Stocks Soar on Favorable CPI Report

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +2.13%, the Dow Jones Industrials Index ($DOWI) (DIA) closed +1.63%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.85%.

Stocks rallied sharply on Wednesday’s favorable CPI report, which sparked hopes that inflation may be peaking and that the Fed may be able to limit its rate-hike regime.  The market is now discounting about a 50-50 chance that the FOMC at its next meeting on September 20-21 will raise its funds rate by +75 bp, versus previous expectations for a very strong chance of that +75 bp rate hike.

T-note yields initially fell sharply on the CPI report but then moved higher later in the day as two Fed officials downplayed the CPI report and indicated that the Fed will continue to raise interest rates.  The 2-year T-note yield ended the day down -5 bp while the 10-year T-note yield ended the day up +1 bp.

Chicago Fed President Charles Evans said that inflation remains “unacceptably high” and that he expects “that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”

Meanwhile, Minneapolis Fed President Kashkari said that the Fed “is far away from declaring victory on inflation and that while Wednesday’s CPI report was in the right direction, “it doesn’t change my path” for interest rates.  He also said, “The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target – I just think it’s unrealistic.”

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, Wednesday’s July CPI report of +8.5% y/y was down by 0.6 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 Wednesday after China said that its Taiwan military drills are over, but also said that regular patrols are now planned.  The 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.

Overseas stocks on Wednesday closed mixed.  The Euro Stoxx 50 closed up +0.91%.  However, China’s Shanghai Composite index today closed down -0.54% and the Nikkei index closed down -0.65%.

Today’s stock movers…

Notable gainers in the Nasdaq 100 Wednesday included +6.4% rally in Zoom (ZM), +6.2% rally in Netflix (NFLX), a +5.8% rally in Meta Platforms (META), and +3.5% rally in Amazon (AMZN).  Also, chip stocks saw a solid recovery on Wednesday after their recent weakness.  Nvidia (NVDA) was the second best performer in the Nasdaq 100 with a +5.92% rally.

U.S.-listed Chinese stocks underperformed Wednesday.  JD.com (JD) fell -2.77% and was the worst performer in the Nasdaq 100 index.  Pinduoduo (PDD) fell -0.15%, although Baidu (BIDU) was able to rally by +1.58%.

Oil stocks underperformed despite a recovery in WTI crude oil prices during afternoon to a gain of +1.58%.  Exxon (XOM) fell -0.08% and Occidental Petroleum (OXY) fell -0.30%, although Marathon Oil (MRO) was able to close +0.70% higher on the day. 

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) rallied +2.84% on the day 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) rallied +2.68% 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) rallied sharply by +6.28% thanks to a +2.4% rally in Bitcoin (^BTCUSD) on the 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) rallied sharply by +14.77%, and Riot Blockchain (RIOT) rallied by +10.71%. 

Rackspace (RXT) fell sharply by -16.55% after disappointing revenue guidance.

Array (ARRY) rallied +27.61% on a positive earnings report.

Across the markets…

Sep 10-year T-notes (ZNU22) on Wednesday closed up +8.5 ticks, while the 10-year T-note yield rose by +0.7 bp to 2.785%.  T-note prices found support on the favorable CPI report and the -2 bp decline in the 10-year breakeven inflation expectations rate to 2.44%.

However, T-note prices were undercut by hawkish Fed comments and by supply pressure as the Treasury on Wednesday sold $35 billion of 10-year T-notes.  The Treasury will conclude this week’s coupon auction package by selling $21 billion of 30-year T-bonds on Thursday.

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