Stocks Move Higher on Improved Fed Rate Cut Prospects

The S&P 500 Index ($SPX) (SPY) today is up +0.92%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.75%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.19%.

Stock indexes today are higher, with the Dow Jones Industrials posting a 7-week high.  Stock index futures today initially moved lower as rising bond yields weighed on stocks after the US PPI report rose more than expected.  However, stock index futures recovered, and bond yields fell, after the details in the PPI report suggested the larger-than-expected increase in June was mostly driven by an outsized jump in trade services and not in categories that are used to calculate the Federal Reserve’s preferred inflation measure, the personal consumption expenditures price index. 

Also, a rebound in chip stocks today from Thursday’s sell-off boosted the overall market.  Stocks extended their gains after the University of Michigan’s US July consumer sentiment index unexpectedly fell to an 8-month low, reinforcing speculation the Fed will be able to cut interest rates at the September FOMC meeting.

Bank earnings today were mostly bearish for stocks, with Wells Fargo down more than -6% after reporting below-consensus Q2 net interest income.  Also, JPMorgan is slightly lower after reporting weaker-than-expected Q2 sales and trading revenue for its FICC segment.  In addition, Citigroup is under pressure despite reporting better-than-expected Q2 revenue when it warned that costs for the year are now likely to be at the high end of the range it previously provided.   

The US June PPI final demand rose +0.2% m/m and +2.6% y/y, stronger than expectations of +0.1% m/m and +2.3% y/y, with the +2.6% y/y gain being the largest year-on-year increase in 15 months. The June PPI ex-food and energy rose +0.4% m/m and +3.0% y/y, stronger than expectations of +0.2% m/m and +2.5% y/y, with the +3.0% y/y gain being the largest year-on-year increase in 14 months.

The University of Michigan’s US July consumer sentiment unexpectedly fell -2.2 to an 8-month low of 66.0, weaker than expectations of an increase to 68.5.

The University of Michigan’s US July 1-year inflation expectations indicator eased to 2.9% from 3.0% y/y in June, right on expectations.  Also, the July 5-10 year inflation expectations eased to 2.9% from 3.0% in July, better than expectations of no change at 3.0%.

The markets are discounting the chances for a -25 bp rate cut at 7% for the next FOMC meeting on July 30-31 and 95% for the following meeting on September 17-18.

Overseas stock markets today are mixed.  The Euro Stoxx 50 rallied to a 5-week high and is up +1.43%. China's Shanghai Composite rose to a 1-week high and closed up +0.03%.  Japan's Nikkei Stock 225 Index closed down -2.45%.

Interest Rates

September 10-year T-notes (ZNU24) today are down -2 ticks.  The 10-year T-note yield is down -0.6 bp at 4.204%.  Sep T-notes today are slightly lower. Weakness in European government bonds is weighing on T-note prices.  T-notes extended their losses after the US PPI report rose more than expected.  However, T-notes recovered from their worst levels after the PPI report categories used to calculate the personal consumption expenditures price index, the Fed’s preferred inflation measure, were benign.  Also, today’s unexpected decline in the University of Michigan’s US July consumer sentiment index to an 8-month low sparked short covering in T-notes.

European government bond yields today are moving higher.  The 10-year German bund yield is up +3.8 bp at 2.501%.  The 10-year UK gilt yield is up +4.5 bp at 4.119%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 4% for the July 18 meeting and 83% for the September 12 meeting.

US Stock Movers

Chip stocks are recovering some of Thursday’s sell-off and are supporting the broader market.  ARM Holdings is up more than +4% to lead gainers in the Nasdaq 100, and Intel (INTC) is up more than +3% to lead gainers in the Dow Jones Industrials.  Also, ASML Holding NV (ASML), GlobalFoundries (GFS), and ON Semiconductor Corp (ON) are up more than +3%.  In addition, Nvidia (NVDA), Analog Devices (ADI), Micron Technology (MU), NXP Semiconductors NV (NXPI), Microchip Technology (MCHP), Lam Research (LRCX), KLA Corp (KLAC), and Texas Instruments (TXN) are up more than +1%. 

Fastenal (FAST) is up more than +4% after reporting Q2 EPS of 51 cents, right on expectations.

Bank of New York Mellon (BK) is up more than +4% after reporting Q2 net interest revenue of $1.03 billion, above the consensus of $1.01 billion. 

Carvana (CVNA) is up more than +4% after BTIG LLC initiated coverage of the stock with a buy recommendation and a price target of $155.

Wells Fargo (WFC) Is down more than -6% to lead losers in the S&P 500 after reporting Q2 net interest income of $11.92 billion, below the consensus of $12.12 billion. 

JPMorgan Chase (JPM) is down more than -1% after reporting Q2 FICC sales and trading revenue of $4.82 billion, weaker than the consensus of $4.85 billion.

Citigroup (C) is down more than -3% despite reporting better-than-expected Q2 revenue when it warned that costs for the year are now likely to be at the high end of the range it previously provided.   

Airline stocks today added to Thursday’s losses after Delta Air Lines forecast Q3 adjusted EPS below consensus.  As a result, Delta Air Lines (DAL) and United Airlines Holdings (UAL) are down more than -2%.  Also, American Airlines Group (AAL) is down more than -1%.

Snowflake (SNOW) is down more than -2% after Piper Sandler cut its price target on the stock to $165 from $240.

Boeing (BA) is down more than -1% to lead losers in the Dow Jones Industrials after notifying some 737 Max customers that aircraft due for delivery in 2025 and 2026 face additional delays. 

Earnings Reports (7/12/2024)

Bank of New York Mellon Corp/T (BK), Citigroup Inc (C), Fastenal Co (FAST), JPMorgan Chase & Co (JPM), Wells Fargo & Co (WFC).

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