Stocks Tumble on Weak Bank Earnings and Strong US PPI

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -2.03%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.93%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.95%. 

U.S. stock indexes this morning are sharply lower, with the S&P 500 and Dow Jones Industrials dropping to 3-week lows and the Nasdaq 100 falling to a 1-week low.  A slump in bank stocks today is leading the overall market lower after both JPMorgan Chase, and Morgan Stanley reported weaker-than-expected Q2 earnings.  Also, energy stocks are tumbling today, with crude prices falling more than -5% to a 4-1/2 month low.

U.S. stock indexes maintained moderate losses after U.S. weekly jobless claims unexpectedly rose to an 8-month high and after U.S. June producer prices rose more than expected. The stronger-than-expected increase in producer prices pushed the 10-year T-note yield today up +8.3 bp to 3.017%. 

U.S. weekly initial unemployment claims unexpectedly rose +9,000 to an 8-month high of 244,000, showing a weaker labor market than expectations of unchanged at 235,000.

The U.S. June final-demand PPI rose +1.1% m/m and +11.3% y/y, stronger than expectations of +0.8% m/m and +10.7% y/y.  Jun PPI ex-food & energy rose +8.2% y/y, right on expectations and easing from May’s +8.5% y/y increase.

Wednesday night, Cleveland Fed President Mester said the Fed should raise rates by at least 75 bp at the July FOMC meeting as "the June inflation report certainly suggests that there's no reason to say that a smaller rate increase is appropriate."

Today’s stock movers…

Bank stocks are falling today and are weighing on the overall market after both JPMorgan Chase and Morgan Stanley reported weaker-than-expected Q2 earnings. JPMorgan also said it was temporarily suspending its share buyback program.  JPMorgan Chase (JPM) is down more than -4% to lead losers in the Dow Jones Industrials.  Also, Goldman Sachs (GS) and Signature Bank New York (SBNY) are down more than -4%.  In addition, Bank of America (BAC), Fifth Third Bancorp (FITB), and Citigroup (C) are down -3%, and Wells Fargo (WFC) and Morgan Stanley (MS) are down more than -2%. 

An increase in T-note yields today is weighing on technology stocks.  Atlassian Corp Plc (TEAM) is down more than -5% to lead losers in the Nasdaq 100.  Also, Meta Platforms (META), Illumina (ILMN), Crowdstrike Holdings (CRWD), Align Technology (ALGN), Okta (OKTA), and Intuit (INTU) are down more than -3%. 

A plunge of more than -5% in crude oil prices today to a 4-1/2 month low is undercutting energy stocks. Diamondback Energy (FANG), Marathon Oil (MRO), Halliburton (HAL), and Devon Energy (DVN) are down more than -5%.  Also, Schlumberger (SLB), Phillips 66 (PSX), Exxon Mobil (XOM), and Valero Energy (VLO) are down more than -4%.

Conagra Brands (CAG) is down more than -8% today to lead losers in the S&P 500 after it reported Q4 net sales of $2.91 billion, weaker than the consensus of $2.93 billion. 

First Republic Bank/CA (FRC) is up more than +1% today to lead gainers in the S&P 500 after reporting Q2 revenue of $1.50 billion, stronger than the consensus of $1.47 billion.

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are down -26 ticks, and the 10-year T-note yield is up +8.3 bp at 3.017%.  T-note prices opened lower in overnight trading on hawkish comments Wednesday night from Cleveland Fed President Mester, who said the Fed should raise rates by at least 75 bp at the July FOMC meeting.  T-notes extended their losses this morning after U.S June producer prices rose more than expected, which may prompt the Fed to be even more aggressive in tightening monetary policy.  Fed fund futures have now priced in 150 bp of Fed rate hikes over the next two FOMC meetings on July 26-27 and September 20-21.  Citigroup today forecast a 100 bp rate hike by the Fed at this month’s FOMC meeting.

The dollar index (DXY00) this morning is up by +1.05% and jumped to a new 20-year high.  A stronger-than-expected increase in the U.S. June PPI bolstered expectations for the Fed to maintain its aggressive rate hike stance, which is bullish for the dollar. Also, weakness in other G-10 currencies is supportive for the dollar, with EUR/USD tumbling to a new 20-year low and the yen plunging to a new 24-year low against the dollar.  A slump in stocks today is also boosting liquidity demand for the dollar.

EUR/USD (^EURUSD) is down by -1.03% today and dropped to a new 20-year low.  EUR/USD is under pressure today after the European Commission cut its 2022 Eurozone GDP forecast and raised its 2022 Eurozone inflation forecast.  Also, political instability in Italy weighs on EUR/USD after Italy’s Five Star Movement said it will refuse to back Prime Minister Draghi’s government in a confidence vote today, raising the prospect that he might be forced to resign.

The European Commission cut its 2022 Eurozone GDP forecast to +2.6% from a May forecast of +2.7% and raised its 2022 Eurozone inflation estimate to +7.6%, up from a May forecast of +6.1%.

The German Jun wholesale price index rose +21.2% y/y, easing further from April's record high of +23.8% y/y.

USD/JPY (^USDJPY) today is up +1.32% and climbed to a new 24-year high. Higher T-note yields today are weighing on the yen.  Also, the larger-than-expected increase in U.S. June PPI today will keep the pressure on the Fed to keep a large-size rate hike stance, which could weaken the yen’s interest rate differentials against the dollar even further.   A worsening pandemic situation in Japan may lead to lockdowns and restrictions that derail economic growth after Tokyo raised its Covid infection alert to the highest level after it reported 16,878 new Covid infections Wednesday, up more than +400% from July 1.

Japan May industrial production was revised downward to -7.5% m/m from the previously reported -7.2% m/m, the steepest pace of decline in 2 years.

August gold (GCQ22) this morning is down -39.6 (-2.28%), and September silver (SIU22) is down -1.114 (-5.80%.)  Precious metals this morning are sharply lower, with gold falling to an 11-month low and silver tumbling to a 2-year low.  A rally in the dollar index today to a new 20-year high is undercutting metals prices. Higher global government bond yields are also weighing on gold prices.  Expectations for the Fed to maintain aggressive interest rate hikes are also weighing on metals after today’s data showed that the U.S. Jun PPI rose faster than expected.

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