Stocks Gain as Bond Yields Fall on Signs of Cooling Inflation

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.85%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.53%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.52%.

Stocks this morning are moderately higher after key measures of U.S. inflation cooled, bolstering optimism the economy can avoid a recession and that the Federal Reserve can achieve a soft landing.  The U.S. Q2 employment cost index rose at the slowest pace in 2 years, and the U.S. Jun PCE core deflator, the Fed's preferred inflation gauge, rose less than expected.  Also, strength in technology stocks is boosting the overall market, with Intel up more than +5% after reporting better-than-expected Q2 revenue.

U.S. Jun personal spending rose +0.5% m/m, stronger than expectations of +0.4% m/m.  Jun personal income rose +0.3% m/m, weaker than expectations of +0.5% m/m.

The U.S. Jun PCE core deflator, the Fed's preferred gauge of inflation, eased to +4.1% y/y from +4.6% y/y in May, better than expectations of +4.2% y/y and the slowest pace of increase in 1-3/4 years.

The U.S. Q2 employment cost index rose +1.0% (q/q annualized), slower than expectations of +1.1% and the smallest pace of increase in 2 years.

The University of Michigan U.S. Jul consumer sentiment was revised lower to 71.6 from the initially reported 72.6.

The markets are discounting the odds at 18% for a +25 bp rate hike at the September 20 FOMC meeting. 

Global bond yields are mixed.  The 10-year T-note yield fell from a 2-1/2 week high of 4.038% and is down -4.8 bp to 3.951%.  The 10-year German bund yield rose to a 2-week high of 2.585% and is up +1.0 bp at 2.485%.  The 10-year UK Gilt yield rose to a 1-1/2 week high of 4.389% and is up +2.0 at 4.330%.  

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.25%.  China’s Shanghai Composite Index today closed up +1.84%.  Japan’s Nikkei Stock Index closed down -0.40%.

Today’s stock movers…

T Rowe Price Group (TROW) is up more than +10% to lead gainers in the S&P 500 after reporting Q2 adjusted EPS of $2.02, well above the consensus of $1.73. 

Cincinnati Financial (CINF) is up more than +8% after reporting Q2 adjusted operating EPS of $1.21, stronger than the consensus of 70 cents. 

Digital Realty Trust (DLR) is up more than +6% after reporting Q2 adjusted Ebitda of $697 million, above the consensus of $665.8 million. 

Intel (INTC) is up more than +5% to lead gainers in the Dow Jones Industrials after reporting Q2 revenue of $12.90 billion, well above the consensus of $12.02 billion, and forecast Q3 revenue of $12.9 billion-$13.9 billion, the midpoint above the consensus of $13.28 billion.

KLA Corp (KLAC) is up more than 5% after reporting Q4 adjusted EPS of $5.40, stronger than the consensus of $4.85.

Reata Pharmaceuticals (RETA) is up more than +52% after Biogen agreed to buy the company for about $7.3 billion.  

Dexcom (DXCM) is up more than +6% to lead gainers in the Nasdaq 100 after reporting Q2 revenue of $871.3 million, stronger than the consensus of $840.2 million, and raising its full-year revenue forecast to $3.50 billion-$3.55 billion from a previous forecast of $3.40 billion-$3.52 billion, above the consensus of $3.50 billion.

Franklin Resources (BEN) is up more than +4% after reporting Q3 net outflows of $7.1 billion, less than the consensus of $8.67 billion.

Mondelez International (MDLZ) is up more than +4% after reporting Q2 net revenue of $8.51 billion, above the consensus of $8.21 billion.

Procter & Gamble (PG) is up more than +3% after reporting Q4 net sales of $20.55 billion, better than the consensus of $20.06 billion. 

Juniper Networks (JNPR) is down more than -6% after it said it is “currently facing some near-term order weakness from its Cloud and to a lesser degree its Service Provider customers.”

Ford Motor (F) is down more than -4% after it said it now expects to see losses from electric vehicles hit $4.50 billion this year, above the consensus of a -$3.25 billion loss.

Centene (CNC) is down more than -5% after company executives said only 2.7% of its members are in its four-star Medicare plans and warned that number might drop to zero this year, which could eventually mean a drop in revenue from those plans.

Mohawk Industries (MHK) is down more than -5% after reporting Q2 free cash flow of $146.9 million, well below the consensus of $245.7 million. 

AON Plc (AON) is down more than -4% after reporting Q2 adjusted EPS of $2.76, below the consensus of $2.82.

Principal Financial Group (PFG) is down more than -4% after reporting Q2 adjusted operating EPS of $1.53, weaker than the consensus of $1.65.

Colgate-Palmolive (CL) is down more than -2% after forecasting full-year organic sales to climb +5% to +7%, the midpoint below the consensus of +6.38%. 

Across the markets…

September 10-year T-notes (ZNU23) today are up +15 ticks, and the 10-year T-note yield is down -4.8 bp to 3.951%.  Sep T-notes today recovered from a 2-1/2 week low, and the 10-year T-note yield fell back from a 2-1/2 week high of 4.038% on signs of easing U.S. price pressures.  T-notes recovered after the Q2 employment cost index and the Jun core PCE deflator rose less than expected.  T-notes this morning initially dropped to a 2-1/2 week low on negative carryover from a jump in 10-year Japan JGB bond yields to a 9-year high after the BOJ adjusted its yield curve control program. 

The dollar index (DXY00) today is down by -0.29%.  The dollar today fell back from a 2-1/2 week high posted on overnight trade and is moderately lower after weaker-than-expected U.S. inflation news knocked T-note yields lower.  Also, strength in the yen weighed on the dollar after the yen climbed to a 1-1/2 week high against the dollar.   

EUR/USD (^EURUSD) today is up by +0.51%.  The euro recovered from a 3-week low and is moderately higher on hawkish comments from ECB Governing Council member and Bundesbank President Nagel, who said, "Core inflation is stubborn, so our monetary policy needs to be even more stubborn.”  The euro today initially fell to a 3-week low after German Jul CPI rose less than expected and after Eurozone Jul economic confidence fell more than expected to a 9-month low.

ECB Governing Council member and Bundesbank President Nagel said, "Core inflation is stubborn, so our monetary policy needs to be even more stubborn, and we need interest rates to be high enough and to keep them there for as long as necessary."

Eurozone Jul economic confidence fell -0.8 to a 9-month low of 94.5, weaker than expectations of 95.0.

German Q2 GDP was unchanged q/q, weaker than expectations of +0.1% q/q.

German Jul CPI (EU harmonized) eased to +6.5% y/y from +6.8% y/y in Jun, better than expectations of +6.6% y/y.

France Q2 GDP rose +0.5% q/q, stronger than expectations of +0.1% q/q.

USD/JPY (^USDJPY) is up by +0.60%.  The yen today fell back from a 1-1/2 week high against the dollar and is moderately lower.  The yen retreated on dovish comments from BOJ Governor Ueda, who said today’s move by the BOJ to adjust its yield curve control was not a step toward normalization of BOJ policy and that there is a “long way” before the BOJ raises negative interest rates.  The yen today initially rallied to a 1-1/2 week high after the BOJ tweaked its yield curve control program and effectively raised the upper limit of its 10-year JGB yield target to 1.0% from 0.5%.  Also, stronger-than-expected Japanese inflation news was hawkish for BOJ policy and supportive for the yen after Tokyo Jul CPI rose more than expected. 

The BOJ, as expected, kept its policy balance rate unchanged at -0.1%.  The BOJ also kept its target for 10-year yields at around 0% but said the 0.5% ceiling was now a reference point and that it would offer to buy 10-year debt at 1.0% each day, suggesting an effective doubling of the upper target of the yield range.

Tokyo Jul CPI rose +3.2% y/y, unchanged from Jun and stronger than expectations of +2.9% y/y.  Tokyo CPI ex-fresh food and energy rose +4.0% y/y, stronger than expectations of +3.7% y/y and the most in 40 years.

August gold (GCQ3) today is up +12.9 (+0.66%), and Sep silver (SIU23) is up +0.048 (+0.20%). Precious metals prices this morning are moderately higher.  Weakness in the dollar today is bullish for metals prices.  Also, today’s U.S. inflation news on the Q2 employment index and Jun core PCE deflator was weaker than expected, knocking bond yields lower and supporting precious metals.   On the negative side was today’s action by the BOJ to tweak its yield curve control program, which sent the 10-year JGB bond yield soaring to a 9-year high.  Also, fund liquidation of long gold holdings is weighing on gold prices after long gold holdings in ETFs fell to a new 3-year low Thursday. 

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