Stocks See Support from U.S. Deflator Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.20%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.21%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.38%.

Stock indexes saw support after this morning’s news that the U.S. PCE deflator fell to a new post-pandemic low of +2.1% (+2.9% core) on a 3-month annualized basis, although the report was in line with market expectations.  Stocks also saw support from today’s -2 bp decline in the 10-year T-note yield and dovish comments from Atlanta Fed President Bostic.

The U.S. Jul PCE deflator, the Fed’s preferred inflation measure, rose by +0.2% m/m and +3.3% y/y, which was in line with market expectations.  The U.S. Jul core PCE deflator rose by +0.2% m/m and +4.2% y/y, which was also in line with expectations. 

On a year-on-year basis, the Jul PCE deflator report of +3.3% was up from June’s 2-1/4 year low of +3.0% but remained far below the 4-decade high of 7.0% posted in June 2022.  Meanwhile, the Jul core PCE deflator of +4.2% was up from June’s 1-1/4 year low of 4.1%, but remained far below the 4-decade high of +5.4% posted in Feb 2022. 

On a 3-month annualized basis, the Jul PCE deflator fell to a new post-pandemic low of +2.1%, and the core deflator fell to a new post-pandemic low of +2.9%.

U.S. Jul personal spending rose +0.8% m/m, slightly stronger than market expectations of +0.7%.  Jul personal income rose +0.2% m/m, slightly weaker than expectations of +0.3% m/m.

The weekly U.S. initial unemployment claims report of -4,000 to 228,000 showed a slightly stronger labor market than expectations for a rise to 235,000.  However, continuing claims rose by +28,000 to 1.725 million, which showed a weaker labor market than expectations for a report of 1.706 million.

In a dovish comment, Atlanta Fed President Bostic said, “I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”

The markets are discounting the odds at 12% for a +25 bp rate hike at the September 20 FOMC meeting and 37% for that +25 bp rate hike at the November 1 FOMC meeting. 

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.38%.  China’s Shanghai Composite Index closed down -0.55%.  Japan’s Nikkei Stock Index closed up +0.88%.

China’s Aug manufacturing PMI rose +0.4 to 49.7, stronger than expectations for a -0.1 point decline to 49.2.  China’s non-manufacturing PMI fell by -0.5 to 51.0, weaker than expectations for a -0.3 point decline to 51.2.

Today’s stock movers…

Dollar General (DG) plunged -17% after cutting its earnings forecast for the second consecutive quarter due to rising labor costs and “softer sales trends.”

Salesforce (CRM) is up +4.2% after its earnings guidance was stronger than expected.

CrowdStrike (CRWD) is up +9.9% after its earnings report was stronger than expected.

Shopify (SHOP) is up +8.4% after Amazon announced that an app integration will allow Shopify stores to offer Buy with Prime.

Chewy (CHWY) fell -12.0% after Evercore ISI cut its rating on the stock to in-line from outperform.

Arista Networks (ANET) is up +3.3% after Citi upgraded its rating on the stock to buy from neutral based on expectations for an improvement in corporate cloud spending through next year.

Across the markets…

September 10-year T-notes (ZNU23) today are up +4 ticks, and the 10-year T-note yield is down -2.0 bp at 4.095% and edged to a new 3-week low.  T-note prices saw support after today’s PCE deflator report showed an improvement on a 3-month annualized basis, which was dovish for Fed policy.  T-note prices also saw support as the 10-year breakeven inflation expectations rate fell -0.8 bp to a new 1-1/2 month low of 2.257%.

The dollar index (DXY00) today is up +0.48% on support from the strong U.S. personal spending report of +0.8% m/m, which indicated resilience in U.S. consumer spending.  The dollar is higher despite today’s decline in U.S. T-note yields.  EUR/USD (^EURUSD) is down -0.68% on dollar strength.  USD/JPY (^USDJPY) is down -0.08%.

There was a slew of overseas economic news released overnight. 

In Europe, German retail sales fell by -0.8% m/m and -2.4% y/y, weaker than expectations of +0.3% m/m and -1.4% y/y.  German unemployment rose by +18,000, which showed a stronger labor market than expectations of +10,000.  The French consumer spending report of +0.3% m/m and -1.1% y/y was in line with market expectations. 

The Eurozone preliminary Aug CPI rose by +0.6% m/m and +5.3% y/y, stronger than expectations of +0.4% m/m and +5.1% y/y.  The Eurozone Aug CPI of +5.3% y/y was unchanged from June’s level of +5.3%. Meanwhile, the Aug core CPI eased to +5.3%, down from July’s +5.5% and was in line with market expectations. 

Japan’s July retail sales rose by +2.1% m/m and +6.8% y/y, stronger than expectations of +0.8% m/m and +5.5% y/y.  Japan’s July preliminary industrial production fell by -2.0% m/m and -2.5% y/y, weaker than expectations of -1.4% m/m and -1.4% y/y.  Japan’s July housing starts fell by -6.7% y/y, which was weaker than expectations of -1.3% y/y and weaker than June’s report of -4.8%.

October gold (GCV3) today is down -2.4 (-0.12%), and Sep silver (SIU23) is down -0.114 (-0.46%).  Precious metals prices are seeing some long liquidation pressure after the rally seen in the past two weeks.  Silver failed to receive much of a boost from the strong U.S. personal spending report. Gold continues to suffer from the liquidation of gold holdings by funds after long gold holdings in ETFs fell to a 3-1/3 year low Tuesday.

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