a buy recommendation and a price target of $46.

Cybersecurity stocks rose after Bloomberg Intelligence said Microsoft’s expansion into cybersecurity with its Secure Access Service Edge (SASE) is likely to augment its endpoint security suite, though a lower efficacy may limit headwinds to other cloud-security vendors.  As a result, Zscaler (ZS) is up more than +4% to lead gainers in the Nasdaq 100.  Also, Cloudflare (NET) is up more than +5%, and Crowdstrike Holdings (CRWD) is up more than +4%.  

Regional bank stocks are moving higher today and supporting gains in the broader market.  KeyCorp  (KEY), Northern Trust Corp (NTRS), and Zions Bancorp (ZION) are up more than +2%.  Also, M&T Bank (MTB), Lincoln National (LNC), US Bancorp (USB), Fifth Third Bancorp (FITB), Huntingtin Bancshares (HBAN), Citizens Financial Group (CFG), and Truist Financial (TFC) are up more than +1%.

Insurance stocks are falling today after Progressive Corp reported Q2 net premiums written $14.72 billion, below consensus of $14.98 billion, and a Q2 combined ratio of 100.4%, worse than estimates of 97.1%.  As a result, Progressive Corp (PGR) is down more than -11% top lead losers in the S&P 500.  Also, Travelers (TRV) is down more than -1% to lead losers in the Dow Jones Industrials, and Allstate (ALL) is down more than -1%. 

Fastenal (FAST) is down more than -2% after reporting Q2 net sales of $1.88 billion, below the consensus of $1.89 billion.

ViaSat (VSAT) is down more than -30% after it said an unexpected event occurred during reflector deployment that may materially impact the performance of the ViaSat-3 Americas satellite. 

Carvana (CVNA) is down more than -5% after JPMorgan Chase downgraded the stock to underweight from neutral, saying the shares have disconnected from fundamentals. 

Crown Castle (CCI) is down more than -1% after BMO Capital Markets initiated coverage of the stock with a recommendation of underperform and a price target of $113.

Across the markets…

September 10-year T-notes (ZNU23) today are up +11 ticks, and the 10-year T-note yield is down -4.7 bp at 3.810%.  Sep T-notes today climbed to a 2-week high, and the 10-year T-note yield fell to a 1-1/2 week low of 3.797%.   Positive inflation news gave T-note prices a boost after U.S. June PPI fell to a 2-3/4 year low.  Gains in T-notes were limited after weekly initial unemployment claims unexpectedly declined, a sign of a stronger labor market.  Also, supply pressures are a negative factor for T-notes as the Treasury today will auction $18 billion 30-year T-bonds as it concludes this week’s $90 billion auction package of T-notes and T-bonds.

The dollar index (DXY00) today is down by -0.44% and posted a fresh 14-1/2 month low.  The dollar is under pressure today as T-note yields are falling after the weaker-than-expected U.S. Jun PPI report adds to evidence that price pressures are easing, which has bolstered speculation the Fed will soon end its rate hike campaign. Also, the strength in stocks today has reduced the liquidity demand for the dollar.   

EUR/USD (^EURUSD) today is up by +0.56% and posted a 15-month high. Dollar weakness is a bullish factor for the euro.  EUR/USD also found support on today’s hawkish minutes of the June 15 ECB meeting that stated that “a very broad consensus supported the 25 bp rate increase” as it was widely felt that core inflation hadn’t shown a turning point. 

Today’s economic news was bearish for the euro after Eurozone May industrial production rose +0.2% m/m, weaker than expectations of +0.3% m/m.

USD/JPY (^USDJPY) is down -0.19%.  The yen today rallied for the sixth consecutive session and posted a 1-1/2 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%. 

August gold (GCQ3) today is up +2.9 (+0.15%), and Sep silver (SIU23) is up +0.455 (+1.87%). Precious metals prices this morning are moving higher, with gold posting a 1-month high and silver posting a 5-week high.  Today's slump in the dollar index to a 14-1/2 month low is bullish for metals.  Also, lower global bond yields today are supportive of metals prices.  In addition, metals are gaining after that today’s weaker-than-expected U.S. June PPI report adds to evidence that price pressures are easing and 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 on Wednesday.  Also, a rally in stocks today has reduced the safe-haven demand for precious metals.

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