Stocks Fall Back as Inflation Expectations Climb

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed down -0.10%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.33%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.04%.

Stocks Friday initially moved higher, with the S&P 500 posting a 15-month high, the Dow Jones Industrials posting a 7-month high, and the Nasdaq 100 posting a 1-1/2 year high.  Stocks moved higher early on strength in bank earnings after JPMorgan Chase, Wells Fargo, and Citigroup reported better-than-expected Q2 earnings.  Stock indexes then posted their highs mid-morning after the University of Michigan’s U.S. July consumer sentiment index rose more than expected to a 1-3/4 year high.

However, stocks faded from their best levels the rest of the day and settled mixed as bond yields rose on hawkish Fed comments, and after the University of Michigan U.S. July inflation expectations indicator unexpectedly rose.

The University of Michigan’s U.S. July consumer sentiment index rose +8.2 to a 1-3/4 year high of 72.6, stronger than expectations of 65.5.

The University of Michigan U.S. July 1-year inflation expectations indicator unexpectedly rose to 3.4% from 3.3% in June, worse than expectations of a decline to 3.1%.  Also, the 5-10 year inflation expectations rose to 3.1%, above expectations of no change at 3.0%.

Positive inflation news was bullish for stocks after the U.S. June import price index ex-petroleum fell -0.3% m/m, a slightly larger decline than expectations of -0.2% m/m.

Late Thursday, Fed Governor Waller said, "I see two more 25 bp interest rate hikes in the target range over the four remaining FOMC meetings this year as necessary to keep inflation moving toward our target."

Chicago Fed President Goolsbee said recent consumer-price data showing inflation easing was "promising," though inflation is still higher than the Fed's 2% goal.  He added that policymakers are on a "golden path" to containing inflation without triggering a recession.

The markets are discounting the odds at 92% 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 Friday moved higher.  The 10-year T-note yield rose +5.4 bp at 3.817%.  The 10-year German bund yield rose +2.7 bp to 2.512%.  The 10-year UK Gilt yield fell to a 1-1/2 week low of 4.371% but rebounded and finished up by +2.2 bp to 4.444%. 

Overseas stock markets Friday settled mixed.  The Euro Stoxx 50 closed up +0.19%.  China’s Shanghai Composite Index today closed up +0.04%.  Japan’s Nikkei Stock Index today closed down -0.09%.

Today’s stock movers…

State Street (STT) closed down more than -12% to lead losers in the S&P 500 after reporting Q2 revenue of $3.11 billion, weaker than the consensus of $3.13 billion.

Corning (GLW) closed down more than -6% after UBS downgraded the stock to neutral from buy. 

Warner Bros Discovery (WBD) closed down more than -5% on profit concerns after the actors guild joined the writers union on a strike that will halt the production of new TV shows and movies. 

Energy producers and energy service providers sold off Friday after crude prices fell nearly -2%.  APA Corp (APA) closed down more than -5%, and Devon Energy (DVN) and Marathon Oil (MRO) closed down more than -4%.  Also, Exxon Mobil (XOM), Occidental Petroleum (OXY), ConocoPhillips (COP), and Diamondback Energy (FANG) closed down more than -3%.  Chevron (CVX) closed down more than -2% to lead losers in the Dow Jones Industrials.

Regional bank stocks retreated Friday after JPMorgan CFO Barnum said net interest income for banks will probably be “substantially below this quarter’s run rate at some point in the future, as competition for deposits plays out.” As a result, Northern Trust (NTRS) and Bank of New York Mellon (BK) closed down more than -6%.  Also, KeyCorp (KEY) and Zions Bancorp (ZION) closed down more than -4%.  In addition, Comerica (CMA), Franklin Resources (BEN), Citizens Financial Group (CFG), and Synchrony Financial (SYF) closed down more than -2%. 

Moderna (MRNA) closed down more than -4% after HSBC initiated coverage of the stock with a recommendation of reduce and a price target of $97. 

AT&T (T) closed down more than -4% after JPMorgan Chase downgraded the stock to neutral from overweight. 

Healthcare stocks moved higher Friday after bellwether UnitedHealth Group reported Q2 revenue of $92.90 billion, above the consensus of $90.93 billion.  As a result, UnitedHealth Group (UNH) closed up more than +7% to lead gainers in the S&P 500 and Dow Jones Industrials. Also, Elevance Health (ELV) closed up more than +5%, and Cigna Group (CI) closed up more than +4%.  In addition, Centene (CNC) and Molina Healthcare (MOH) closed up more than +3%, and Humana (HUM) closed up more than +2%. 

Homebuilders rallied after Raymond James upgraded several stocks in the sector.  Toll Brothers (TOL) closed up more than +1% after being upgraded to strong buy from outperform. Also, Lennar (LEN), PulteGroup (PHM), and KB Home (KBH) closed up more than +2% after being upgraded to outperform from market perform. In addition, DR Horton (DHI) closed up more than +3%.

Eli Lilly (LLY) closed up more than +3% after it agreed to buy Versanis, a private clinical-stage biopharmaceutical company that develops new drugs for the treatment of cardiometabolic diseases.

Microsoft (MSFT) closed up +0.75% after UBS upgraded the stock to buy from neutral, saying cloud infrastructure spending is starting to stabilize after significant deceleration over the past year.

JPMorgan Chase (JPM) closed up +0.6% after reporting Q2 adjusted revenue of $42.40 billion, well above the consensus of $39.34 billion, and raised its full-year net interest income estimate, excluding CIB markets, to $87 billion from a prior estimate of $84 billion. 

Las Vegas Sands (LVS) closed up more than +1% after Morgan Stanley designated the stock as a Top Pick in their gaming coverage.

Across the markets…

September 10-year T-notes (ZNU23) Friday closed down -15.5 ticks, and the 10-year T-note yield rose +5.4 bp to 3.817%.  Sep T-notes Friday opened lower on hawkish comments Thursday evening from Fed Governor Waller, who said he sees two more +25 bp rate hikes this year.  Losses in T-notes accelerated after the University of Michigan’s U.S. July consumer sentiment index rose to a 1-3/4 year high, and the University of Michigan’s U.S. July inflation expectations indicators unexpectedly rose. 

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