Stocks Rally as Inflation Expectations Fall

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.38%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +1.70%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.24%. 

U.S. stock indexes this morning are moderately higher.  Bank stocks are rallying today, led by an +8% jump in Citigroup after it reported better-than-expected Q2 trading revenue.  Also, hopes for a less-aggressive Fed are boosting stocks after today’s data from the University of Michigan showed that 5-10 year inflation expectations fell more than expected to their lowest in a year.

U.S. stock indexes extended their gains this morning after U.S. June retail sales rose more than expected and the July Empire manufacturing survey general business conditions index unexpectedly rose.  Also, inflation concerns subsided a bit after Jun import prices unexpectedly declined. In addition, a decline in T-note yields is supportive for stocks as the 10-year T-note yield is down -4.2 bp at 2.917%.

U.S. June retail sales rose +1.0% m/m and +1.0% m/m ex-autos, stronger than expectations of +0.9% m/m and +0.7% m/m ex-autos.

The U.S. July Empire manufacturing survey general business conditions index unexpectedly rose +12.3 to 11.1, stronger than expectations of a decline to -2.0.

U.S. June import prices ex-petroleum unexpectedly fell -0.4% m/m, weaker than expectations of +0.2% m/m and the largest decline in more than 2 years.  The strong dollar should in theory be pushing import prices lower.

U.S. June manufacturing production fell -0.5% m/m, weaker than expectations of -0.1% m/m.

The University of Michigan’s July U.S. consumer sentiment index unexpectedly rose +1.1 to 51.1, stronger than expectations of unchanged at 50.0.  The 5-10 year inflation expectations level fell to 2.8%, lower than expectations of 3.0% and the lowest in a year.

Atlanta Fed President Bostic said he doesn't favor a 100 bp rate hike at the July FOMC meeting and said a 75 bp rate increase is a "very big move" compared to past practice and "if we went" much larger, "people would be concerned."

Today’s stock movers…

Bank stocks are climbing today and are supporting gains in the overall market after Citigroup reported Q2 FICC sales and trading revenue of $4.08 billion, above the consensus of $3.84 billion.  Citigroup (C) is up more than +8% today to lead gainers in the S&P 500.  Also, Wells Fargo (WFC) is up more than +6%, and State Street (STT) is up more than +4%.  In addition, US Bancorp (USB) and Bank of America (BAC) are up more than +3%, and Morgan Stanley (MS), Goldman Sachs (GS), Comerica (CMA), and Fifth Third Bancorp (FITB) are up more than +2%.

UnitedHealth Group (UNH) is up more than +3% today to lead gainers in the Dow Jones Industrials after reporting Q2 adjusted EPS of $5.57, better than the consensus of $5.19 and raised its full-year adjusted EPS estimate to $21.40-$21.90 from a prior estimate of $21.20-$21.70.

A decline in T-note yields today is lifting technology stocks.  Fortinet (FTNT) is up more than +3% to lead gainers in the Nasdaq 100.  Also, Intuit (INTU) is up more than +3%, and Amazon.com (AMZN), Microsoft (MSFT), Meta Platforms (META), and Adobe (ADBE) are all up more than +2%. 

Solar stocks are under pressure today after Senator Manchin told Democratic leaders he wouldn’t support new spending on climate measures or tax increases.  As a result, Enphase Energy (ENPH) is down more than -7% to lead losers in the S&P 500.  Also, SolarEdge Technologies (SEDG) is down more than -6%, and Constellation Energy (CEG) is down more than -5% to lead losers in the Nasdaq 100.  First Solar (FSLR) is down more than -12%, and Array Technologies (ARRY) is down more than -10%.

Boeing (BA) is down more than -1% today to lead losers in the Dow Jones Industrials after Benchmark cut its price target on the stock to $200 from $250.

Codexis (CDXS) plunged more than -45% today after it cut its full-year revenue forecast to $135-$141 million from a prior view of $152-$158 million, weaker than the consensus of $155.5 million.

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are up +4 ticks, and the 10-year T-note yield is down -4.2 bp at 2.917%.  Strength in 10-year German bunds today is providing support to T-notes as the 10-year German bund yield dropped to a 1-1/2 month low today at 1.073%.  T-notes also found support in today’s U.S. economic data that showed June import prices unexpectedly fell and June manufacturing production dropped more than expected.  However, gains in T-notes are limited after today’s data showed U.S. June retail sales rose more than expected, keeping aggressive Fed rate hikes in play. 

The dollar index (DXY00) this morning is down by -0.28%, falling back slightly from Thursday’s 20-year high.  A rally in stocks today has reduced the liquidity demand for the dollar. The dollar also fell back today after Atlanta Fed President Bostic said he doesn't favor a 100 bp rate hike at the July FOMC meeting.  Today’s U.S economic data was mixed for the dollar.

EUR/USD (^EURUSD) is up by +0.39% today, recovering slightly from Thursday’s 20-year low.  Short covering pushed EUR/USD higher today after political risks in Italy eased after Italian President Mattarella asked Prime Minister Draghi to remain in his position in order to avert a political crisis.  Prime Minister Draghi had offered his resignation Thursday after Italy’s Five Star Movement boycotted a confidence vote in the Senate.  The move by President Mattarella leaves the door open for a solution that would see Draghi leading the government until elections due in early 2023.  Gains in EUR/USD are limited after the 10-year German bund yield fell to a 1-1/2 month low today of 1.073%.

Hawkish comments today from ECB Governing Council member Rehn were bullish for EUR/USD when he said the ECB would start raising interest rates next week with a "likely" 25 bp hike, followed by a "likely" 50 bp rate hike in September. 

USD/JPY (^USDJPY) today is down -0.12%.    The yen today is slightly higher and is consolidating just above Thursday's 24-year low against the dollar.  Comments today from Japanese Prime Minister Suzuki sparked short-covering in the yen today when he said, “I am worried about the rapid slide in the yen and the speculative move seen behind it.”  Suzuki’s comments suggest the BOJ may soon intervene in the forex market in an attempt to stop the yens’ slide.

August gold (GCQ22) this morning is down -4.3 (-0.25%), and September silver (SIU22) is up +0.140 (+0.77%.)  Precious metals this morning are mixed.  A weaker dollar today is supportive of metals prices.   Gold is slightly lower today and is holding above Thursday’s 11-month low.  Strength in stocks today has curbed safe-haven demand for precious metals.  Also, demand for gold as an inflation hedge declined today after U.S. Jun import prices unexpectedly fell.  Lower global government bond yields today are limiting losses in gold prices. 

• Stocks Climb on Strong U.S. Retail Sales Report
• How To Buy Cisco For A 9% Discount, Or Achieve A 17% Annual Return
• Stocks See Some Support from Tempered Fed Comments
• Dollar Climbs on Monetary Policy Divergence