Stocks Gain as Global Inflation Decelerates

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.59%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.22%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.06%.

Stocks this morning are moderately higher.  Signs of deceleration in global inflation are boosting stocks today.  U.S. stocks have carryover support from a rally in European stocks after today’s news showed Eurozone price pressures eased more than expected.  Eurozone Sep CPI eased to +4.3% y/y from +5.2% y/y in Aug, the slowest pace of increase in almost two years.  The friendly inflation news also sparked a bond rally, adding to the positive sentiment in stocks. 

U.S. stock index futures extended their gains as bond yields fell further on dovish inflation news after this morning’s report on the Aug PCE core deflator, the Fed’s preferred inflation gauge, rose +3/.9% y/y, the slowest pace in 2 years.

Adding to positive sentiment is the possible improvement in U.S.-China relations after the Wall Street Journal reported that China’s Vice Premier He Lifeng and Foreign Minister Wang Yi are discussing possible visits to Washington to prepare for a potential summit between President Xi Jinping and President Biden.

A negative factor for stocks is the near certainty of a U.S. government shutdown, with House Republicans unable to agree on a plan to continue funding federal operations.  A shutdown appears imminent on October 1 as House Speaker McCarthy cannot get GOP lawmakers to agree on a temporary spending bill to keep the government open. 

U.S. Aug personal spending rose +0.4% m/m, weaker than expectations of +0.5% m/m.  Aug personal income rose +0.4% m/m, right on expectations.

The U.S. Aug PCE core deflator eased to +3.9% y/y from +4.3% y/y in July, right on expectations and the slowest pace of increase in 2 years.

The U.S. Sep MNI Chicago PMI fell -4.6 to 44.1, weaker than expectations of 47.6,

The University of Michigan U.S. consumer sentiment was revised upward by +0.4 to 68.1, stronger than expectations of no change at 67.7.

The markets are discounting a 17% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 34% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields today are moving lower.  The 10-year T-note yield is down -5.3 bp at 4.522%. The 10-year German bund yield is down -10.9 bp at 2.821%.  The 10-year UK gilt yield is down -6.9 bp at 4.415%.  

Overseas stock markets are mixed.  The Euro Stoxx 50 is up +0.68%.  China’s Shanghai Composite Index was closed for the Golden Week holidays. Japan’s Nikkei 225 today closed -0.05%.

Today’s stock movers…

Nike (NKE) is up more than +7% to lead gainers in the S&P 50 and Dow Jones Industrials after reporting Q4 EPS of 93 cents, stronger than the consensus of 75 cents.  Other sports apparel and footwear stocks rallied on the Nike news, with Foot Locker (FL) up more than +2% and Dick’s Sporting Goods (DKS) and Lululemon Athletica (LULU) up more than +1%.

Walgreens Boot Alliance (WBA) is up more than +5% to lead gainers in the Nasdaq 100 after Bloomberg reported the company is looking at former Cigna Group CEO Wentworth to be its next CEO. 

CarMax (KMX) is up more than +4% after General United Auto Workers said they plan to extend their strike to three more plants, which will curb auto output and may boost demand for used cars. 

Ball Corp (BALL) is up more than +3% after Jeffries upgraded the stock to buy from hold with a price target of $64. 

Zions Bancorp (ZION) is up more than +3% after Citigroup initiated coverage on the stock with a recommendation of buy and a price target of $42. 

Trimble (TRMB) is up more than +4% after Raymond James upgraded the stock to outperform from market perform with a price target of $65. 

Micron Technology (MU) is up more than +3% after Nikkei reported that Japan’s Ministry of Economy, Trade and Industry will subsidize up to 192 billion yen toward Micron’s semiconductor plant in Hiroshima prefecture. 

Brinker International (EAT) is up more than +4% after Stifel upgraded the stock to buy from hold with a price target of $45. 

Texas Roadhouse (TXRH) is up more than +2% after Northcoast Research upgraded the stock to buy from neutral with a price target of $118.

Weakness in crude oil prices today is pressuring energy stocks.  As a result, Schlumberger (SLB) is down more than -3%.  Also, Baker Hughes (BKR) is down more than -2% to lead losers in the Nasdaq 100.  In addition, Haliburton (HAL) is down more than -3%, and APA Corp (APA), Hess (HES), Marathon Petroleum (MPC), Exxon Mobil (XOM), and Phillips 66 (PSX) are down more than -2%.    

Cruise line operators are weaker today after Carnival forecasted Q4 adjusted Ebitda of $800 million-$900 million, weaker than the consensus of $949.5 million.  As a result, Carnival (CCL) Is down more than -4% to lead losers in the S&P 500.  Also, Norwegian Cruise Line Holdings (NCLH) is down more than -3%, and Royal Caribbean Cruises (RCL) is down more than -1%.

Across the markets…

December 10-year T-notes (ZNZ23) today are up +14 ticks, and the 10-year T-note yield is down -5.3 bp at 4.522%.  Dec T-notes today are moderately higher on carryover support from a rally in 10-year German bunds after Eurozone Sep CPI rose less than expected.  T-notes extended their gains after today’s report on the Aug PCE core deflator, the Fed’s preferred inflation gauge, rose at the slowest pace in 2 years, and after the Sep MNI Chicago PMI fell more than expected.

The dollar index (DXY00) today is down by -0.35%.  The dollar index today is moderately lower and fell to a four-session low.  Dovish U.S. inflation news today knocked T-note yields slower and weighed on the dollar. Also, today’s rally in stocks has reduced the liquidity demand for the dollar. 

EUR/USD (^EURUSD) today is up by +0.22%.  The euro is moderately higher today and is finding support from a weaker dollar.  Gains in the euro are limited after today’s economic news showed Eurozone Sep consumer prices rose less than expected and German Aug retail sales unexpectedly fell by the most in 8 months, dovish factors for ECB policy.  Also, dovish comments from ECB Governing Council member Kazaks weighed on the euro when he said, "Interest rates will probably remain steady for an extended period.”

Eurozone Sep CPI eased to +4.3% y/y from +5.2% y/y in Aug, better than expectations of +4.5% y/y and the slowest pace of increase in almost 2 years.  Also, Sep core CPI eased to +4.5% y/y from +5.2% y/y in Aug, better than expectations of +4.8% y/y and the slowest pace of increase in 13 months.

German Aug retail sales unexpectedly fell -1.2% m/m, weaker than expectations of an increase of +0.5% m/m and the biggest decline in 8 months.

ECB Governing Council member Kazaks said, "Interest rates will probably remain steady for an extended period.  However, if inflation doesn't go down, then there could be a small increase."

USD/JPY (^USDJPY) is down by -0.03%.  The yen today is slightly higher.  Lower T-note yields today are supportive of the yen.  Also, today’s increase in the 10-year JGB bond yield to a 10-year high of 0.774% was bullish for the yen as it strengthened the yen’s interest rate differentials.  The yen gave up most of its advance after the BOJ announced an unscheduled bond-purchase operation and purchased 300 billion yen ($2 billion) of five- to 10-year bonds in an attempt to keep long-term bond yields from rising.

Today’s Japanese economic news was mixed for the yen.  On the positive side, Aug industrial production was unchanged m/m, stronger than expectations of -0.8% m/m.  Conversely, the Japan Sep consumer confidence index fell -1.0 to a 6-month low of 35.2, weaker than expectations of no change at 36.2.  Also, Aug retail sales rose +0.1% m/m, weaker than expectations of +0.4% m/m.

Japan Tokyo Sep CPI ex-fresh food and energy eased to +3.8% y/y from +4.0% y/y in Aug, better than expectations of +3.9% y/y.

October gold (GCV3) today is up +11.0 (+0.59%), and Dec silver (SIZ23) is up +0.779 (+3.43%). Precious metals prices this morning are moving higher on a weak dollar.  Also, weaker-than-expected inflation news in the Eurozone and the U.S. may prompt the ECB and Fed to pause their rate-hike campaigns, a bullish factor for precious metals.  In addition, lower global bond yields today are positive for metals process.  Silver has carryover support today from a rally in copper prices to a 1-wek high.  Gains in gold are limited from long liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Thursday.

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