Financial markets, which have been on a rollercoaster since mid-July, seem to have finally found their feet. There has been a recovery in recent days, although they are still not back to their highs for the year. Investors are increasingly liking the idea that cheaper money is on the horizon thanks to possible interest rate cuts. Today’s consumer price index data only reinforced their belief.
Yesterday, stock markets were a sea of green. In the US, it was a rich, dark green, while Europe was a more pastel shade. The Nasdaq 100, the index that measures the markets’ appetite for risk, rose 2.5%, marking its fourth straight day of gains. Investors are flocking to their favorite bets: Nvidia for AI, Eli Lilly for weight-loss drugs, and Tesla for… well, who knows? The most profitable bet of the day was the Starbucks-Chipotle pair, with Starbucks up 24.5% and Chipotle falling 7.5%. Brian Niccol, the man who turned Chipotle around, is now tasked with rescuing Starbucks from its crisis. One man’s promotion is another man’s demotion.
The ongoing rally in U.S. stocks was boosted by a modest, lower-than-expected increase in U.S. producer prices (PPI) in July, the latest in a series of lower-than-expected data that bolsters hopes for a Fed rate cut next month. Even Raphael Bostic, one of the Fed’s staunchest hawks, struggled to argue against monetary easing (though he tried valiantly). The favorable PPI reading gave investors optimism that today’s U.S. consumer price index (CPI) would also be modest. While the relationship between PPI and CPI is not always clear, it was reasonable to expect a low CPI, and that is what happened. In July, consumer prices rebounded slightly, rising 0.2%, according to the Bureau of Labor Statistics, after briefly falling 0.1% in June. Last year, the consumer price index (CPI) rose 2.9%, following a 3.0% increase in June. Economists had predicted this exact scenario. It’s almost as if they had a crystal ball – or just really good data models. Inflation is now slowly approaching the Federal Reserve’s 2% target. Excluding the ever-volatile food and energy components, core CPI rose 0.2% in July, up from 0.1% in June. Last year, core CPI rose 3.2%, the smallest year-over-year increase since April 2021. All of this favors a rate cut in September. This confidence is reflected in falling U.S. bond yields and rising expectations of a rate cut in futures contracts. There is some debate about whether the Fed will cut rates by 25 or 50 basis points, but a 50-point cut seems unlikely unless the economy warms up or cools dramatically. For now, Jerome Powell and his team are unlikely to hold their cards close to their chest. Futures on Wall Street turned from red to pale green after the data was released.
Meanwhile, New Zealand’s central bank cut its key interest rate overnight by 25 basis points (from 5.50% to 5.25%), after previously considering a 50-point cut. This unexpected decision sent the kiwi plummeting. New Zealand’s central bank rarely makes headlines in the world, but is considered an indicator of regional monetary policy, particularly that of Australia. Nothing against the central banks of Vanuatu or Fiji.
In China, one problem follows another. Recent data showed a decline in bank lending to the real economy in July, the first in 19 years. This is bad news for the Chinese economy, but fuels speculation about stimulus measures. Same story, different day. In Japan, the Nikkei 225 is hovering near equilibrium. Prime Minister Fumio Kishida, who took office in late 2021, announced he would step down next month. His popularity has waned and his party is mired in scandals. The Hang Seng lost 0.3%. The strong performance of American technology stocks is benefiting South Korea and Taiwan, which are up about 1%. India (+0.1%) and Australia (+0.3%) are more cautious. European indices are optimistic, driven by Wall Street’s strong close.
The economic highlights of the day:
The main indicators on Wednesday are UK inflation figures, France’s second estimate and Eurozone industrial production. In the US, July inflation and the Department of Energy’s crude oil inventories will round out the picture. The full agenda can be found here.
The dollar is worth 0.9076 EUR and 0.7785 GBP. An ounce of gold has fallen to USD 2,473. Oil is slightly down: North Sea Brent costs USD 80.74 per barrel and US light oil WTI USD 77.14. The yield on 10-year US debt has fallen to 3.86%. Bitcoin is trading at USD 61,000.
In company news:
- Alphabet – The U.S. Justice Department is considering several options, including breaking up Google, after a judge ruled that the company had illegally monopolized the online search market, Bloomberg News reported on Tuesday. The stock lost 1.2% before the open.
- Kellanova – Mars is close to an agreement to acquire the group for nearly $30 billion, a source familiar with the matter told Reuters on Tuesday. Mars will pay $83.50 per share in an all-cash transaction expected to be announced on Wednesday. At the close of trading on Tuesday, Kellanova’s share price was $74.5. The stock was up 8.1 percent before the open.
- Intel has sold its 1.18 million share stake in British chip designer Arm Holdings, regulatory documents show.
- Southwest Airlines – Elliott Investment Management wants to replace 10 of the airline’s 15 board members. The activist investor wants to replace the group’s CEO in order to improve the airline’s stock market performance. The stock rose 1.3% in premarket trading.
- General Motors – Texas Attorney General Ken Paxton has filed a lawsuit against General Motors alleging that the company sold private drivers’ data to several companies, including insurers, without their consent.
- Cardinal Health – On Wednesday, the pharmaceutical distributor raised its earnings target per share from at least $7.50 to $7.55 to $7.70. The share price rose 5.4 percent in premarket trading.
- Grail said on Tuesday that the company had cut about 350 jobs and would focus on developing Galleri, its flagship cancer detection test.
- Allstate – Meiji Yasuda Life Insurance will acquire American Heritage Life Insurance, a division of the U.S. insurance group, for about $2 billion, Nikkei reported on Wednesday.
Analyst recommendations:
- Ball Corporation: Baird upgrades the rating from “Neutral” to “Outperform” with a price target of $70.
- Emerson Electric Co.: JP Morgan downgrades the rating from “Overweight” to “Neutral” and lowers the price target from $132 to $115.
- Eqt Corporation: Wells Fargo upgrades the stock from “Equalweight” to “Overweight” and increases the price target from $40 to $42.
- Intuit Inc.: Morgan Stanley downgrades the stock from “overwt” to “equalwt” and reduces the price target from $750 to $685.
- Johnson Controls International Plc: RBC Capital upgrades the rating from “Underperform” to “Sector Perform” and increases the price target from $61 to $69.
- Medtronic Plc: Stifel downgrades rating to hold from buy and reduces price target to $85 from $100.
- Monolithic Power Systems, Inc.: William O’Neil & Co Incorporated is making upgrades to purchase the lost insurance coverage.
- Monster Beverage Corporation: Zacks downgrades the rating from “Neutral” to “Underperform” and reduces the price target from $53 to $39.
- Pultegroup, Inc.: Wolfe Research downgrades the rating from “outperform” to “peer perform”.
- Qualcomm, Inc.: President Capital Management Corp upgrades the rating to “Buy” from “Neutral” and increases the price target to $208 from $184.
- Starbucks Corporation: Stifel upgrades the stock from “Hold” to “Buy” and increases the price target from $80 to $110.
- Coherent Corp.: Barclays maintains its overweight rating and increases the price target to $85 from $66.
- Crowdstrike Holdings, Inc.: DA Davidson maintains a Buy rating and reduces the price target from $380 to $290.
- Lyft, Inc.: Roth Capital maintains its neutral rating with a price target reduced from $19 to $13.
- Monster Beverage Corporation: Zacks downgrades the rating from “Neutral” to “Underperform” and again reduces the price target from $53 to $39.
- Solaredge Technologies, Inc.: Makor Capital Ltd maintains its hold rating and reduces the price target from $65 to $34.
- Vornado Realty Trust: Barclays maintains its underweight rating and increases the price target from $21 to $27.
- Warner Bros. Discovery, Inc.: Citigroup maintains its buy rating and reduces the price target from $14 to $11.
- Domino’s Pizza Group Plc: Investec upgrades recommendation to Buy from Hold and increases price target to GBX 383 from GBX 355.
