(Bloomberg) — Stocks rose and bond yields fell after the latest US inflation reading reinforced speculation the Federal Reserve will be able to deploy its widely anticipated interest-rate cut in September.
Most Read from Bloomberg
Just 24 hours ahead of the consumer inflation report, data showed the producer price index rose less than forecast. Categories in the PPI report used to calculate the Fed’s preferred inflation measure — the personal consumption expenditures price index — were generally tame. The S&P 500 rose about 1%. Treasuries climbed, with the move led by shorter maturities. The dollar fell.
“Markets searching for stability got more evidence of cooling inflation,” said Chris Larkin at E*Trade from Morgan Stanley. “Today’s PPI may be the appetizer for tomorrow’s CPI main course, but the lower-than-expected reading will probably be welcomed by a stock market attempting to bounce from its biggest pullback of the year.”
The recent easing of price pressures has bolstered Fed officials’ confidence that they can start to lower borrowing costs while refocusing their attention on the labor market, which is showing greater signs of slowing. Swap markets priced in about 40 basis points of easing by the Fed at the September meeting and a total rate reduction of roughly 105 basis points for 2024.
To Ian Lyngen at BMO Capital Markets, there isn’t anything in Tuesday’s data suggesting the Fed will have any hesitation cutting rates next month.
“That said, tomorrow’s consumer inflation update is far more relevant to near-term policy expectations,” he noted.
The S&P 500 hovered near 5,400. The Nasdaq 100 climbed about 1.5%. The Russell 2000 of smaller firms rose 0.4%. Wall Street’s favorite volatility gauge — the VIX – tumbled below 20. Nvidia Corp. led gains in megacaps. Starbucks Corp. surged over 20% after appointing a new chief. Alphabet Inc. investors are gearing up for a Google hardware event.
Treasury 10-year yields declined four basis points to 3.87%. Oil slipped after rising for five days, as traders weighed concerns over escalation in the Middle East conflict against the prospect of a potential surplus.
The producer price index for final demand increased 0.1% from a month earlier. The median forecast in a Bloomberg survey of economists called for a 0.2% gain. Compared with a year ago, the PPI rose 2.2%. Excluding the volatile food and energy categories, it was unchanged in July from the prior month — the tamest reading in four months.
“Muted PPI is more good data,” said Paul Ashworth at Capital Economics. “It is nevertheless consistent with the Fed’s preferred core PCE prices measure increasing at a below 2% annualized pace.”
To Chris Zaccarelli at Independent Advisor Alliance, if the CPI report comes in lower than expected, like PPI did, the Fed would have a “green light” to cut rates by 50 basis points in at their next meeting.
“The runway is clear for the Fed to cut rates in September,” said Jamie Cox at Harris Financial Group. “If data like this persists, the Fed will have plenty of room to cut rates further this year.”
David Russell at TradeStation says PPI data gave gives further evidence that the tide has turned on inflation, especially in services.
“This process could continue or accelerate in coming months as weakness in China weighs on commodity prices. Jerome Powell has a lot to feel good about going into Jackson Hole,” he said.
At Evercore, Krishna Guha said there’s “nothing threatening” in the latest PPI data.
“The larger point here is that we are past the point at which a few basis points here or there on month-over-month inflation will have any material bearing on Fed policy and the rate outlook, which at this juncture will be driven overwhelmingly by the labor market data,” Guha said.
With both hawks and the doves delivering a consistent message of projecting “calm,” Jerome Powell’s Jackson Hole speech this month will of course be very important, but we do not believe he will veer from the current Fed narrative, according to Win Thin and Elias Haddad at Brown Brothers Harriman & Co.
“Producer prices have been leading the way in this inflation cycle,” said Scott Helfstein at Global X. “They moved higher ahead of consumer prices, and they also led on the way down. Companies have done an excellent job managing through this inflation cycle while still reaching near record profit margins. Technology in areas like AI and automation have played an important role.”
The volatility in global financial markets hasn’t derailed investor optimism around US technology behemoths or expectations of a soft economic landing, according to a global survey by Bank of America Corp.
While the poll, conducted from Aug. 2 to Aug. 8 and covering the height of last week’s turmoil, showed a defensive rotation into bonds and cash and out of equities, long bets on the Magnificent Seven tech stocks remained the most crowded trade — albeit less so after the selloff.
“Core optimism on soft landing and US large cap growth stocks is unbowed,” strategist Michael Hartnett wrote in the note. It’s “just that investors now think the Fed needs to cut harder to guarantee no recession.”
Bank of America clients were net buyers of US equities for the first time in more than a month last week, snapping up shares during the rout and subsequent recovery. Institutional investors led net purchases of $5.8 billion in US stocks as hedge funds and retail investors offloaded shares, quantitative strategists led by Jill Carey Hall said.
At Citigroup Inc., Chris Montagu said US technology stocks are under “significant pressure” as investor positioning remains extended on the bullish side despite the past month’s selloff.
“On any negative economic data, there will be significant pressure on these long positions,” which face an average loss of 7.6%, Montagu wrote in a note. “That, in turn, could amplify any down moves from here in the near term.”
Corporate Highlights:
-
Starbucks Corp. has named Chipotle Mexican Grill Inc. Chief Executive Officer Brian Niccol as the coffee chain’s new CEO and chairman, replacing Laxman Narasimhan after just over a year in the role.
-
Home Depot Inc. lowered its forecast of a key sales metric for the year on expectations that consumers will continue to hold back spending in the coming months.
-
Paramount Global began laying off staff Tuesday after the entertainment company said last week that it planned to slash 15% of its US-based workforce, amounting to roughly 2,000 positions.
-
General Motors Co. has been laying off staff in China and will soon meet with local partner SAIC to plan a larger structural overhaul of its operations there, a recognition the Detroit automaker is unlikely to see its sales return to 2017 peak levels.
-
Baxter International Inc. said it will sell its kidney-care unit to the Carlyle Group private equity firm for $3.8 billion, part of the health care company’s efforts to streamline and pay down debt.
-
Avon Products Inc., owner of the beauty brand known for its door-to-door saleswomen, filed for bankruptcy after facing a wave of lawsuits alleging talc in its products caused cancer.
-
HelloFresh SE, the German meal-kit delivery company announced efforts to cut costs and preserve profits.
-
On Holding AG saw consumers rush to buy its running shoes and new lines of training apparel, as the Swiss sneaker maker tries to challenge established players like Adidas AG and Nike Inc.
Key events this week:
-
Eurozone GDP, industrial production, Wednesday
-
US CPI, Wednesday
-
China home prices, retail sales, industrial production, Thursday
-
US initial jobless claims, retail sales, industrial production, Thursday
-
Fed’s Alberto Musalem and Patrick Harker speak, Thursday
-
US housing starts, University of Michigan consumer sentiment, Friday
-
Fed’s Austan Goolsbee speaks, Friday
Some of the main moves in markets:
Stocks
-
The S&P 500 rose 0.7% as of 10:32 a.m. New York time
-
The Nasdaq 100 rose 1.3%
-
The Dow Jones Industrial Average rose 0.2%
-
The Stoxx Europe 600 rose 0.2%
-
The MSCI World Index rose 0.8%
-
The Russell 2000 Index rose 0.4%
Currencies
-
The Bloomberg Dollar Spot Index fell 0.2%
-
The euro rose 0.2% to $1.0953
-
The British pound rose 0.4% to $1.2819
-
The Japanese yen was little changed at 147.08 per dollar
Cryptocurrencies
-
Bitcoin rose 0.7% to $59,275.06
-
Ether fell 1.4% to $2,645.25
Bonds
-
The yield on 10-year Treasuries declined four basis points to 3.87%
-
Germany’s 10-year yield declined four basis points to 2.19%
-
Britain’s 10-year yield declined four basis points to 3.88%
Commodities
-
West Texas Intermediate crude fell 1.7% to $78.69 a barrel
-
Spot gold fell 0.2% to $2,467.13 an ounce
This story was produced with the assistance of Bloomberg Automation.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
