Stocks Finish Higher on a Fed-Friendly US July CPI Report

The S&P 500 Index ($SPX) (SPY) Wednesday closed up +0.38%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.61%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.09%.

US stocks on Wednesday closed higher, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 posting 1-1/2 week highs.  Stocks found support Wednesday after the US July CPI report was slightly weaker than expected, reinforcing the outlook for the Fed to cut interest rates next month.  Also, M&A activity supported stocks Wednesday after Mars agreed to buy Kellanova in a deal valued at $36 billion.

Weakness in chip stocks Wednesday limited gains in the Nasdaq 100. Also, Wednesday’s US July CPI report was close to expectations and dampened speculation that the Fed will cut rates by 50 bp next month instead of 25 bp.

US July CPI eased to 2.9% y/y from 3.0% y/y, slightly better than expectations of no change at 3.0% y/y and the smallest year-on-year increase in over three years.  July CPI ex-food and energy eased to 3.2% y/y from 3.3% y/y in June, right on expectations and the smallest annual increase in 3-1/4 years.

US MBA mortgage applications rose +16.8% in the week ended August 9, with the purchase mortgage sub-index up +2.8% and the refinancing sub-index up +34.5%.  The average 30-year fixed rate mortgage fell -1 bp to a 5-month low of 6.54% from 6.55% the previous week. 

The market consensus is that Q2 earnings for the S&P 500 companies will rise +7.4% y/y.  More than 80% of the companies in the S&P 500 have reported thus far.  According to Bloomberg, most reporting companies have beaten their earnings consensus, but only 43% have beaten revenue expectations, the lowest percentage in five years.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 40% for a -50 bp rate cut at that meeting.

Overseas stock markets Wednesday settled mixed.  The Euro Stoxx 50 rose to a 1-1/2 week high and closed up +0.70%.  China's Shanghai Composite closed down -0.60%.  Japan's Nikkei Stock 225 rose to a 1-1/2 week high and closed up by +0.58%.

Interest Rates

September 10-year T-notes (ZNU24) Wednesday closed up +4.5 ticks.  The 10-year T-note yield fell -1.9 bp to 3.824%.  Sep T-notes Wednesday climbed to a 1-week high, and the 10-year T-note yield fell to a 1-week low of 3.803%.  Wednesday’s as-expected US July CPI report supported T-notes.  Also, an easing of inflation expectations is bullish for T-notes after the 10-year breakeven inflation rate fell to a 1-week low Wednesday at 2.058%. 

Gains in T-notes were limited as expectations for a 50 bp Fed rate cut at next month’s FOMC meeting fell to 40% Wednesday from 75% last week.  Also, Wednesday’s rally in the S&P 500 to a 1-1/2 week high reduced safe-haven demand for T-notes. 

European government bond yields Wednesday moved lower.  The 10-year German bund yield fell to a 1-week low of 2.168% and finished down -0.6 bp at 2.180%.  The 10-year UK gilt yield fell to a 1-week low of 3.812% and finished down -6.3 bp at 3.825%.

Eurozone June industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.5% m/m.

Eurozone employment eased last quarter as Q2 employment rose +0.2% q/q and +0.8% y/y, weakening from +0.3% q/q and +1.0% y/y in Q1. 

UK July CPI rose +2.2% y/y, weaker than expectations of +2.3% y/y. Also, July core CPI rose +3.3% y/y, weaker than expectations of +3.4% y/y.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 99% for the September 12 meeting.

US Stock Movers

Kellanova (K) is up more than +7% to lead gainers in the S&P 500 after Mars agreed to buy the company for $83.50 a share in a deal valued at $36 billion. 

Progressive Corp (PGR) closed up more than +5% after reporting net premiums earned for July of $6.07 billion. 

Allstate (ALL) closed up more than +5% after agreeing to sell its employer voluntary benefits unit to The Standard for $2 billion in cash.

Alphabet (GOOGL) closed down more than -2% after the US Justice Department said it is considering several options to break up Google after a landmark court ruling found that the company monopolized the online search market. 

Weakness in chip stocks on Wednesday weighed on the Nasdaq 100. Intel (INTC) closed down more than -2% to lead losers in the Dow Jones Industrials.  Also, GlobalFoundries (GFS) and ON Semiconductors NV (ON) closed down more than -2%.  In addition, NXP Semiconductors (NXPI), Microchip Technology (MCHP), Marvell Technology (MRVL), Analog Devices (ADI), and Qualcomm (QCOM) closed down more than -1%.

Charles Schwab (SCHW) closed up more than +4% after reporting core net new assets brought to the company by new and existing clients in July was $29 billion.

Cardinal Health (CAH) closed up more than +3% after reporting Q4 adjusted EPS of $1.84, stronger than the consensus of $1.73, and raising its 2025 adjusted EPS forecast to $7.55-$7.70 from a prior forecast of $$7.50, above the consensus of $7.54. 

Mercury Systems (MRCY) closed up more than +17% after reporting Q4 revenue of $248.6 million, above the consensus of $230.7 million. 

Illumina (ILMN) closed up more than +2% after TD Cown upgraded the stock to buy from hold with a price target of $144. 

Victoria’s Secret (VSCO) closed up more than +16% after the company said it replaced CEO Waters with Hillary Super, the former CEO of Rihanna’s lingerie brand.

Brinker International (EAT) closed down more than -10% after reporting Q4 adjusted EPS of $1.61, weaker than the consensus of $1.68, and forecasting 2025 adjusted EPS of $4.35-$4.75, the midpoint below the consensus of $4.68.

Global-e-Online (GLBE) closed down more than -5% after cutting its full-year revenue forecast to $710 million-$750 million from a previous forecast of $733 million-$773 million, weaker than the consensus of $748.6 million. 

Intuit (INTU) closed down more than -1% after Morgan Stanley downgraded the stock to equal weight from overweight. 

L3Harris Technologies (LHX) closed down -0.85% after RBC Capital Markets downgraded the stock to sector perform from outperform. 

Earnings Reports (8/15/2024)

Amcor PLC (AMCR), Applied Materials Inc (AMAT), Coherent Corp (COHR), Deere & Co (DE), Globant SA (GLOB), H&R Block Inc (HRB), Tapestry Inc (TPR), Walmart Inc (WMT).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.