More Inflation Cheer As June PPI Lighter Than Expected, Lifting Markets Ahead Of Friday's Bank Earnings

(Thursday market open) ) It’s déjà vu on Wall Street this morning. For the second straight session, major indexes rose ahead of the opening bell on signs of U.S. inflation easing, this time as the June Producer Price Index (PPI) rose less than analysts had expected.

Both PPI and core PPI (which strips out volatile food and energy prices) rose 0.1% in June, below the analyst consensus of 0.2%. Despite the encouraging data, futures trading prices in a 92% probability of a Federal Reserve rate hike later this month. However, chances of more hikes after that continue to retreat.

This week’s comforting inflation data came in on the cusp of earnings season, with quarterly results expected on Friday from JPMorgan Chase JPM, Citigroup C, and Wells Fargo WFC. Banks were among many sector winners yesterday as major indexes soared following the release of the June Consumer Price Index (CPI). Every sector rose except industrials and healthcare, and buying was broad-based, albeit on lower-than-normal volume.

While much of Wednesday’s focus centered on U.S. annual core inflation growth slowing to 4.8% from 5.3% in May, a measure deeper in the report might be more meaningful to the Fed. “Super-core” inflation, which strips out some measures like housing and is closely watched by the Fed, rose just 0.01% from the prior month, notes Cooper Howard a director and fixed income strategist at the Schwab Center for Financial Research. That’s worth tracking in the July report, as it could be one factor influencing the Fed’s September decision on interest rates.

While the unofficial start of earnings seasons is tomorrow, a couple of early arrivals this morning looked positive. Shares of PepsiCo PEP and Delta Airlines DAL rose in premarket trading after the companies unveiled their Q2 results. Additionally, the overnight hours saw major indexes rise across Europe and Asia, providing a potential tailwind for the U.S. market. The strength overseas came despite Chinese import and export data that missed expectations and raised further questions about that key economy.

Morning rush

• The 10-year Treasury note yield (TNX) fell 2 basis points to 3.83% following PPI.
• The U.S. Dollar Index ($DXY) tumbled to 100.17 and has essentially fallen off a cliff this week to its lowest point since April 2022 as rate hike fears eased.
• Cboe Volatility Index® (VIX) futures slipped to 13.45.
• WTI Crude Oil (/CL) is steady near $75.70 per barrel.

Just in

Easing PPI data today followed yesterday’s bullish CPI report, but the market’s initial response wasn’t as vigorous. Critical year-over-year core PPI rose just 2.4%, below the consensus of 2.6% and the prior month’s 2.6% reading. Additionally, the government downwardly revised May’s monthly PPI data.

While the 2.4% annual core reading was the lowest since January 2021, you might want to take it with a grain of salt because last June’s readings were near the peak of rising inflation at the time, making the comparison relatively easy.

In other data this morning, initial weekly jobless claims of 237,000 were below the Briefing.com consensus of 247,000 and on the lower end of the recent range. The Fed has been watching claims as they ticked up over the last two months—a possible sign of cooling in the hot U.S. jobs market.

Eye on the Fed

Futures trading indicates a  92% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its July 25–26 meeting, according to the CME FedWatch Tool. Chances of a follow-up September hike fell to 13% from above 20% last week, and the market prices in a 62% probability that the July hike will be the last of the year.

Recent inflation and wages data might be agenda items when Fed Governor Chris Waller delivers a speech this evening on the economic outlook. When we last heard from Waller a few weeks ago, he sounded quite hawkish, saying he won’t support a pause in rate hikes until there’s a clear indication of inflation moving toward the Fed’s 2% target, Barron’s reported. One positive CPI report likely won’t be enough evidence of that, but inflation has been tracking lower for a while now by some other metrics.

What to Watch

Auction block: With CPI and PPI out of the way, the data calendar lightens a bit to end the week. There are a couple of Treasury note auctions scheduled today for shorter-term notes, as well as a 30-year bond auction. The speech by Fed Governor Waller tonight could draw some attention depending on what he says, and tomorrow morning brings the preliminary July reading on Consumer Sentiment from the University of Michigan. But barring a major news event, earnings will be the focus for market participants the rest of this week and early next.

Stocks in Spotlight

Seatbelts fastened: Delta shares sped down the runway and took off after the company easily beat Wall Street’s expectations for revenue and earnings per share (EPS). Delta also issued above-consensus EPS guidance for Q3. Things were similar on the snack aisle as PepsiCo also beat analysts’ revenue and EPS expectations and issued fiscal 2023 EPS guidance that surpassed Wall Street’s average estimate. Potato chip sales helped drive the successful Q2.

Take it to the…: Bank stocks ignored the sector-related adage about not rallying into earnings. The S&P 500 Financial Select Sector Index (IXM) is up 4% over the last month, and JPMorgan Chase posted a 52-week high Wednesday.

Banks got a pre-earnings boost from thanks in part to news of Microsoft’s MSFT victory over the Federal Trade Commission (FTC) in the court case involving Microsoft’s attempt to buy Activision Blizzard ATVI. The lack of mergers and acquisitions (M&A) over the last year is one thing holding back the banking sector, but if the Microsoft case causes the FTC to soften its stance even slightly, that could fire up optimism for improved investment banking demand. However, there’s no guarantee that one failure in court will cool the FTC’s vigor in challenging acquisitions.

M&A (and initial public offerings, or IPOs), have also been crippled by the 500-basis-point rise in U.S. interest rates over the last 16 months, but the idea that the Fed may be nearing the end of this long rate hike cycle could fuel optimism for investment banks. One thing is clear: It should be interesting to get bank executives’ take on the M&A and IPO environment, as well as the future rate path, when quarterly reporting begins tomorrow.

Thinking cap

Ideas to mull as you trade or invest

Syncing up: It’s hard to find two parts of the market less in sync so far this year than the Russell 2000 (RUT) small-cap index and the information technology sector. Small caps have mostly treaded water while tech skyrocketed. On Wednesday, small-caps joined the party following Microsoft’s court victory over the FTC’s attempt to block the purchase of Activision Blizzard, and the Russell 2000 closed at a five-month high. Microsoft—by virtue of its mega-market capitalization—can often move the tech sector higher on its own. And tech includes many smaller companies with investors hoping the victory generates takeover interest in their firms. But it goes beyond that, arguably helping to explain why the Russell 2000 rallied. The FTC’s loss fueled ideas that the M&A space could start to improve beyond tech. Not that the FTC necessarily will step back or companies will immediately step in, but anti-trust cases are costly; the agency’s recent loss may cause some hesitation to block other mergers in the future, analysts said. The Russell 2000 is packed with smaller regional bank stocks, and that sector could be one to watch beyond tech for possible consolidation if this court case leads to a friendlier M&A environment. Biotech is traditionally another interesting space for M&A.

Watch what you wish for: Yesterday’s bullish U.S. CPI report had the market celebrating—arguably a bit too soon. Slower inflation growth has market participants building in high chances of a single 25-basis-point rate increase this month and then none after that, according to the CME FedWatch Tool. The report sent stocks up and the U.S. dollar index to a 15-month low just above 100—a level it hasn’t dropped under since April 2022. When the dollar falls, crude oil tends to rise as it did on Wednesday. WTI crude (/CL) was already at 10-week highs above $75 per barrel even before the inflation news and firmed after the report. Falling energy prices contributed heavily to the one-year slowdown in CPI, and crude has generally struggled this year despite heavy production cuts by Saudi Arabia. This week’s surge lifted futures above their 100-day moving average (MA) near $74 and within sight of the 200-day moving average of $77.40. The front-month contract hasn’t traded above its 200-day MA since last September. A push through that level might be a warning that inflation isn’t fully tamed, after all. A test of the 200-day MA failed in April and futures fell sharply in the aftermath.

Yield watch: The 10-year and 2-year Treasury note yields both plummeted after yesterday’s CPI data, but the inversion between them narrowed as the more rate-sensitive 2-year yield fell more. There may be technical support for the 10-year note yield near 3.5%, a level it pivoted around for most of April and May before taking off in June. The recent highs were above 4% for the 10-year note yield and above 5% for the 2-year note yield, but neither approached the peaks seen last fall.

Calendar

July 14: University of Michigan July Preliminary Consumer Sentiment and expected earnings from JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and UnitedHealth (UNH)

July 17: July Empire State Manufacturing

July 18: June Retail Sales and expected earnings from Bank of America (BAC), Morgan Stanley (MS), Lockheed Martin (LMT), and PNC (PNC)

July 19: June Housing Starts and Building Permits, and expected earnings from Goldman Sachs (GS), First Horizon (FHN), Haliburton (HAL), and U.S. Bancorp (USB)

July 20: June Existing Home Sales, June Leading Indicators, and expected earnings from Abbott Labs (ABT), American Airlines (AAL), Philip Morris (PM), Johnson & Johnson (JNJ), D.R. Horton (DHI), Freeport McMoran (FCX), Travelers (TRV), and CSX (CSX).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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