(Bloomberg) — Stocks rose and bond yields fell after the latest U.S. inflation figures fueled speculation that the Federal Reserve could make its long-awaited interest rate cut in September.
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Just 24 hours before the CPI, data showed that the Producer Price Index rose less than forecast. The categories in the Producer Price Index used to calculate the Fed’s preferred inflation measure – the Personal Consumption Expenditures Price Index – remained generally subdued. The S&P 500 rose about 1%. Treasuries rose across the curve, with the move led by shorter maturities. The dollar fell.
“Markets seeking stability now have more signs of inflation cooling,” said Chris Larkin of Morgan Stanley’s E*Trade. “Today’s PPI may be a foretaste of tomorrow’s main course, the CPI, but the lower-than-expected reading should be welcomed by a stock market trying to recover from its biggest slump of the year.”
The recent price pressure has boosted Fed officials’ confidence that they can now begin cutting borrowing costs while refocusing on the labor market, which is showing increasing signs of weakening. Swaps markets showed that traders have priced in a 37 basis point rate easing at the Fed’s September meeting and a total rate cut of 104 basis points for the year.
According to Ian Lyngen of BMO Capital Markets, recent inflation figures do not suggest that the Fed will hesitate to cut interest rates next month.
“However, tomorrow’s consumer inflation update is much more relevant to near-term policy expectations,” he noted.
The S&P 500 remained stable at around 5,400 points. The Nasdaq 100 rose about 1.5 percent. Nvidia Corp. led the gains among mega-caps. Starbucks Corp. rose more than 20 percent after appointing a new CEO. The yield on 10-year U.S. Treasury bonds fell four basis points to 3.87 percent.
Oil prices fell after five days of gains as traders weighed concerns about an escalating Middle East conflict against the prospect of a possible surplus.
The producer price index for final demand rose by 0.1 percent compared to the previous month. The median forecast of a Bloomberg survey of economists had predicted an increase of 0.2 percent. Compared to the previous year, the producer price index rose by 2.2 percent. Excluding the volatile categories of food and energy, it remained unchanged in July compared to the previous month – the lowest value in four months.
“The subdued producer price index is another good reading,” said Paul Ashworth of Capital Economics. “But it is in line with the Fed’s preferred core PCE price measure, which is rising less than 2% annually.”
Chris Zaccarelli of Independent Advisor Alliance: If the CPI report comes in lower than expected, like the PPI report, the Fed would get the green light to cut rates by 50 basis points at its next meeting.
“The Fed has room to cut rates in September,” said Jamie Cox of Harris Financial Group. “If this data is accurate, the Fed has room to cut rates further this year.”
According to TradeStation’s David Russell, the PPI data provided further evidence that inflation has turned around, particularly in the services sector.
“This process could continue or accelerate in the coming months as China’s weakness weighs on commodity prices. Jerome Powell has every reason to be sympathetic on his way to Jackson Hole,” he said.
At Evercore, Krishna Guha said there was “nothing threatening” in the latest PPI data.
“The key point here is that we have passed the point where a few basis points here and there in monthly inflation will have any material impact on Fed policy and the interest rate outlook, which at this point is largely driven by labor market data,” Guha said.
With both the hawks and the doves currently consistently pushing a message of “calm,” Jerome Powell’s speech at Jackson Hole this month will obviously be very important, but we don’t think he will deviate from the current Fed stance, say Win Thin and Elias Haddad of Brown Brothers Harriman & Co.
“Producer prices have led the way in this inflation cycle,” said Scott Helfstein of Global X. “They have risen faster than consumer prices and led the downward trend. Companies have done an excellent job of navigating this inflation cycle while still achieving near-record profit margins. Technologies in areas such as AI and automation have played a major role in this.”
Bank of America Corp. customers bought net U.S. stocks last week for the first time in more than a month, buying stocks throughout the recession and subsequent recovery.
Institutional investors bought a net $5.8 billion worth of U.S. stocks, while hedge funds and retail investors sold their shares, quantitative strategists led by Jill Carey Hall said in a research report on Tuesday.
Chris Montagu of Citigroup Inc. said U.S. technology stocks were under “significant pressure” as investor positioning remained optimistic despite last month’s sell-off.
“Negative economic data will put significant pressure on these long positions,” Montagu wrote in a note, which face an average loss of 7.6 percent. “That, in turn, could amplify any downside in the short term.”
Company highlights:
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Starbucks Corp. has named Brian Niccol, CEO of Chipotle Mexican Grill Inc., as the coffee chain’s new CEO and chairman, replacing Laxman Narasimhan, who had served in the role for just over a year.
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Home Depot Inc. lowered its forecast for significant sales growth this year, saying consumers will remain cautious about spending in the coming months.
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Baxter International Inc. said it will sell its kidney care business to private equity firm Carlyle Group for $3.8 billion, part of the health care company’s efforts to streamline its business and reduce debt.
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Avon Products Inc., owner of the cosmetics brand known for its door-to-door salespeople, has filed for bankruptcy after facing a wave of lawsuits alleging that the talc contained in its products causes cancer.
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General Motors Co. has laid off employees in China and will soon begin talks with local partner SAIC to plan a broader restructuring of its operations there. The Detroit-based automaker announced the move on Wednesday morning, acknowledging that it is unlikely to return to the peak sales of 2017.
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Sea Ltd. has raised its forecast for its main online retail business, signaling that the Southeast Asian e-commerce leader faces strong competition from the likes of TikTok and Lazada.
Important events this week:
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GDP, industrial production of the Eurozone, Wednesday
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US CPI, Wednesday
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China: Real estate prices, retail sales, industrial production, Thursday
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US initial jobless claims, retail sales, industrial production, Thursday
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Fed President Alberto Musalem and Patrick Harker will speak on Thursday
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US housing starts, consumer confidence University of Michigan, Friday
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Fed Chairman Austan Goolsbee speaks on Friday
Some of the key market movements:
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The S&P 500 rose 0.9% (as of 9:48 a.m. New York time)
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The Nasdaq 100 rose 1.3%
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The Dow Jones Industrial Average rose 0.7%
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The Stoxx Europe 600 rose 0.2 percent
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The MSCI World Index rose 1%
Currencies
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The Bloomberg Dollar Spot Index fell 0.2 percent
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The euro rose 0.3 percent to 1.0959 dollars.
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The British pound rose 0.4% to $1.2819.
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The Japanese yen remained almost unchanged at 147.20 per dollar
Cryptocurrency
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Bitcoin rose 0.8% to $59,352.25
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Ether fell 0.5% to $2,666.96
Bonds
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The yield on 10-year government bonds fell four basis points to 3.87%
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The yield on German 10-year bonds fell three basis points to 2.19%.
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The yield on UK 10-year bonds fell three basis points to 3.89%.
Raw materials
This story was created with the help of Bloomberg Automation.
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