Stocks Fall Despite Dovish CPI Due to Weakness in Chip Stocks

The S&P 500 Index ($SPX) (SPY) today is down -0.35%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.24%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.09%.

Stock indexes today are mixed, with the Dow Jones Industrials posting a 7-week high.  Today's decline in chip stocks knocked the S&P 500 from a new record high and is weighing on the Nasdaq 100 and the broader market.  Also, airline stocks are under pressure today after Delta Air Lines forecast Q3 adjusted EPS below consensus.

Stocks found early support on today’s Fed-friendly US June CPI report that knocked bond yields lower and reinforced speculation the Fed will be able to cut interest rates this year. However, gains in stocks were limited after US weekly initial unemployment claims fell to a 6-week low, a sign of strength in the labor market that is hawkish for Fed policy.

The US June CPI eased to +3.0% y/y from +3.3% y/y in May, better than expectations of +3.1% y/y.  The June CPI ex-food and energy eased to a 3-year low of +3.3% y/y from +3.4% y/y in May, better than expectations of no change at +3.4% y/y.

US weekly initial unemployment claims fell -17,000 to a 6-week low of 222,000, showing a stronger labor market than expectations of 235,000.  Weekly continuing claims unexpectedly fell -4,000 to 1,852 million, showing a stronger labor market than expectations of an increase to 1.860 million.

The markets are looking ahead to the Q2 earnings season that begins Friday, as some of the biggest US banks, including JPMorgan Chase, Citigroup, and Wells Fargo, will report quarterly results.  

The markets are discounting the chances for a -25 bp rate cut at 9% for the next FOMC meeting on July 30-31 and 86% for the following meeting on September 17-18.

Overseas stock markets today are higher.  The Euro Stoxx 50 is up +0.33%.  China's Shanghai Composite closed up +1.06%.  Japan's Nikkei Stock 225 Index climbed to a new all-time high and closed up +0.94%.

Interest Rates

September 10-year T-notes (ZNU24) today are up +23 ticks.  The 10-year T-note yield is down -9.5 bp at 4.189%.  Sep T-notes today climbed to a 4-month high, and the 10-year T-note yield fell to a 4-month low of 4.166%.  T-notes rallied today after today’s weaker-than-expected US CPI report bolstered expectations for the Fed to cut interest rates this year. Also, a decline in inflation expectations supported T-notes after the 10-year breakeven inflation rate fell to a 2-week low of 2.239%.

On the bearish side, weekly US jobless claims fell to a 6-week low, a hawkish factor for Fed policy.  Also, supply pressures are negative for T-notes as the Treasury will auction $22 billion of reopened 30-year T-bonds later today to conclude this week’s $119 billion T-notes and T-bonds auction package. 

European government bond yields today are moving lower.  The 10-year German bund yield fell to a 1-1/2 week low of 2.466% and is down -5.6 bp at 2.476%.  The 10-year UK gilt yield fell to a 2-week low of 4.075% and is down -3.7 bp at 4.089%. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 78% for the September 12 meeting.

US Stock Movers

Chip stocks are retreating today and are weighing on the broader market.  Lam Research (LRCX) is down more than -3% to lead losers in the Nasdaq 100.  Also, Nvidia (NVDA), Micron Technology (MU), KLA Corp (KLAC), Microchip Technology (MCHP), and Qualcomm (QCOM) are down more than -2%.  Intel (INTC) is down more than -2% to lead losers in the Dow Jones Industrials.

Airline stocks are under pressure today after Delta Air Lines forecast Q3 adjusted EPS of $1.70-$2.00, below the consensus of $2.04. As a result, Delta Air Lines (DAL) is down more than -5% to lead losers in the S&P 500.  Also, American Airlines Group (AAL) and United Airlines Holdings (UAL) are down more than -4%, and Southwest Airlines (LUV) is down more than -2%. 

Cruise line operators are falling on negative carryover from a slide in airline stocks.  Norwegian Cruise Line Holdings (NCLH), Carnival (CCL), and Royal Caribbean Cruises (RCL) are down more than -1%.

Homebuilding and supply stocks are rallying today after the 10-year T-note yield fell to a 4-month low, a supportive factor for housing demand.  Builders FirstSource (BLDR) is up more than +7%.  Also, PulteGroup (PHM), DR Horton (DHI), Lennar (LEN), and Toll Brothers (TOL) are up more than +4%.  Home Depot (HD) is up more than +2% to lead gainers in the Dow Jones Industrials.

Real estate investment trusts are moving higher today with the drop in the 10-year T-note yield to a 4-month low.  As a result, VICI Properties  (VICI) and Alexandria Real Estate Equities (ARE) are up more than +3%.  Also, Realty Income (O), Healthpeak Properties (DOC), Federal Realty Investment Trust (FRT), Kimco Realty (KIM), and Digital Realty Trust (DLR) are up more than +2%.

Conagra Brands (CAG) is down more than -3% after reporting Q4 net sales of $2.91 billion, below the consensus of $2.93 billion. 

Citigroup (C) is down more than -1% after US bank regulators fined it $136 million over issues related to data quality management and risk controls.

XP Inc (XP) is down more than -1% after UBS downgraded the stock to neutral from buy. 

Atlassian (TEAM) is up more than +2% today after Capital One Securities upgraded the stock to overweight from equal weight with a price target of $211. 

Alcoa (AA) is up more than +2% after announcing Q2 preliminary sales of $2.85 billion-$2.93 billion, above the consensus of $2.80 billion.

WD-40 (WDFC) is up more than +2% after reporting Q3 EPS of $1.46, stronger than the consensus of $1.39. 

Earnings Reports (7/11/2024)

Bank7 Corp (BSVN), Conagra Brands Inc (CAG), Delta Air Lines Inc (DAL), Methode Electronics Inc (MEI), Northern Technologies International (NTIC), and PepsiCo Inc (PEP).

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