What you need to know…
The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.42%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.18%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.15%.
Stock investors turned cautious ahead of Wednesday’s U.S. July CPI report, which will be a key factor for the Fed in determining the size of its rate hike at its next meeting on September 20-21. Stocks were also undercut by Tuesday’s +2 bp rise in the 10-year T-note yield and by poor labor-cost and productivity news.
The semiconductor sector was hit hard again due to the post-pandemic fall-out for computer and chip sales and gaming. Micron Technologies (MU) was the latest chip company to report a disappointing outlook. Chip-related companies littered the list of the largest losers in the Nasdaq 100 index on Tuesday.
Taiwan tensions continued after China on Tuesday held another day of military drills. Meanwhile, Taiwan on Tuesday announced its own live-fire artillery drills to demonstrate its ability to defend its island.
Stocks were undercut by Tuesday’s news that Q2 U.S. unit labor costs rose +10.8%, stronger than expectations of +9.5% and only modestly below Q1’s revised +12.7%. The high level of labor costs is taking a direct bite out of U.S. corporate earnings. Also, Q2 U.S. productivity fell by -4.6%, illustrating that companies are not getting a bang for their buck from their labor forces. Q1 productivity was revised slightly weaker to -7.4% from -7.3%.
In some positive news for stocks, the July NFIB U.S. small business optimism index in July rose by +0.4 points to 89.9 from June’s 9-year low of 89.5. Small businesses are facing a host of issues such as higher interest rates, high input and labor costs, continued supply chain disruptions, labor shortages, and concern about weaker consumer spending.
The markets are looking ahead to Wednesday’s U.S. CPI report for indications of whether inflation is peaking. A strong CPI report on Wednesday could help solidify expectations for a +75 bp rate hike at the next FOMC meeting in September, which were sparked by last Friday’s much stronger-than-expected U.S. July payroll report of +528,000 (versus expectations of +250,000).
The consensus is for Wednesday’s July CPI report to show an increase of +0.2% m/m and +8.7% y/y, down from June’s report of +1.3% m/m and +9.1% y /y. The July core CPI is expected at +0.5% m/m and +6.1%, compared with June’s report of +0.7% m/m and +5.9% y/y. The CPI in June rose to a 40-year high of +9.1% y/y, but the core CPI of 5.9% y/y is currently 0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March.
The Euro Stoxx 50 on Tuesday closed down -1.11%, with broad weakness in most sectors. China’s Shanghai Composite index Tuesday closed up +0.32% despite news of an investigation of the $3 trillion trust industry. The Nikkei index Tuesday closed down -0.88% as investors continue to fret about China’s military drills against Taiwan, which resulted in Chinese missiles landing in Japan’s economic zone last week.
Today’s stock movers…
Chip stocks fell again Tuesday, led by a -3.4% drop in Micron Technologies (MU). Micron fell after reducing its Q4 revenue guidance on weakening demand. Micron said a “challenging market” means that sales may miss its forecast. Nvidia (NVDA) Tuesday fell -3.64%, adding to Monday’s loss of -6.30% on Nvidia’s own guidance downgrade. Advanced Micro Devices (AMD) fell -4.20%, and Intel (INTC) fell -2.10%.
Norwegian Cruise Lines (NCLH) fell -10.26% after reporting Q2 revenue of $1.19 billion, below the consensus of $1.28 billion. The company reported an adjusted loss of $1.14 per share, larger than the consensus of 82 cents. Royal Caribbean Cruises (RCL) fell -5.29%, and Carnival (CCL) fell -5.07%.
Crypto stocks fell due to a -4% sell-off in Bitcoin (^BTCUSD). Coinbase (COIN) fell -10.24%, Marathon Digital (MARA) fell -1.88%, and Riot Blockchain (RIOT) fell -6.17%.
Bausch Health (BHC) fell -11.00% after a disappointing revenue and earnings report.
Across the markets…
Sep 10-year T-notes (ZNU22) on Tuesday fell by -12 ticks, and the 10-year T-note yield rose by +1.8 bp to 2.776%. T-note prices were undercut by caution ahead of Wednesday’s CPI report and by supply pressures as the Treasury sold $42 billion of 3-year T-notes. The Treasury will sell $35 billion of 10-year T-notes on Wednesday and $21 billion of 30-year T-bonds on Thursday. T-note prices received some support from Tuesday’s small -0.9 bp decline in the 10-year breakeven inflation expectations rate to 2.463%.
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