At 8:30 A.M. (EDT), the Labor Department reported that the Producer Price Index (PPI) fell 0.5% on a month-to-month basis in July, which was a vast change from the 1.1% gain registered in June. On a 12-month basis, the PPI rose 9.8%, which also was a moderation from the previous-month’s figure. Both readings, when stripping out the volatile food and energy components to yield the so-called “core” figures, also came in below expectations. This, along with yesterday’s lighter-than-expected readings on consumer prices has emboldened the bulls and kicked off a buying spree on Wall Street. Meanwhile, initial weekly jobless claims for the week ending August 6th ticked up slightly, to 262,000, but that was not unexpected, given the Fed’s recent attempt to slow growth and fight inflation.
The eyes of Wall Street have been fixated on the latest inflation data from the Department of Labor, and the reaction to the reports has been the driving force behind trading in both the equity and bond markets. The inflation data are likely to weigh heavily into the next monetary policy decision by the Federal Reserve Open Market Committee (FOMC), explaining the huge investor reaction the reports have been drawing the last few days. After a forceful rally during yesterday session, which saw the Dow Jones Industrial Average, the technology-heavy NASDAQ Composite, and the broader S&P 500 Index jump 1.6%, 2.9%, and 2.1%, respectively, the equity futures are pointing to a continuation of that strong buying when trading kicks off stateside.
The investment community viewed the latest pricing data as a sign that inflation may have peaked earlier this year and perhaps the July CPI and PPI readings may serve as an inflection point for Federal Reserve in its fight to tame inflation. After two very aggressive three-quarter point hikes to the benchmark short-term interest rate, Wall Street, prompted by the tamer inflation data, is now thinking that the central bank may only raise the federal funds rate by a 0.50% at its September FOMC meeting. That sentiment has changed rapidly after a strong labor report last week, which showed the creation of 528,000 jobs last month, brought talks of another 0.75% hike next month. That said, between now and the next FOMC confab, we will get another round of inflation data and the central bank leaders will hold their annual Jackson Hole, Wyoming get together, so this remains a highly fluid situation and may bring some more twists and turns.
The lighter-than-expected pricing data drove Treasury market yields lower and provided a big impetus for technology stocks, especially those of the less profitable companies. Those entities are valued on potential cash flows and lower “discount rates” applied by analysts and investors on the basis of lower prevailing interest rates increase their appeal, especially to the risk-tolerant investor. Still, the thought of a slightly less-restrictive central bank in the months ahead was a big catalyst for the broader equity market. The CBOE Volatility Index (VX) fell below 20 yesterday, an indication that Wall Street’s appetite for more risky assets has increased in recent weeks.
Meantime, we did get some important news from Corporate America since yesterday’s closing bell. This came in the form of the latest quarterly report from entertainment giant Walt Disney (DIS). The Dow-30 component reported better-than-expected top- and bottom-line results, driven by a jump in parks visitation and an increase in streaming service subscribers. It now has more subscribers than main competitor Netflix (NFLX). The stock, which has been slammed this year, is rallying in extended hours trading. The question going forward for Disney is how the company, which is heavily reliant on consumer discretionary spending, will perform if the economy goes into a recession after all.
On the other hand, the stock of fellow theme parks operator Six Flags (SIX) is down sharply after the company reported that a notable drop in year-over-year park attendance figures (-22%) led to a revenue miss in the latest quarter. Likewise, shares of Sonos (SONO) tumbled after the audio systems maker posted weak results and announced that it has parted ways with its CFO.
Overall, the investment community has taken the lighter-than-expected price gains and resultant drop in bond yields and run with it the last few days, with buying rather broad-based. In particular, the thought of a moderation in prices has been a big catalyst for the consumer discretionary and technology stocks. Going forward, it will be interesting to see if the former group can maintain the recent gains, especially with all signs pointing to a Fed-driven slowing economy and the battle against inflation still far from over. Our sense is that the gains in the consumer discretionary sector will be harder to come by through year’s end, especially if the economic data were to disappoint over the fall and winter months. Of note, tomorrow morning will bring the first August reading on consumer sentiment from the University of Michigan.
− William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
