Stocks Rally as Inflation Expectations Moderate

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Friday closed up +1.92%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +2.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.83%. 

U.S. stock indexes Friday moved sharply higher.  A rally in bank stocks Friday lifted the overall market, led by a +13% jump in Citigroup after it reported better-than-expected Q2 trading revenue.  Also, hopes for a less-aggressive Fed boosted stocks after Friday’s data from the University of Michigan showed that 5-10 year inflation expectations fell more than expected to the lowest level in a year.

U.S. stock indexes extended their gains Friday 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 June import prices unexpectedly declined. In addition, a decline in T-note yields is supportive for stocks as the 10-year T-note yield fell -3.0 bp to 2.930%.

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 rallied Friday and supported 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) closed up more than +13% Friday to lead gainers in the S&P 500.  Also, State Street (STT) closed up by more than +9%, and Bank of America (BAC) closed up by more than +6%.  JPMorgan Chase (JPM), Morgan Stanley (MS), US Bancorp (USB), Goldman Sachs (GS), Comerica (CMA), and Fifth Third Bancorp (FITB) closed up more than +4%.

UnitedHealth Group (UNH) closed up more than +5% Friday 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 Friday lifted technology stocks.  Netflix (NFLX) closed up more than +8% to lead gainers in the Nasdaq 100.  Also, Fortinet (FTNT) and Meta Platforms (META) closed up more than +4%.  In addition, Intuit (INTU), Micron Technology (MU), and Advanced Micro Device (AMD) closed up more than +3%, and Amzon.com (AMZN), Nvidia (NVDA), Intel (INTC), Analog Devices (ADI), Marvell Technology (MRVL), and Microchip Technology (MCHP) closed up more than +2%.

Walt Disney (DIS) closed up more than +3% Friday after ESPN+ said it would raise the price of its streaming service by 43% next month.

Solar stocks were under pressure Friday after Senator Manchin told Democratic leaders he wouldn’t support new spending on climate measures or tax increases.  As a result, First Solar (FSLR) closed down by more than -8%, and Sunrun (RUN) closed down by more than -6%.  In addition, Enphase Energy (ENPH), SolarEdge Technologies (SEDG), and Array Technologies (ARRY) closed down by more than -1%.

Codexis (CDXS) closed down more than -44% Friday 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) on Friday closed up +4.5 ticks, and the 10-year T-note yield fell -3.0 bp to 2.930%.  T-note prices Friday posted moderate gains and found carry-over support from a rally in German bunds after the 10-year German bund yield dropped to a 1-1/2 month low of 1.073%.  T-notes also found support in Friday’s U.S. economic data that showed June import prices unexpectedly fell and June manufacturing production dropped more than expected.  T-notes Friday jumped to their highs mid-morning after the University of Michigan inflation expectations dropped below estimates. 

Strength in stocks Friday limited gains in T-notes along with stronger-than-expected U.S. June retail sales and Jul Empire manufacturing reports, which kept aggressive Fed rate hikes in play. 

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