Stocks Fade as T-note Yields Rise

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Thursday closed -0.07%, the Dow Jones Industrials Index ($DOWI) (DIA) closed +0.08%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed -0.65%.

Stocks started out Thursday morning on a strong note due to the weaker-than-expected PPI report, which added to Wednesday’s CPI report in suggesting that U.S. inflation might have already peaked.

However, the stock market then faded during the day as the inflation optimism ran its course and the 10-year T-note yield rose to a large daily gain of +10 bp.  Also, initial unemployment claims rose to a 9-month high, raising some doubts about the U.S. labor market.

Thursday’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.

Thursday’s PPI report provided support for ideas sparked by Wednesday’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.

Thursday’s initial unemployment claims report was bearish for stocks.  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.

The Euro Stoxx 50 on Thursday closed up +0.21%.  China’s Shanghai Composite index closed up +1.60% on support from Wednesday’s rally in U.S. stocks.  The markets in Japan on Thursday were closed for a holiday.

Today’s stock movers…

U.S.-listed Chinese stocks Thursday closed sharply higher on a technical rebound after recent losses and were among the best-performing stocks in the Nasdaq 100 index.  The Nasdaq Golden Dragon Index Thursday’s rallied +2.60%, adding to Wednesday’s +1.61% rally and posting a 1-week high.  Pinduoduo (PDD) rallied +4.99%, JD.com (JD) rallied +2.59%, and Baidu (BIDU) rallied +1.19%.

Some chip stocks Thursday saw a continued upward rebound.  Micron Technology (MU) rose +1.50%, and Lam Research (LRCX) rose +0.51%.  After early gains, however, AMD (AMD) closed the day down -1.14%, and NVIDIA (NVDA) closed down -1.06%.

Bitcoin (^BTCUSD) showed strength during the day and was up +1.13% in late-afternoon trading, providing support for crypto stocks.  Marathon Digital (MARA) rallied +4.86%, and Riot Blockchain (RIOT) rallied +4.29%.  However, Coinbase (COIN) closed the day sharply lower by -10.95%, as the stock lagged 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 and gas companies saw support Thursday from the sharp +2.62% rally in Sep WTI crude oil prices and the +8.19% surge in Sep natural gas prices.  Marathon Oil (MRO) rallied +6.81%, ConocoPhillips (COP) rallied +4.35%, Occidental Petroleum (OXY) rallied +4.29%, and Exxon Mobil (XOM) rallied +1.70%. 

Disney (DIS) closed the day sharply higher by +4.47% after the company late Wednesday 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.

Across the markets…

Sep 10-year T-notes (ZNU22) on Thursday closed down -21 ticks, and the 10-year T-note yield rose by +10.7 bp to 2.888%.  T-note prices saw support early from the weaker-than-expected PPI report and the 9-month high in initial unemployment claims. 

However, T-note prices then faded during the day as crude oil and natural gas prices surged, causing a +4 bp rise in the 10-year breakeven inflation expectations rate.  Also, there was some technical selling as Sep 10-year T-note prices fell to a new 3-week low. Longer-dated T-note prices also fell after underwhelming demand was seen for Thursday’s auction of $21 billion of 30-year T-bonds.

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