Stocks Rally on Improved Consumer Sentiment

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed +1.73%, the Dow Jones Industrials Index ($DOWI) (DIA) closed +1.27%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.06%. 

Stocks on Friday rallied after the stronger-than-expected U.S. consumer sentiment index put the U.S. economy in a mildly stronger light.  Stocks also saw support from Friday’s -5 bp decline in the 10-year T-note yield and the favorable U.S. import price report.

The University of Michigan reported that its preliminary-Aug U.S. consumer sentiment index rose by +3.6 points to a 3-month high of 55.1, which was stronger than market expectations of +1.0 point to 52.5.  The uptick in consumer sentiment was a step in the right direction, but the index is still only 5.1 points above June’s record low of 50.0 (data since 1978).  Consumers remain worried about inflation, high gasoline prices, rising interest rates, and a weakening labor market if the economy continues to slide.

There was some good news on the inflation front with Friday’s report that U.S. July import prices fell -1.4% m/m and eased to +8.8% y/y from June’s +10.7%.  U.S. July import prices ex-petroleum fell -0.7% m/m, adding to June’s revised -0.5% m/m drop.

San Francisco Fed President Mary Daly said in an interview late Thursday that her base case is for a +50 bp rate hike at the Sep 20-21 FOMC meeting but that she has an “open mind” about whether a larger rate hike might be necessary.  She said the July inflation figures are “significant in that they are saying that we’re seeing some improvement, but they’re not victory.” 

This week’s favorable CPI and PPI reports caused the markets to scale back expectations for a +75 bp rate hike at the Sep 20-21 FOMC meeting to about 50-50 versus the previous view of a very strong chance. 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 U.S. House of Representatives returned from its recess on Friday to pass the Inflation Reduction Act, which passed the Senate this past Sunday.  President Biden is then expected to sign the bill into law.  The bill contains $430 billion of spending on climate and healthcare, and also cuts the U.S. budget deficit. 

The Euro Stoxx 50 on Friday closed up +0.53%.  China’s Shanghai Composite index on Friday closed down -0.15%.  Japan’s Nikkei index closed up +2.62% after Thursday’s holiday.

Today’s stock movers…

U.S.-listed Chinese stocks on Friday traded on a weak note after the news that five of China’s state-owned companies will voluntarily delist from the U.S. exchanges.  Those five companies fell by an average of only about -1.4% on Friday, which indicated that the news didn’t spark any panic.  Those companies include China Life Insurance (LFC), PetroChina (PTR), China Petroleum & Chemical Corp (SNP), Sinopec Shanghai Petrochemical Co (SHI), and Aluminum Corp of China (ACH).

That delisting news indicates that China is not giving in to the U.S. demand for audits and that negotiations may be deadlocked.  However, it is also possible that the delisting of China’s sensitive state-owned companies might make it easier for China to agree to an audit deal now that its state-owned companies are out of the picture.  U.S. law currently requires U.S.-listed Chinese companies to provide the audit information that the U.S. is demanding or the companies will be delisted in 2024.  There are reports that China may segment its companies according to the sensitivity of the information that they handle, allowing less-sensitive companies to perhaps meet the U.S. audit demands and remain listed in the U.S.

Other closely-watched U.S.-listed Chinese companies closed mixed after the delisting news.  Alibaba (BABA) fell -0.1%, Pinduoduo (PDD) fell -1.65%, Baidu (BIDU) rose +0.7%, JD.com (JD) closed +0.19%, and Bilibili (BILI) closed +0.75%.

Bitcoin (^BTCUSD) on Friday fell mildly by -0.5%, but crypto stocks rallied on support from the +2% rally in the Nasdaq 100 index.  Coinbase (COIN) rose by +8.09%, Marathon Digital (MARA) closed +6.47%, and Riot Blockchain (RIOT) closed up +4.66%.

Oil and gas company stocks on Friday rallied on general stock market strength, and shook off the sell-offs of -2.38% in Sep WTI crude oil prices and -1.19% in Sep natural gas prices.  Exxon Mobil (XOM) closed +1.21%, Occidental Petroleum (OXY) closed +0.40%, and ConocoPhillips (COP) closed +2.73%, and Marathon Oil (MRO) closed +0.97%.

Across the markets…

Sep 10-year T-notes (ZNU22) today are up +5.5 ticks, and the 10-year T-note yield fell -4.7 bp to 2.840%.  T-note prices saw support from the favorable U.S. import price report and carry-over from this week’s favorable CPI and PPI reports.  T-note prices saw supply relief after Thursday’s conclusion of this week’s coupon auctions.  However, T-note prices saw some downward pressure from Friday’s stronger-than-expected U.S. consumer sentiment report and the rally in stocks.

• Short Option Plays Are Enhanced with These Huge Buybacks
• Chinese Delisting News Raises Concern about $2.4 trillion of Market Cap
• Stocks Higher on Consumer Sentiment Optimism
• Stocks Mildly Higher as Inflation Optimism Prevails