Stocks Post Moderate Gains as Powell Says Inflation is Receding

The S&P 500 Index ($SPX) (SPY) Tuesday closed up +0.62%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.41%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.01%.

Stock indexes Tuesday finished moderately higher.  Stocks found support Tuesday from lower bond yields after Fed Chair Powell said prices now show signs of resuming their disinflation trend and the Fed can "take its time" with interest rate cuts with a strong economy and a job market.  Also, a +10% surge in Tesla on Tuesday and a rally in chip stocks lifted the broader market. 

Stocks had some negative carryover Tuesday from weakness in European stocks.  European stocks fell Tuesday on hawkish comments from ECB President Lagarde, who said Monday night that the ECB doesn’t yet have sufficient evidence that inflation threats have passed, bolstering expectations that the ECB will delay further interest rate cuts.  European stocks also retreated as political uncertainty in France remains high ahead of the second round of parliamentary elections this Sunday.

Tuesday’s US economic news was hawkish for Fed policy and bearish for stocks after May JOLTS job openings unexpectedly rose +221,000 to 8.140 million, showing a stronger labor market than expectations of a decline to 7.946 million.

The markets are discounting the chances for a -25 bp rate cut at 9% for the next FOMC meeting on July 30-31 and 66% for the following meeting on September 17-18.

Overseas stock markets Tuesday settled mixed.  The Euro Stoxx 50 closed down -0.64%.  China's Shanghai Composite rose to a 1-week high and closed up +0.08%.  Japan's Nikkei Stock 225 Index rose to a 2-3/4 month high and closed up +1.12%.

Interest Rates

September 10-year T-notes (ZNU24) Tuesday closed up +9.5 ticks.  The 10-year T-note yield fell -2.3 bp to 4.438%.  Sep T-notes Tuesday posted moderate gains after Fed Chair Powell said prices now show signs of resuming their disinflation trend.  T-notes also have some positive carryover from Tuesday’s rally in European government bonds.  T-notes fell back from their best levels Tuesday after US May JOLTS job openings unexpectedly increased, a hawkish factor for Fed policy. 

European government bond yields Tuesday moved lower.  The 10-year German bund yield fell back from a 2-1/2 week high of 2.615% and finished down -0.5 bp at 2.603%.  The 10-year UK gilt yield fell -3.4 bp to 4.248%. 

The Eurozone Jun CPI eased to +2.5% y/y from +2.6% y/y in May, right on expectations.  However, Jun core CPI rose +2.9% y/y, unchanged from May and stronger than expectations of a decline to +2.8% y/y.

ECB Governing Council member Simkus said core inflation is the "most important" indicator that will sway the ECB into action and that the ECB isn't in a rush to lower borrowing costs and is looking to September and the months beyond for more potential interest rate cuts.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 7% for the July 18 meeting and 65% for the September 12 meeting.

US Stock Movers

Tesla (TSLA) closed up more than +10% at a 5-1/2 month high to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q2 vehicle deliveries of 443,956, stronger than the consensus of 436,000.

Paramount Global (PARA) closed up more than +5% after the New York Times reported that Barry Diller was considering making a bid for the company.

Lower bond yields on Tuesday sparked a rally in chip stocks.  ON Semiconductor (ON) closed up more than +5%, and Advanced Micro Devices (AMD) closed up more than +4%.  Also, Super Micro Computer (SMCI), Texas Instruments (TXN), and ARM Holdings Plc (ARM) closed up more than +2%.  In addition, NXP Semiconductors NV (NXPI), Analog Devices (ADI), ASML Holding NV (ASML), and KLA Corp (KLAC) closed up more than +1%.  

Bank of America (BAC) closed up more than +2% after Seaport Global Securities upgraded the stock to buy from neutral with a price target of $48.

PayPal Holdings (PYPL) closed up more than +2% after Susquehanna upgraded the stock to positive from neutral with a price target of $71. 

Tyler Technologies (TYL) closed up more than +1% after announcing that it signed a contract with the Arizona Supreme Court that expands the use of the company’s Enterprise Supervision solution to encompass juvenile probation for all 15 counties across Arizona.

Homebuilders moved lower Tuesday after Raymond James and Citigroup downgraded Lennar to hold-equivalent ratings, citing concerns around a softening Florida housing market.  As a result, Lennar (LEN), DR Horton (DHI), Toll Brothers (TOL), and PulteGroup (PHM) closed down more than -1%.

Incyte (INCY) closed down more than -3% after BMO Capital Markets downgraded the stock to underperform from market perform with a price target of $48. 

Eli Lilly (LLY) closed down more than -1% after US President Biden demanded it cut “unconscionably high prices” for its diabetes and weight loss drugs. 

CrowdStrike Holdings (CRWD) closed down more than -1% to lead losers in the Nasdaq 100 after Piper Sandler downgraded the stock to neutral from overweight.

Nike (NKE) closed down more than -1% after RBC Capital Markets cut its price target on the stock to $75 from $100. 

Pure Storage (PSTG) closed down more than -4% after UBS downgraded the stock to sell from neutral, saying the stock’s valuation is unjustified given the increased competition.   

R1 RCM (RCM) closed down more than -14% after New Mountain Capital and TCP-ASC failed to agree on a joint takeover of the company. 

Earnings Reports (7/3/2024)

Constellation Brands Inc (STZ), Dakota Gold Corp (DC), Lifecore Biomedical Inc (LFCR), Simulations Plus Inc (SLP).

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