Stocks Waver on Fed Comments and Weak U.S. Q1 GDP Data

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down by -0.22%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.26%. 

Stock indexes this morning are mixed.  Stocks have support today on comments from Fed Chair Powell, who said the U.S. economy is in "strong shape" and "overall the U.S. economy is well-positioned to withstand tighter monetary policy."  Also, better-than-expected global inflation news knocked bond yields lower and gave stocks a boost after German consumer prices in June unexpectedly eased.  On the other hand, a negative for stocks was this morning’s data that showed U.S. Q1 GDP contracted more than expected.

U.S. stock indexes were weighed down today on negative carry-over from a -1.4% fall in China’s Shanghai Composite Stock Index after Chinese President Xi Jinping vowed to maintain his country’s strict Covid zero policy. Also, hawkish comments overnight from Cleveland Fed President Mester weighed on stocks when she said she wants to see the fed funds rate reach 3.0% to 3.5% this year and "a little bit above 4% next year" to rein in price pressures even if that tips the economy into recession.

U.S. Q1 GDP fell -1.6% (q/q annualized), weaker than expectations of -1.5% and the steepest pace of contraction since Q2 of 2020.  Q1 personal consumption rose +1.8%, weaker than expectations of +3.1%.  Also, the Q1 core PCE deflator rose +5.2% q/q,  stronger than expectations of +5.1% q/q.

Cleveland Fed President Mester said central bankers must not be complacent about increases in long-term inflation expectations and should be "resolute and intentional" in taking actions to bring inflation down.  She added that she wants to see the fed funds rate reach 3.0% to 3.5% this year and "a little bit above 4% next year" to rein in price pressures even if that tips the economy into recession.

Today’s stock movers…

A decline in T-note yields today is giving mega-cap technology stocks a boost. Amazon.com (AMZN) is up more than +2%, and Meta Platforms (META), Apple (AAPL), and Microsoft (MSFT) are all up more than +1%. 

General Mills (GIS) is up more than +5% to lead gainers in the S&P 500s after reporting Q4 net sales of $4.90 billion, stronger than the consensus of $4.81 billion, and forecast 2023 organic net sales up +4% to +5%, above the consensus of +3.72%.   

Goldman Sachs (GS) is up nearly +2% today to lead gainers in the Dow Jones Industrials after Bank of America raised its recommendation on the stock to a buy with a price target of $380. 

Semiconductor stocks are falling today after Bank of America said a downturn in the industry may be ahead.  Advanced Micro Devices (AMD) is down more than -3% to lead losers in the Nasdaq 100.  Also, Nvidia (NVDA), Marvell Technology (MRVL), Micron Technology (MU), Applied Materials (AMAT), and Lam Research (LRCX) are down more than -2%.  In addition, Qualcomm (QCOM), Texas Instruments (TXN), Microchip Technology (MCHP), and NXP Semiconductors NV (NXPI) are down more than -1%.

Carnival (CCL) is down more than -14% today to lead losers in the S&P 500 after Morgan Stanley warned that the company could lose all of its value in the event of another demand shock.  Other cruise line operators are also falling on the news, with Royal Caribbean Cruises (RCL) and Norwegian Cruise Line Holdings (NCLH) down more than -9%.

Airline stocks are weaker today on concern a more than +1% rise in crude prices to a 1-1/2 week high will boost jet fuel costs that eat into corporate profits.  American Airlines Group (AAL) and United Airlines Holdings (UAL) are down more than -3%.  Also, Delta Air Lines (DAL) is down more than -2%, and Southwest Airlines (LUV) and Alaska Air Group (ALKWa) are down more than -1%. 

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are up +7 ticks, and the 10-year T-note yield is down -5.6 bp at 3.166%.  Lower European government bond yields today benefit T-note prices after German Jun CPI rose less than expected.  Lower inflation expectations are bullish for T-note prices after the 10-year breakeven inflation rate dropped to a 4-month low today at 2.452%.  Gains in T-notes were limited after the U.S. Q1 core PCE deflator rose +5.2% q/q, stronger than expectations of +5.1% q/q.  Also, hawkish comments from Fed Chair Powell today weighed on T-notes when he said, “the U.S. economy is well-positioned to withstand tighter monetary policy." 

The dollar index (DXY00) this morning is up +0.26%.  The dollar this morning is moderately higher and posted a 1-1/2 week high after comments from Fed Chair Powell signaled the Fed would continue to tighten monetary policy.  Also, the yen sank to a new 23-year low against the dollar as divergent central bank policies continue to weigh on the yen.  Gains in the dollar were limited after U.S. Q1 GDP contracted more than expected. 

EUR/USD (^EURUSD) is down -0.31% today.  The euro today is moving lower as lower European government bond yields weaken the euro’s interest rate differentials.  The 10-year German bund yield dropped -5.0 bp to 1.578% today after German Jun CPI unexpectedly eased.  Also, a fall in Eurozone Jun economic confidence to a 15-month low is undercutting EUR/USD.

German Jun CPI (EU harmonized) fell -0.1% m/m and rose +8.2% y/y, weaker than expectations of +0.4% m/m and +8.8% y/y.

Eurozone Jun economic confidence fell -1.0 to a 15-month low of 104.0,  although stronger than expectations of 103.0.

Eurozone May M3 money supply rose +5.6% y/y, weaker than expectations of +5.8% y/y and the slowest pace of growth in 2 years.

USD/JPY (^USDJPY) today is up +0.59%.  USD/JPY today rallied to a new 23-year high.  The yen is under pressure today on strength in the dollar after Fed Chair Powell said the U.S. economy could handle tighter monetary policy.  Divergent central bank policies continue to pressure the yen, with the Fed, BOE, and ECB ending their QE programs and raising interest rates while the BOJ maintains its QE program and record low interest rates.

August gold (GCQ22) this morning is up +3.4 (+0.19%), and July silver (SIN22) is down -0.116 (-0.56%).  Precious metals today are mixed.  Gold is higher on lower global bond yields.  Silver prices fell on industrial metals demand concerns after U.S. Q1 GDP contracted more than expected.  Metals are also under pressure from a stronger dollar after the dollar index today climbed to a 1-1/2 week high.  Hawkish comments today from Fed Chair Powel and Cleveland Fed President Mester limited gains in gold.

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