Stocks Rally on Favorable CPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.58%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +1.56%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.88%. 

Stocks rallied sharply on today’s favorable CPI report, which sparked hopes that inflation may be peaking and that the Fed may be able to ease up on its rate-hike regime. 

The 10-year T-note yield is down -5 bp this morning on the CPI news, while the 2-year T-note yield showed a dramatic decline of -16 bp.

The July CPI report of unchanged m/m and +8.5% y/y was weaker than expectations of +0.2% m/m and +8.7% y/y.  The July CPI eased from June’s report of +1.3% m/m and +9.1% y/y.  Meanwhile, the July core CPI report of +0.3% m/m and +5.9% y/y was weaker than expectations of +0.5% m/m and +6.1%.  The July core CPI report compared favorably with June’s report of +0.7% m/m and +5.9% y/y.

On a year-on-year basis, today’s July CPI report of +8.7% y/y was down by 0.4 points from June’s 40-year peak of +9.1% y.y.  The July core CPI of +5.9% y/y was unchanged from June and was 0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March.

Taiwan tensions eased today after China said that its Taiwan military drills are over, but also said that regular patrols are now planned.  China’s statement said the Chinese military plans to “regularly organize patrols in the direction of the Taiwan Strait,” which raises the possibility that China plans to frequently cross the median line in the Taiwan Strait, which it previously refrained from doing.

Sep WTI crude oil futures prices this morning are down -2.5% on a bearish weekly EIA report and on news that the flow of Russian crude oil through the southern leg of the Druzhba pipeline through Ukraine to Hungary, Slovakia, and the Czech Republic will be restarted by later today after a Hungarian refinery made good on the need for Ukraine to pay transit fees.  The flow of crude oil in that pipeline had been shut down since last week because sanctions prevented the payment of the transit fee by Ukraine's oil pipeline company. That pipeline carries about 250,000 bpd of oil and supplies key refineries.  However, the crude oil flows in the northern leg of the pipeline through Belarus to Poland and Germany were not affected.

Overseas stocks today are mixed.  The Euro Stoxx 50 today is up +0.20%.  China’s Shanghai Composite index today closed down -0.54%, breaking a string of four consecutive rises.  The Nikkei index today closed down -0.65%.

Today’s stock movers…

Notable gainers in the Nasdaq 100 today include a +5.4% rally in Meta Platforms (META), +4.8% rally in Netflix (NFLX), +4.6% rally in Zoom (ZM), and +3.0% rally in Amazon (AMZN).

U.S.-listed Chinese stocks are underperforming today.  JD.com (JD) is down -2.7%, Pinduoduo (PDD) is down -2.2%, and Baidu (BIDU) is little changed.

Oil stocks are being undercut by today’s -2.5% sell-off in crude oil prices on the bearish EIA report and restart of the oil pipeline through Ukraine.  Exxon (XOM) is down -1.0%, Occidental Petroleum (OXY) is down -1.2%, and Marathon Oil (MRO) is down -1.2%. 

Elon Musk sold $6.9 billion of Tesla stock in what he said was an attempt to avoid an emergency sale of Tesla stock if a court forces Mr. Musk to go through with his purchase of Twitter.  Tesla (TSLA) is up +0.9% after Mr. Musk said he was done selling shares in Tesla and that he would buy Tesla stock if the Twitter deal doesn’t close.  Meanwhile, Twitter (TWTR) is up +2.9% due to Mr. Musk’s apparent opinion that there is a chance he may be forced by a court to proceed with his purchase of Twitter.  Tesla has seen strength in the past several weeks as the Senate moved towards this past Sunday’s passage of the Inflation Reduction Act, which contains significant electric vehicles tax credits. 

Coinbase (COIN) is up +4% today after a +3.5% rally in Bitcoin (^BTCUSD) on this morning’s dovish CPI report, which gave risk assets a boost.  Coinbase had earlier fallen -6% in pre-market trading due to a disappointing quarterly earnings report that included a $1.1 billion loss and weaker-than-expected revenue.  Marathon Digital (MARA) is up +5.3%, and Riot Blockchain (RIOT) is up +1.9%. 

Rackspace (RXT) is sharply lower by -20% after disappointing revenue guidance.

Array (ARRY) is up +17% in after a positive earnings report.

Across the markets…

Sep 10-year T-notes (ZNU22) today are up +24 ticks, and the 10-year T-note yield is down -4.9 bp at 2.728%.  T-note prices found support on today’s favorable CPI report and today’s -4 bp decline in the 10-year breakeven inflation expectations rate to 2.42%.

T-note prices are seeing some supply pressure ahead of today’s Treasury sale of $35 billion of 10-year T-notes.  The Treasury will then sell $21 billion of 30-year T-bonds on Thursday this complete this week’s auction package.

The dollar index (DXY00) today is sharply lower by -1.5% after today’s CPI report was dovish for Fed policy and negative for the dollar’s interest rate differentials. The dollar is also suffering from reduced liquidity demand with today’s rally in stocks.  

EUR/USD (^EURUSD) today is up by +1.4% as the dollar weakens on the U.S. CPI report.  USD/JPY (^USDJPY) is down -2.2%.

October gold (GCV22) is up +4.5 (+0.25%), while September silver (SIU22) is up +0.298 (+1.45%).  Gold is seeing support from today’s dovish CPI report.  Silver is seeing support today from hopes for less economic damage from Fed rate hikes.

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