Stocks Slightly Higher after Mixed U.S. CPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.23%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.17%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.41%.

Stock indexes this morning are slightly higher.  Stocks are posting modest gains today after a mixed U.S. consumer price report.  U.S. consumer prices in August increased to +3.7% y/y from +3.2% y/y in July, stronger than expectations of +3.6% y/y.  However, stocks found support after Aug core CPI eased to +4.3% y/y from +4.7% y/y in July, right on expectations and the smallest increase in almost two years.

Gains in U.S. stock index futures are limited by negative carryover from a slide in European stocks as the 10-year German bund yield jumped to a 3-week high after Reuters reported that the ECB's new economic estimates due to be released Thursday will show a Eurozone inflation forecast for 2024 above 3%, bolstering the case for the ECB to raise interest rates at Thursday’s policy meeting.

The markets are discounting the odds at 3% for a +25 bp rate hike at the September 20 FOMC meeting and 42% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields are mixed.  The 10-year T-note yield fell from a 3-week high of 4.342% and is down -0.2 bp at 4.278%.  The 10-year German bund yield rose to a 3-week high of 2.690% and is up +1.5 bp at 2.658%.  The 10-year UK gilt yield fell to a 1-1/2 week low of 4.345% and is down -6.1 bp at 4.355%. 

Overseas stock markets are lower.  The Euro Stoxx 50 is down -0.40%.  China’s Shanghai Composite Index closed -0.45%.  Japan’s Nikkei Stock Index closed -0.21%.

Today’s stock movers…

Moderna (MRNA) is up more than +6% to lead gainers in the S&P 500 and Nasdaq 100 after it said a reformulated version of its messenger-RNA-based flu shot met its primary goals in a final-stage trial, paving the way for it to seek FDA approval for the vaccine. 

Westrock (WRK) is up more than +2%, adding to Tuesday’s +2% gain after Smurfit Kappa Group Plc agreed to acquire the company in a $11.2 billion deal. 

Ford Motor (F) is up more than +2% after UBS double-upgraded the stock to buy from sell with a price target of $15. 

General Motors (GM) is up nearly +1% after UBS upgraded the stock to buy from neutral with a price target of $44.

Morgan Stanley (MS) is up more than +2%, adding to Tuesday’s +2% gain after investment manager Simkowitz said, “We are more confident now than any time this year about an improved outlook for 2024.” 

Airline stocks are under pressure after American Airlines Group cut its guidance for Q3 adjusted EPS to 20-30 cents from a previous estimate of 85-95 cents, well below the consensus of 65 cents.  As a result, American Airlines Group (AAL) is down more than -4% to lead losers in the S&P 500.  Also, Delta Air Lines (DAL), United Airlines Holdings (UAL), and Southwest Airlines (LUV) are down more than -2%.

Regional bank stocks are retreating today on comments from Zions Bancorp CEO Simmons, who said they are seeing a slowdown in loan demand. As a result, Zions Bancorp (ZION) and U.S. Bancorp (USB) are down more than -4%.  Also, Comerica (CMA) Truist Financial (TFC) are down more than -2%.  In addition, M&T Bank (MTB), Citizens Financial Group (CFG), Regions Financial (RF), Huntington Bancshares (HBAN), and KeyCorp (KEY) are down more than -1%. 

Applied Optoelectronics (AAOI) is down more than -19% after it terminated its agreement to sell manufacturing facilities in China to Yuhan Optoelectronic Technology.

Verizon Communications (VZ) is down more than -1% after Bloomberg Intelligence said T-Mobile may continue to gain market share from Verizon as it deploys the nationwide mid-band spectrum acquired from Sprint. 

Apple (AAPL) is down nearly -1% after China flagged “security incidents” with Apple’s iPhones, the government’s first comments after news reports that it was restricting the use of Apple products in sensitive departments and state-owned companies. 

Across the markets…

December 10-year T-notes (ZNZ23) today are up +2 ticks, and the 10-year T-note yield is down -0.2 bp at 4.278%.  Dec T-note prices today recovered from a 3-week low and moved higher, and the 10-year T-note yield fell back from a 3-week high of 4.342% and moved lower.  T-notes found support today after U.S. Aug core CPI eased to +4.3% y/y from +4.7% y/y in July, right on expectations and the slowest pace of increase in almost two years.  T-notes initially fell today on negative carryover from a slump in 10-year German bunds to a 3-week low.  Also, the stronger-than-expected U.S. Aug CPI was bearish for T-notes.  In addition, supply pressures are weighing on T-notes as the Treasury will auction $20 billion of re-opened 30-year T-bonds later today as part of this week’s $99 billion package of T-note and T-bond auctions.  

The dollar index (DXY00) today is down by -0.11%.  The dollar today is posting modest losses.  Strength in stocks today has curbed the liquidity demand for the dollar. Also, T-note yields today gave up an early advance and turned lower, weighing in the dollar.

EUR/USD (^EURUSD) is down by -0.09%.  Weaker-than-expected Eurozone economic news today weighed on the euro after Eurozone Jul industrial production fell more than expected. Losses in the euro were limited after the odds for a 25 bp rate hike by the ECB on Thursday rose to 64% from 46% on Tuesday after Reuters reported the ECB’s inflation projections, to be released Thursday, will remain above 3% for 2024, bolstering the cast for more hawkish ECB policy.

Eurozone Jul industrial production fell -1.1% m/m, weaker than expectations of -0.9% m/m and the biggest decline in 4 months.

Reuters reported that the ECB's new economic estimates, due to be released Thursday, will show a Eurozone inflation forecast for 2024 above 3%.

USD/JPY (^USDJPY) is up +0.24%.  The yen today is moderately lower.  Central bank divergence is weighing on the yen, with the ECB and Federal Reserve currently raising interest rates while the BOJ maintains record-low interest rates.

Today’s Japanese economic news was mixed for the yen.  On the negative side, Japan's Aug PPI eased to +3.2% y/y from +3.4% y/y in July, better than expectations of +3.3% y/y and dovish for BOJ policy.  Conversely, the Q3 BSI large manufacturing business conditions rose +5.8 to 5.4, the highest since Q4 of 2021.

October gold (GCV3) today is down -0.1 (-0.01%), and Dec silver (SIZ23) is down -0.247 (-1.06%).  Precious metals prices this morning are moderately lower, with gold falling to a 3-week low and silver dropping to a 3-1/2 week low.  Increased expectations for a 25 bp rate hike by the ECB Thursday are undercutting precious metals as the odds for an ECB rate hike rose to 66% today from 46% Tuesday after Reuters reported the ECB’s new economic projections will show inflation remaining above 3% in 2024, bolstering the case for tighter ECB policy.

Also, the continued liquidation of gold holdings by funds is bearish for gold after long gold holdings in ETFs fell to a 3-1/3 year low Tuesday.  A weaker dollar today is limiting losses in metals prices.  Also, an increase in inflation expectations boosted demand for precious metals as an inflation hedge after the U.S. 10-year breakeven inflation rate climbed to a 4-week high today of 2.371%. 

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