Stocks Rally After Favorable Inflation Report

Rich Asplund - Barchart - Fri Jun 30, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed up +1.23%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.84%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.60%.

Stocks rallied after Friday’s PCE deflator report was mildly favorable and could encourage the Fed to be less hawkish. Stocks also saw support from Friday’s +0.5 point upward revision in the University of Michigan’s U.S. consumer sentiment index to a 4-month high.

The U.S. Supreme Court Friday struck down President Biden’s plan to forgive student debt, which is a negative factor for consumer spending when student loan payments are due to restart in October.

Friday’s May PCE deflator, the Fed’s preferred inflation measure, rose +0.1% m/m and +3.8% y/y, which was in line with market expectations. The May core PCE deflator rose +0.3% m/m, which was in line with market expectations, but the May core PCE deflator on a year-on-year basis rose by +4.6%, which was slightly weaker than market expectations of +4.7%.

The deflator report showed that inflation is going in the right direction, with the headline deflator easing to +3.8% y/y from April’s revised +4.3%, and the core deflator easing to +4.6% y/y from April’s +4.7%. Still, the Fed will remain worried about sticky core inflation, with the core deflator still at a very high +4.6% y/y, far above the Fed’s +2% inflation target.

May U.S. personal income rose +0.4% m/m, slightly stronger than expectations of +0.3%, although April was revised lower to +0.3% m/m from +0.4%. May U.S. personal spending rose by +0.1% m/m, slightly weaker than expectations of +0.2%, and April was revised lower to +0.6% m/m from +0.8%. May real personal spending was unchanged m/m after a revised +0.2% m/m increase in April.

The final-June University of Michigan U.S. consumer sentiment index was revised higher by +0.5 points to a 4-month high of 64.4, stronger than expectations for no revision. The revision left the index up by +5.2 points from May’s level of 59.2.

The markets are discounting the odds at 81% for a +25 bp rate hike at the next FOMC meeting on July 25-26. The markets are anticipating a peak funds rate of 5.42% by November, which indicates that the market is discounting an overall rate hike of +33 bp through November from the current effective federal funds rate of 5.07%.

China’s PMI reports overnight were roughly in line with market expectations but reinforced the view that China’s economy is losing steam after an initial post-Covid boom. China’s June manufacturing PMI rose +0.2 points to 49.0, which was in line with market expectations but remained below the expansion-contraction level of 50. China’s June non-manufacturing PMI fell -1.3 points to 53.2, weaker than market expectations for a decline to 53.5.

The June Eurozone CPI report of +0.3% m/m was in line with market expectations. The June CPI on a year-on-year basis eased to +5.5% y/y from May’s +6.1% y/y and was slightly weaker than market expectations of +5.6%. The June core CPI rose slightly to +5.4% y/y from May’s +5.3% but was slightly weaker than market expectations of +5.5% y/y.

The May Eurozone unemployment rate was unchanged from April at 6.5%, in line with market expectations.

Overseas stock markets closed mixed. The Euro Stoxx 50 closed up +1.02%. China’s Shanghai Composite index closed +0.62%. Japan’s Nikkei Stock Index closed down -0.14%.

Today’s stock movers…

Market breadth was highly bullish Friday, with all but eight of the Nasdaq 100 components showing gains. Nvidia (NVDA) showed a +3.63% gain, while notable stocks with rallies of more than +2.0% included Netflix (NFLX) and Airbnb (ABNB). Meta (META) closed up +1.94%, Amazon.com (AMZN) closed up +1.92%, Tesla (TSLA) closed up +1.66%, and Microsoft (MSFT) closed up +1.64%.

Apple (AAPL) rallied +2.31% and made Wall Street history by being the first company ever to exceed $3 trillion in market cap.

Chip stocks rallied Friday, led by the +3.63% gain in Nvidia (NVDA). Semiconductor stocks with gains of more than +2% included Microchip Technology (MCHP), ON Semiconductor (ON), NXP Semiconductors (NXPI), Marvell Technology (MRVL), AMD (AMD), and Globalfoundaries (GFS).

Carnival (CCL) rallied +9.73% after an upgrade by Jefferies to buy from hold.

XPeng (XPEV) rallied +13.44% after the company announced its new G6 electric SUV.

Citi initiated research coverage at a buy for Juniper Networks (JNPR), which closed up +1.46%, and for Keysight Technologies (KEYS), which closed up +1.28%. Citi initiated coverage at neutral for Cisco Systems (CSCO) (up +1.03%) and Arista Networks (ANET) (up +1.74%).

Accolade (ACCD) closed up +6.57% after management issued stronger-than-expected guidance for Q2 revenue.

Across the markets…

September 10-year T-notes (ZNU23) Friday closed up +2 ticks, and the 10-year T-note yield rose +0.2 bp to 3.841%. The 10-year T-note yield Friday closed little changed after soaring by +15 bp on Thursday due to Fed Chair Powell’s mention of the possibility of more than two rate hikes. T-note prices Friday saw support from the generally favorable U.S. deflator report and the slightly weaker-than-expected U.S. personal spending report.

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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.