What you need to know…
The S&P 500 Index ($SPX) (SPY) today is up +0.14%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.58%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.31%.
Stocks are being undercut by today’s hawkish Powell comments, where he raised the possibility of more than two rate hikes by year-end. The 10-year T-note yield this morning is sharply higher by +15 bp.
However, stocks are seeing underlying support from U.S. economic resilience, as reflected in today’s U.S. Q1 GDP revision. Also, there is optimism about the U.S. banking system after all the largest U.S. banks passed the Fed’s annual stress tests.
Fed Chair Powell reiterated his recent comments today at a conference in Madrid sponsored by the Bank of Spain. Mr. Powell said, “A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year. Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.” He said that the risks of doing too much or too little are “not in balance yet,” and that “It may be that we don’t move for a meeting and then move at a meeting. We haven’t taken consecutive moves off the table.”
The markets are currently discounting the odds at 86% for a +25 bp rate hike at the next FOMC meeting on July 25-26, the highest odds yet, after fresh hawkish comments by Fed Chair Powell today. The markets are now anticipating a peak funds rate of 5.43% by November, which is +36 bp higher than the current effective federal funds rate of 5.07%.
Atlanta Fed President Bostic, the FOMC’s most dovish member, reiterated today that he favors keeping rates unchanged, saying, “There is time for us to wait and let our policy work. I don’t see as much urgency to move as others, including my chair.”
In some good news released after Wednesday’s close, the Fed’s annual stress test results showed that all of the largest U.S. banks passed their respective stress tests, clearing the way for dividend payments to shareholders and stock buybacks. The report bolstered confidence that the largest Wall Street banks are in good shape, even if regional banks remain under pressure from the recent run and incoming losses from various credit sectors such as commercial real estate. The stress tests did not cover mid-sized U.S. banks. Fed Chair Powell has recently indicated that the Fed plans to raise capital requirements for U.S. banks in response to the recent runs. Fed Chair Powell today said the U.S. banking system is “strong and resilient.”
Q1 U.S. GDP was revised higher to +2.0% (q/q annualized) from +1.3%, stronger than expectations for an upward revision to +1.4%. Q1 personal consumption was revised higher to +4.2% from +3.8%. The GDP price index was revised slightly lower to +4.1% from +4.2%, while the core PCE inflation measure was revised slightly lower to +4.9% from +5.0%.
U.S. weekly initial unemployment claims fell by -26,000 to 239,000, which showed a stronger labor market than expectations of 265,000. Continuing claims fell by -19,000 to 1.742 million, which showed a stronger labor market than expectations of 1.765 million. However, the unemployment report may have been skewed by the Juneteenth holiday.
May U.S. pending home sales fell -2.7% m/m and -20.8% y/y, weaker than expectations of -0.5% m/m.
The preliminary June Eurozone EU-harmonized CPI of +0.4% m/m and +6.8% y/y was in line with market expectations.
The final-June Eurozone consumer confidence index was left unrevised at -16.1. June Eurozone economic confidence fell by -1.1 points to 95.3 from May’s revised 96.4, which was weaker than expectations for a decline to 95.7.
Japan’s June consumer confidence index rose +0.2 points to 36.2, slightly stronger than expectations for a +0.1 point increase to 36.1.
Overseas stock markets are mixed. The Euro Stoxx 50 is up +0.17%. China’s Shanghai’s Composite index today closed -0.22%. Japan’s Nikkei Stock Index today closed up +0.12%.
Today’s stock movers…
Several mega-cap stocks are undercutting the broad stock market, with Alphabet (GOOG) down -1.1%, Amazon.com down -1.0% (AMZN), and Microsoft (MSFT) down -0.7%.
Semiconductor stocks are having another rough day after falling on Wednesday on a report that the Biden administration is considering more restrictions on chip sales to China. Micron Technology (MU) is down -4.8% and is the largest loser in the Nasdaq 100 despite having reported above-consensus fiscal Q3 results and positive fiscal Q4 guidance. Other chip stocks are trading lower, with Intel (INTC), down -1.5%, Globalfoundaries (GFS) down -1.0%, and NXP Semiconductors (NXPI) down -0.8%, and Nvidia (NVDA) down -0.6%.
Wall Street banks are seeing support today after the Fed announced late Wednesday that all the largest U.S. banks passed their annual stress tests and will soon be allowed to announce dividends and share buybacks. Wells Fargo (WFC) is up +3.2%, Bank of America (BAC) is up +2.5%, JPMorgan (JPM) is up +2.4%, and Citigroup (C) is up +0.2%.
U.S.-listed Chinese stocks are seeing weakness again today after Wednesday’s news that the Biden administration plans to further restrict chip sales to China as the U.S. “de-risks” its relationship with China. PDD Holdings (PDD) is down -3.8% and JD.com (JD) is down -2.5%.
Netflix (NFLX) is up +0.2% on a rating upgrade by Citibank based on improved subscription figures resulting from its password-sharing crackdown and its ad-supported subscription plan.
Overstock (OSTK) is up +14% after announcing that it plans to relaunch the Bed Bath & Beyond brand online in the U.S. and Canada. Overstock bought Bed Bath & Beyond’s intellectual property assets after its bankruptcy filing.
Pfizer (PFE) is down -0.5% on a downgrade to neutral by Credit Suisse, with the analyst saying that Pfizer is entering a phase of uncertainty.
Across the markets…
September 10-year T-notes (ZNU23) today are down -1-03/32 points, and the 10-year T-note yield is sharply higher by +14.8 bp at 3.856%. T-note yields soared after Fed Chair Powell pointedly mentioned the possibility of more than two more rate hikes. That drove the odds for a rate hike at the next FOMC meeting up to a new high of 86%. T-note prices were also undercut by today’s upward Q1 GDP revision and the strong unemployment claims report.
The dollar index (DXY00) today is up +0.29% on the sharp rise in U.S. T-note yields on the hawkish Powell comments, which substantially improved the dollar’s interest rate differentials. EUR/USD (^EURUSD) is down -0.34%. USD/JPY (^USDJPY) is up +0.08%.
August gold (GCQ3) today is down -6.2 (-0.32%), and July silver (SIN23) is down -0.314 (-1.37%). Gold is being undercut by today’s hawkish Powell comments, the sharp rise in T-note yields, and the mildly higher dollar.
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.
