Stocks Finish Higher as Easing Price Pressures Curb Interest Rate Concerns

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed up +0.85%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.73%.

Stock indexes Thursday added to Wednesday’s gains, with the S&P 500 at a 15-month high and the Nasdaq 100 at a 1-1/2 year high. Stocks moved higher Thursday on optimism that the moderation of U.S. price pressures will soon allow the Federal Reserve to end its interest rate hiking campaign after producer prices rose less than expected in June.  On the negative side was an unexpected decline in weekly jobless claims, a sign of a resilient U.S. labor market that is hawkish for Fed policy. 

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.

Comments Thursday from San Francisco Fed President Daly were slightly hawkish and bearish for stocks when she said it's "too soon" to declare victory on inflation and that "while we've put over 500 bp of tightening in the system over a rapid period of time, we still have an economy that has a lot of momentum.  This is why we continue to say we're going to keep working on rate hikes until we're sure that inflation is on a path to come down to 2%."

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 on Thursday moved lower.  The 10-year T-note yield fell to a 2-week low of 3.758% and finished down -9.4 bp at 3.763%.  The 10-year German bund yield fell to a 1-week low of 2.470% and finished down -9.2 bp at 2.485%.  The 10-year UK Gilt yield fell to a 1-week low of 4.416% and finished down -9.2 bp at 4.422%. 

Bitcoin (^BTCUSD) rallied more than +4% Thursday to a 13-1/2 month high after a federal judge ruled that the Ripple Labs token is a security when sold to institutional investors but not the general public, a decision seen as supportive for the crypto industry over the Securities and Exchange Commission (SEC) when it comes down to what is classified as a security. 

Overseas stock markets Thursday settled higher. The Euro Stoxx 50 closed up +0.72%. China’s Shanghai Composite Index today closed up +1.26%.  Japan’s Nikkei Stock Index today closed up +1.49%.

Today’s stock movers…

Lower T-note yields Thursday fueled a rally in chip stocks.  Nvidia (NVDA) and Qualcomm (QCOM) closed up more than +4%.  Also, ON Semiconductor (ON), Marvell Technology (MRVL), and ASML Holding NV (ASML) closed up more than +3%.  In addition, Applied Materials (AMAT), Lam Research (LRCX), and NXP Semiconductor NV (NXPI) closed up more than +2%. 

Alphabet (GOOGL) closed up more than +4% 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.

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) and Cloudflare (NET) closed up more than +5%.  Also, Crowdstrike Holdings (CRWD) closed up more than +3%. 

Regional bank stocks moved higher and supported gains in the broader market.  KeyCorp (KEY) closed up more than +3%.  Also,  Franklin Resources (BEN), Lincoln National (LNC), Synchrony Financial (SYF), Northern Trust Corp (NTRS), US Bancorp (USB), and Zions Bancorp (ZION) closed up more than +2%.  In addition, Comerica (CMA), M&T Bank (MTB), Huntingtin Bancshares (HBAN), and Truist Financial (TFC) closed up more than +1%.

Palo Alto Networks (PANW) closed up more than +2% after JMP Securities raised its price target on the stock to $300 from $255.

APA Corp (APA) closed up more than +2% after Benchmark Company LLC initiated coverage of the stock with a buy recommendation and a price target of $46.

Insurance stocks retreated Thursday 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) closed down more than -13% top lead losers in the S&P 500.  Also, Allstate (ALL) closed down more than -2%, and Travelers (TRV) closed down more than -1%. 

Fastenal (FAST) closed down more than -3% to lead losers in the Nasdaq 100 after reporting Q2 net sales of $1.88 billion, below the consensus of $1.89 billion.

ViaSat (VSAT) closed down more than -28% after it said an unexpected event occurred during reflector deployment that may materially impact the performance of the ViaSat-3 Americas satellite. 

Carvana (CVNA) closed down more than -3% after JPMorgan Chase downgraded the stock to underweight from neutral, saying the shares have disconnected from fundamentals. 

Across the markets…

September 10-year T-notes (ZNU23) Thursday closed up +25 ticks, and the 10-year T-note yield fell -9.4 bp to 3.763%.  Sep T-notes Thursday climbed to a 2-week high, and the 10-year T-note yield fell to a 2-week low of 3.758%.   Positive inflation news gave T-note prices a boost after U.S. June PPI fell to a 2-3/4 year low.  T-notes maintained their gains on strong demand for the Treasury’s $18 billion auction of 30-year T-bonds, which had a bid-to-cover ratio of 2,43, above the 10-auction average of 2.38.

On the negative side was Thursday’s rally in the S&P 500 to a 15-month high, which curbed the safe-haven demand for T-notes.  Also, hawkish comments from San Francisco Fed President Daly were bearish for T-notes when she said it's "too soon" to declare victory on inflation.  In addition, the unexpected decline in weekly U.S. jobless claims was negative for T-notes.

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