Stocks Rebound Higher as Deflator Report Supports Fed Rate-Cut Expectations

The S&P 500 Index ($SPX) (SPY) on Friday rose +1.14%, the Dow Jones Industrials Index ($DOWI) (DIA) rose +1.58%, and the Nasdaq 100 Index ($IUXX) (QQQ) rose +1.03%.

US stocks Friday rebounded higher on some bargain hunting after the rout seen on Wednesday and Thursday. Stocks also saw support from Friday’s US PCE deflator report, which was largely in line with dovish market expectations and supported the thesis for a Fed rate cut in September.

The Russell 2000 index on Friday rallied by +1.67%, besting the +1.14% rise in the S&P 500 index, as small-cap stocks extended this week’s rally.  The Russell 2000 rose by +3.35% on the week, much better than the comparable -0.95% performance of the S&P 500 index.  There was some rotation into small-cap stocks after the mega-cap tech stocks and chip stocks took a heavy hit this week and weighed down the S&P 500 index and Nasdaq 100 index.

Sep 10-year T-note prices rallied after the PCE deflator report and provided underlying support for stocks.  The 10-year T-note yield on Friday fell -4.9 bp.

Friday’s PCE deflator report was close to expectations and supported the case for a FOMC rate cut in September.  On a month-on-month basis, the June PCE deflator report of +0.1% m/m (headline) and +0.2% (core) was exactly in line with market expectations.  On a year-on-year basis, the June PCE deflator of +2.5% y/y was in line with market expectations, fell from +2.6% in May, and matched the 3-1/4 year low of +2.5% posted earlier this year.  The June core PCE deflator of +2.6% y/y was slightly stronger than expectations of +2.5% and was unchanged from May's 3-1/4 year low of +2.6%.

The fact that both the headline and core PCE deflators were at 3-1/4 year lows in June was a dovish factor for Fed policy.  Also, the headline deflator rose by only +1.5%, and the core deflator rose by +2.3%, on a 3-month annualized basis.

However, the headline deflator of +2.5% y/y and the core deflator of +2.6% y/y were still above the Fed's +2.0% inflation target, which means it might be premature for the Fed to declare success in meeting its inflation target.  That suggests that the market is correct in predicting that the FOMC, at its meeting next week, will leave rates unchanged but will also hint that a rate cut is likely at its next meeting in September.

In other US economic news, June US personal spending was in line with market expectations at +0.3% m/m, down from May's revised +0.4% (preliminary +0.3%).  However, the June US personal income report of +0.2% m/m was weaker than expectations of +0.4% and was down from May's revised report of +0.4% m/m (preliminary +0.5%).  Those reports suggested that US consumer spending is still holding up even as consumer finances deteriorate with less income.

Friday’s final-July University of Michigan US consumer sentiment index was revised upward by +0.4 points to 66.4 from the preliminary-July level of 66.0, which was slightly weaker than expectations for a +0.5 point upward revision to 66.5. The July level of 66.4 was an 8-month low and was down by -1.8 points from June's 68.2.

Stock investors will continue to focus on tech stocks, with key earnings reports on tap for next week. Magnificent 7 companies reporting next week include Microsoft (MSFT) on Tuesday, Meta (META) on Wednesday, and Apple (AAPL) and Amazon (AMZN) on Thursday.  Nvidia (NVDA) is expected to report earnings on August 28.  Tesla (TSLA) and Alphabet (GOOG) were the first of the Magnificent 7 to report earnings, with their reports this past Wednesday. 

The market consensus is that Q2 earnings for the S&P 500 companies will rise +9% y/y.  About one-third of the companies in the S&P 500 have reported thus far.  The majority of reporting companies have beaten their earnings consensus, but only 43% have beaten revenue expectations, the lowest percentage in five years, according to Bloomberg.

The markets are discounting the chances for a -25 bp rate cut at 5% for next week's FOMC meeting on July 30-31, and 100% for the following meeting on September 17-18 if the FOMC does not cut rates next week.

Overseas stock markets Friday closed mixed.  The Euro Stoxx 50 closed up +1.06%.  China's Shanghai Composite closed up +0.14%, snapping the string of four consecutive daily declines.  Japan's Nikkei Stock 225 Index closed down by -0.53%, extending its string to eight consecutive daily declines.

Interest Rates

September 10-year T-notes (ZNU24) Friday closed up +13 ticks.  The 10-year T-note yield fell by -4.9 bp to 4.192%.  T-note prices saw support from the PCE deflator report, the weaker-than-expected US personal income report of +0.2% m/m, and the slightly smaller-than-expected +0.4 point upward revision in the University of Michigan's US final-July consumer sentiment report.  T-note prices also had support from supply relief after the Treasury on Thursday concluded this week's T-note auctions.  In addition, T-note prices had support as the 10-year breakeven inflation expectations rate Friday fell -1.6 bp to 2.254%.

European government bond yields ended lower.  The 10-year German bund yield fell -0.1 bp to 2.407%.  The 10-year UK gilt yield fell -3.0 bp to 4.100%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 90% for the September 12 meeting.

US Stock Movers

Bitcoin rallied +3.8% on Friday, which boosted crypto-related stocks.  Marathon Digital (MARA) rose +6.50%, Coinbase (COIN) rose +5.07%, Riot Blockchain (RIOT) rose +4.52%, and Bit Digital (BTBT) rose +3.25%.

Chip stocks showed a partial recovery on Friday and were featured on the Nasdaq 100 leaderboard.  ON Semiconductor (ON), and KLA Corp (KLAC) showed gains of more than +3%.  Marvell Technology (MRVL), Qualcomm (QCOM), Analog Devices (ADI), NXP Semiconductors (NXPI), Texas Instruments (TXN), Microchip Technology (MCHP), and Applied Materials (AMAT) all closed up more than +2%.

Tesla (TSLA) and Alphabet (GOOG) continue to show weakness, with respective declines Friday of -0.07% and -0.15%.

Charter Communications (CHTR) rallied +16.62% and topped the Nasdaq 100 leaderboard after better-than-expected earnings.

3M (MMM) soared by +22.99% after boosting 2024 annual guidance as the company pursues its turnaround strategy.  3M topped the leaderboard for the Dow Jones Industrial Index and helped that index to outperform the S&P 500 and Nasdaq 100 indexes on Friday.

Baker Hughes (BKR) rallied +5.82% after reporting better-than-expected earnings.

Bristol Myers (BMY) rallied +11.59% after reporting better-than-expected Q2 earnings and revenue.

Biogen (BIIB) fell -7.03% after its Alzheimer's drug was rejected by European drug regulators.

Booz Allen (BAH) fell -8.83% after a disappointing earnings report.

Earnings Reports (7/29/2024)

McDonald's Corp (MCD), ON Semiconductor Corp (ON), Revvity Inc (RVTY), Loews Corp (L), Hologic Inc (HOLX), Equity Residential (EQR), F5 Inc (FFIV), SBA Communications Corp (SBAC), Welltower Inc (WELL).

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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.