S&P 500 and Dow Jones Industrials Post Record Highs on Rate Cut Optimism

The S&P 500 Index ($SPX) (SPY) Friday closed up +0.55%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.62%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.59%.

Stock indexes Friday settled higher, with the S&P 500 and Dow Jones Industrials posting new record highs.  A rebound in chip stocks on Friday 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.

Stock index futures Friday 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. 

Bank earnings results on Friday were primarily bearish for stocks, with Wells Fargo closing down more than -6% after reporting below-consensus Q2 net interest income.  Also, JPMorgan fell after reporting weaker-than-expected Q2 sales and trading revenue for its FICC segment.  In addition, Citigroup was 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 Friday settled mixed.  The Euro Stoxx 50 rallied to a 5-week high and closed up +1.34%.  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) Friday closed up +1 tick.  The 10-year T-note yield fell -2.5 bp to 4.1854%.  Sep T-notes Friday recovered from early losses and closed slightly higher.  T-notes Friday initially moved lower on carryover weakness from a slide in European government bonds.  Also, the US Jun PPI report rose more than expected and weighed on T-notes.  However, T-notes recovered from their worst levels after the PPI report categories used to calculate the Fed's preferred inflation measure's personal consumption expenditures price index were benign.  Also, Friday’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.  T-notes extended their gains as US inflation expectations fell after the 10-year breakeven inflation rate fell to a 2-week low Friday at 2.233%.

European government bond yields on Friday moved higher.  The 10-year German bund yield rose +3.3 bp to 2.496%.  The 10-year UK gilt yield rose +3.5 bp to 4.109%.

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 rallied Friday to recover some of Thursday’s sell-off and supported gains in the broader market.  ARM Holdings closed up more than +4% to lead gainers in the Nasdaq 100, and ON Semiconductor Corp (ON) closed up more than +3%.  Also, Intel (INTC) closed up more than +2% to lead gainers in the Dow Jones Industrials.  In addition, GlobalFoundries (GFS), ASML Holding NV (ASML), Analog Devices (ADI), Micron Technology (MU), and NXP Semiconductors NV (NXPI) closed up more than +2%. 

Smurfit WestRock Plc (SW) closed up more than +4% after JPMorgan Chase initiated coverage on the stock with a recommendation of overweight and a price target of $66.

Bank of New York Mellon (BK) closed up more than +5% after reporting Q2 net interest revenue of $1.03 billion, above the consensus of $1.01 billion. 

Homebuilders rallied Friday and extended Thursday’s gains after the weaker-than-expected US Jun CPI report bolstered expectations for the Fed to cut interest rates at the September FOMC meeting.  As a result, DR Horton (DHI), Lennar (LEN), and PulteGroup (PHM) closed up more than +2%.  Also, Toll Brothers (TOL) closed up more than +1%. 

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

Fastenal (FAST) closed up more than +1% after reporting Q2 EPS of 51 cents, right on expectations.

Wells Fargo (WFC) closed 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) closed down more than -1% to lead losers in the Dow Jones Industrials after reporting Q2 FICC sales and trading revenue of $4.82 billion, weaker than the consensus of $4.85 billion.

Citigroup (C) closed down more than -1% 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) closed down more than -3%, and United Airlines Holdings (UAL) closed down more than -2%.  Also, American Airlines Group (AAL) closed down -0.58%.

Snowflake (SNOW) closed down more than -1% after Piper Sandler cut its price target on the stock to $165 from $240.

Boeing (BA) closed down nearly -1% after notifying some 737 Max customers that aircraft due for delivery in 2025 and 2026 face additional delays. 

Earnings Reports (7/15/2024)

BlackRock Inc (BLK), CG oncology Inc (CGON), Critical Metals Corp (CRML), CrossFirst Bankshares Inc (CFB), FB Financial Corp (FBK), Goldman Sachs Group Inc/The (GS), Guaranty Bancshares Inc/TX (GNTY), Hingham Institution For Saving (HIFS), Inhibrx Biosciences Inc (INBX), NET Lease Office Properties (NLOP), ServisFirst Bancshares Inc (SFBS), WaFd Inc (WAFD).

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