This morning, we received a few key reports on the U.S. economy before the start of trading and will also get the latest reading on manufacturing activity from the Institute for Supply Management a half-hour into the trading session. However, the direction of trading is again likely to be driven by the latest Federal Reserve monetary policy decision and commentary, which we received yesterday afternoon (see below).
At 8:30 A.M. (EDT), we learned that initial jobless claims for the week ending July 27th totaled 249,000 which was up 14,000 from the prior week’s revised figure and the highest level since August of 2023. In a separate release, the Labor Department reported that nonfarm productivity increased by 2.3% in the second quarter, which was up sharply from the previous tally of 0.4% and was accompanied by a drop in unit labor costs. The increased productivity is a good sign for the Federal Reserve in its battle to tame inflation. A more-efficient labor market can put downward pressure on wages. The equity futures, which were higher heading into the aforementioned economic releases, are still presaging an up opening when trading kicks off stateside. The drop in Treasury yields—the rate on the 10-year Treasury note, at just over 4.00%, fell to its lowest level since March—and some good quarterly results from the technology sector are giving a boost to equities this morning.
As expected, the Federal Open Market Committee (FOMC) kept the key federal funds rate steady at 5.25% to 5.50%. However, it did change the language in the statement, compared to recent meeting releases, striking a more-dovish tone and possibly set the stage for a rate cut at the next (September) FOMC meeting if inflation moderates further and the labor market shows some continued softening. Of note, the Fed statement said inflation has eased, but remains somewhat elevated. The addition of the word “somewhat” raised sentiment that the central bank is close to being comfortable enough to begin the interest-rate policy pivot. Fed Chairman Jerome Powell reiterated such in his post-decision press conference saying: “the economy is moving closer to the point of reducing the policy rate.” He also did not rule out an interest-rate cut as soon as the September FOMC meeting, but again reiterated that central bank policymakers will remain data dependent. Equities typically get a boost from an interest-rate reduction or even increased talk of loosening the monetary reigns. That certainly was the case yesterday on the final trading day of July.
The major equity averages, which typically trade in a tight band ahead of a Fed statement, moved notably higher yesterday, fueled by a strong showing from the technology sector. The tech stocks reacted very positively to Microsoft’s (MSFT) latest quarterly results. Although the technology behemoth disappointed Wall Street with its cloud revenue growth, investors liked remarks from the company that it plans to continue spending heavily in the artificial intelligence “arms race.” That would likely be a continued catalyst for processing chips demand and a boon for the semiconductor and semiconductor equipment makers. Those companies, which produce the high-powered memory chips to run large language models, are the profitable suppliers in the race to add AI to the corporate world. Shares of NVIDIA (NVDA), Broadcom (AVGO), and ASML Holdings (ASML) rallied forcefully.
The higher-growth technology sector also got a boost from hopes that the Federal Reserve would deliver a more-dovish message on monetary policy, and the central bank did not disappoint with the release of its July statement at 2:00 P.M. (EDT). The technology-dominated NASDAQ Composite and broader S&P 500 Index jumped 2.6% and 1.6%, respectively, during yesterday’s highly bullish session. The blue-chip Dow Jones industrial Average did pare a good deal of its earlier gains by the closing bell, as there was a notable increased appetite for riskier assets on Wall Street. The dovish monetary policy commentary also played a role in the small-cap Russell 2000 hitting a 52-week high.
Another noteworthy development yesterday was the increase in the price of oil. Crude quotations spiked on news that a senior leader of Hamas was killed. That bulletin raised the possibility of an escalation in geopolitical tensions in the Middle East, which could potentially lead to disruptions in global oil supplies. This bears close watching, as the specter of higher energy costs could throw a monkey wrench into the Fed’s goal of reducing inflation, as oil is a major component in the production of many goods and services. The stocks of the major oil producers and refiners rose on the possibility that the aforementioned rising geopolitical tensions could put upward pressure on the price of crude.
The first day of August also brings a heavy dose of quarterly results from Corporate America. After yesterday’s closing bell, the headline report came from Meta Platforms (META), with the social media and technology giant reporting better-than-forecast revenue and earnings-per-share results. Revenues climbed significantly, helped by digital advertising. The company also raised the low end of its capital spending guidance with a focus on artificial intelligence. But what Wall Street seemed to like most was that Meta Platforms outpaced its peers in the area of top-line growth. Meta stock is looking at a higher opening this morning. Likewise, Qualcomm (QCOM) beat consensus forecasts on both the top and bottom lines and raised its guidance, citing heightened demand for the company’s semiconductor chips. Fellow semiconductor maker ARM Holdings (ARM) also surpassed revenue and earnings-per-share estimates, but the stock is trading lower in pre-market action on revenue guidance that disappointed Wall Street. After the close of trading today, all eyes will be on the release of quarterly results from Amazon.com (AMZN) and Apple (AAPL), two of the “Magnificent Seven” companies. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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