Stocks Rally as PPI Report Fuels Hopes for Less Hawkish Fed

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.0%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.9%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +1.2%. 

Stocks are higher after today’s U.S. PPI report provided more support for the idea that U.S. inflation may have peaked and the Fed may be able to trim its rate-hike ambitions. Stocks on Wednesday earlier rallied sharply after the dovish CPI report initially sparked hopes that inflation may be headed lower.  The S&P 500 index on Wednesday closed up +2.13%, and the Nasdaq 100 index closed up +2.85%.

On the negative side, today’s initial unemployment claims report rose to a 9-month high, raising some questions about the U.S. labor market.

Today’s July final-demand PPI report of -0.5 m/m and +9.8% y/y was weaker than market expectations of +0.2% m/m and +10.4% y/y.  On a year-on-year basis, the July PPI report of +9.8% y/y was down by -1.5 points from June’s +11.3% y/y and was -1.8 points below March’s peak of +11.6% y/y.

Meanwhile, the July core PPI report of +0.2% m/m and +7.6% y/y was weaker than market expectations of +0.4% m/m and +7.7% y/y.  On a year-on-year basis, the July core CPI of +7.6% y/y fell by -0.6 points from June’s +8.2% and was -2.1 points below March’s peak of +9.7% y/y.

Today’s PPI report provided support for ideas sparked by yesterday’s CPI report that inflation may have already peaked.  The July CPI on Wednesday fell by -0.6 points to +8.5% y/y from June’s 40-year peak of +9.1%. The July core CPI was unchanged from June at +5.9% y/y and remained -0.6 points below the 40-year peak of +6.5% y/y posted earlier this year in March.  The CPI report caused short-term T-note yields to fall Wednesday and caused market participants to mildly reduce their expectations for Fed tightening in the coming months.  The market is now discounting a 100% chance of a +50 bp rate hike at the next FOMC meeting on September 20-21 and about a 50-50 chance of a +75 bp rate hike.

U.S. weekly initial unemployment claims in the week ended Aug 6 rose by +14,000 to 262,000, which showed a slightly stronger labor market than expectations for a rise to 265,000. Nevertheless, initial claims rose to a 9-month high, raising concerns about rising layoffs and a weaker U.S. labor market.

Sep WTI crude oil prices this morning are up +1.0% after the International Energy Agency (IEA) raised its forecast for global crude oil demand this year due to pressure for some electricity producers to switch to oil as fuel due to soaring natural gas prices.

The Euro Stoxx 50 today is up +0.4%.  China’s Shanghai Composite index today closed up +1.60% on support from yesterday’s rally in U.S. stocks.  The markets in Japan were closed today for a holiday.

Today’s stock movers…

U.S.-listed Chinese stocks today are sharply higher on a technical rebound after recent losses and are among the best-performing stocks in the Nasdaq 100 index.  The Nasdaq Golden Dragon Index today is up +5.1%, adding to Wednesday’s +1.61% rally and posting a 1-week high.  Pinduoduo (PDD) is up +8.4%, JD.com (JD) is up +4.2%, and Baidu (BIDU) is up +3.6%.

Chip stocks are seeing a continued upward rebound today.  Micron Technology (MU) is up +3.7%, Lam Research (LRCX) is up +3.4%, AMD (AMD) is up +2.6%, and NVIDIA (NVDA) is up +2.6%.

Bitcoin (^BTCUSD) is trading sharply higher by +3.0%, providing support for crypto stocks.  Marathon Digital (MARA) is up +10%, and Riot Blockchain (RIOT) is up +11%.  However, Coinbase (COIN) is slightly lower after Wednesday’s gain of +7.37% as the stock seems to be lagging due to its poor earnings report earlier this week and Wednesday’s news that the SEC is examining some aspects of the company’s business, including “customer programs, operations, and existing and intended future programs.”   

Oil company stocks are seeing support with today’s +1.0% rally in WTI crude oil futures.  Occidental Petroleum (OXY) is up +3.0%, ConocoPhillips (COP) is up +2.9%, Marathon Oil (MRO) is up +2.2%, and Exxon Mobil (XOM) is up +1.3%. 

Disney (DIS) is up +6.9% after the company reported strong growth in its streaming business with 14.4 million new Disney+ subscribers in the quarter ended July 2.  Most of that growth was in overseas markets.  Disney also raised its price for Disney+ by 38%, which should boost Disney’s income from the service and stem losses from the division.  There was also optimism about higher income from Disney parks as travel rebounds from the pandemic.

HP Inc (HPQ) is up +1.5% even though Morgan Stanley today reduced its outlook for PC sales this year due to weaker demand from consumers and rising PC inventories.  Dell Technologies (DELL) is up +1.9%.

Across the markets…

Sep 10-year T-notes (ZNU22) today are up +2 ticks, and the 10-year T-note yield is up +2.5 bp at 2.806%. T-note prices are seeing support today from the favorable PPI report and the 9-month high in U.S. initial unemployment claims.  However, T-note prices are seeing downward supply pressure ahead of the Treasury’s sale later today of $21 billion of 30-year T-bonds.

The dollar index (DXY00) today is down by -0.43%, adding to Wednesday’s loss of -1.11%.  The dollar is seeing continued weakness today on the PPI and unemployment claims reports, which were both dovish for Fed policy.  The 2-year T-note yield today is down by another -4 bp at 3.18%, adding to Wednesday’s decline of -6 bp and indicating a continued deterioration of the dollar’s short-term interest rate differentials.

The dollar is also being undercut by reduced liquidity demand with today’s continued rally in stocks.  

EUR/USD (^EURUSD) today is up by +0.5% on dollar weakness.  USD/JPY (^USDJPY) is sharply lower by -1.40% as the yen sees strength.

October gold (GCV22) is down -2.0 (-0.11%), and September silver (SIU22) is down -0.267 (-1.29%).  Precious metals prices are seeing some technical fatigue after the recent rally and are failing to get much of a boost from the weaker dollar.  Silver is seeing some weakness on U.S. economic concerns with today’s rise in initial unemployment claims to a 9-month high.

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