Stocks Settle Higher on Favorable PPI Report

The S&P 500 Index ($SPX) (SPY) Tuesday closed up +1.68%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.04%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.50%.

US stocks settled moderately higher on Tuesday, with the S&P 500 and Nasdaq 100 posting 1-1/2 week highs and the Dow Jones Industrials posting a 1-week high.  Stocks found support Tuesday on falling bond yields after US July producer prices rose less than expected, bolstering expectations for the Fed to begin cutting interest rates next month. 

Strength in semiconductor stocks and megacap technology stocks Tuesday also supported gains in the overall market.  In addition, Starbucks closed up more than +24% after appointing a new CEO.

On the negative side, Baxter International closed down more than -6% after selling its kidney-care unit, which accounted for about a third of its revenue last year, to Carlyle Group for $3.8 billion.

US July PPI final demand eased to +2.2% y/y from +2.7% y/y in June, a smaller increase than expectations of +2.3% y/y.  Also, July PPI ex-food and energy eased to +2.4% y/y from +3.0% y/y in June, better than expectations of +2.6% y/y.

Dovish comments on Tuesday from Atlanta Fed President Bostic were supportive for stocks when he said he'll likely be ready to support Fed rate cuts "by the end of the year" and he's looking for "a little more data" before supporting a rate cut as he wants to be sure the Fed will not have to change course once it begins cutting.

The markets are awaiting Wednesday’s consumer price report, which should also help clarify the likely timing and size of any Fed interest rate cuts.  The July CPI is expected to remain unchanged at +3.0% y/y from June, and July CPI ex-food and energy is expected to ease to +3.2% y/y from +3.3% y/y in June.

The market consensus is that Q2 earnings for the S&P 500 companies will rise +7.4% y/y.  More than 80% of the companies in the S&P 500 have reported thus far.  According to Bloomberg, most reporting companies have beaten their earnings consensus, but only 43% have beaten revenue expectations, the lowest percentage in five years.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 60% for a -50 bp rate cut at that meeting.

Overseas stock markets Tuesday settled higher.  The Euro Stoxx 50 closed up +0.49%.  China's Shanghai Composite closed up +0.34%.  Japan's Nikkei Stock 225 rallied to a 1-week high and closed up sharply by +3.45%.

Interest Rates

September 10-year T-notes (ZNU24) Tuesday closed up +12.5 ticks.  The 10-year T-note yield fell -5.6 bp to 3.848%.  Sep T-notes rose to a 1-week high Tuesday, and the 10-year T-note yield fell to a 1-week low of 3.847%.  Tuesday’s Fed-friendly US July PPI report pushed T-note prices higher. T-notes also had carryover support from today’s rally in 10-year German bunds to a 1-week high.  In addition, a decline in inflation expectations supported T-notes after the 10-year breakeven inflation rate fell to a 1-week low Tuesday of 2.095%.  T-notes extended their gains Tuesday afternoon on dovish comments from  Atlanta Fed President Bostic, who said he'll likely be ready to support Fed rate cuts "by the end of the year."  Strength in stocks Tuesday limited the upside in T-note prices. 

European government bond yields on Tuesday moved lower.  The 10-year German bund yield fell to a 1-week low of 2.177% and finished down -4.0 bp at 2.186%.  The 10-year UK gilt yield fell to a 1-week low of 3.873% and finished down -2.8 bp at 3.888%.

The German Aug ZEW expectation of economic growth survey fell -22.6 to a 7-month low of 19.2, weaker than expectations of 34.0.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 99% for the September 12 meeting.

US Stock Movers

Starbucks (SBUX) closed up more than +24% to lead gainers in the S&P 500 and Nasdaq 100 after appointing Brian Nicol as CEO effective Sep 9, replacing Laxman Narasimhan, who is stepping down as CEO effective immediately.

Chip stocks rallied Tuesday and provided support to the overall market. Nvidia (NVDA) closed up more than +6%, adding to Monday’s +4% gain, and Intel (INTC) closed up more than +5% to lead gainers in the Dow Jones Industrials.  Also, ARM Holdings Plc (ARM) closed up more than +6%, and Marvell Technology (MRVL) closed up more than +5%.  In addition, Broadcom (AVGO), KLA Corp (KLAC), and Applied Materials (AMAT) closed up more than +4%.  Finally, Microchip Technology (MCHP), GlobalFoundries (GFS), Micron Technology (MU), and Lam Research (LRCX) closed up more than +3%.

Mega-cap technology stocks moved higher and underpinned the broader market.  Tesla (TSLA) closed up more than +5%.  Also, Meta Platforms (META) and Netflix (NFLX) closed up more than +2%.  In addition, Apple (AAPL), Amazon.com (AMZN), and Microsoft (MSFT) closed up more than +1% 

Dell Technologies (DELL) closed up more than +4% after Barclays upgraded the stock to equal weight from underweight. 

ARS Pharmaceuticals (SPRY) closed up more than +19% after Raymond James upgraded the stock to strong buy from outperform with a price target of $22.

Ducommun Inc (DCO) closed up more than +6% after Goldman Sachs upgraded the stock to buy from neutral with a price target of $80. 

Nike (NKE) closed up more than +5% on positive carryover from a 4% rally in peer On Holding (ONON), which reported better-than-expected Q2 results. 

Hormel Foods (HRL) is up more than +1% after Citigroup upgraded the stock to buy from neutral with a price target of $37. 

Chipotle Mexican Grill (CMG) closed down more than -7% to lead losers in the S&P 500 after CEO Niccol left the company to become CEO of Starbucks.

Baxter International (BAX) closed down more than -6% after selling its kidney-care unit to Carlyle Group for $3.8 billion.  Kidney care accounted for about a third of Baxter’s revenue last year.

EQT Corp (EQT) closed down more than -3% after BMO Capital Markets cut its price target on the stock to $39 from $45. 

Western Midstream Partners (WES) closed down more than -3% after holder Occidental Petroleum offered 19 million shares via Barclays. 

Illumina (ILMN) closed down more than -3% to lead losers in the Nasdaq 100 as analysts were unimpressed when the company said it plans to boost sales growth by as much as 8% to 9% by 2027, in part by finding $200 million in cost savings.

Diamondback Energy (FANG) closed down more than -2% on signs of insider selling after an SEC filing showed CFO Van’t sold $9.91 million of shares last Thursday. 

Occidental Petroleum (OXY) closed down more than -2% after holder CrownRock Holdings LP was said to sell 29.6 million shares of its OXY holdings. 

Earnings Reports (8/14/2024)

Cardinal Health Inc (CAH), Cisco Systems Inc (CSCO), Lumentum Holdings Inc (LITE), Paycor HCM Inc (PYCR), Performance Food Group Co (PFGC).

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