Market Update - July 29

The major indices nudged higher on Monday in front of a busy week of market-moving events. The Dow Jones Industrial Average registered its eleventh consecutive gain as many blue chip stocks outperformed.

Monday's more deliberate approach to buying was reflected in low volume and a mixed advance-decline line that saw advancing issues outpace declining issues at the NYSE and declining issues outpace advancing issues at the Nasdaq.

Treasuries started the session with gains after a slate of discouraging preliminary July Manufacturing and Services PMI readings out of the eurozone. Meanwhile, the preliminary July S&P Global US Manufacturing and Services PMIs were mixed, showing some improvement in manufacturing versus June while services activity decelerated some versus June.

Yields ultimately settled close to their highs for the day as the market digested an okay 2-yr note auction and readied itself for a $43 bln 5-yr note auction on Tuesday. The 2-yr note yield rose three basis points to 4.88% and the 10-yr note yield rose one basis point to 3.86%.

Reviewing Monday's economic data:

• July S&P Global US Manufacturing PMI - Prelim 49.0; Prior 46.3
• July S&P Global US Services PMI - Prelim 52.4; Prior 54.4

The major indices closed with gains after the S&P 500 and Dow Jones Industrial Average each hit new 52-week highs at their best levels of the day. The DJIA also logged its twelfth straight winning session. Strength from some mega cap stocks helped to boost index performance.

Blue chip companies dominated the earnings calendar since yesterday's close and largely received positive reactions from market participants, acting as added support for the market. Packaging Corp. (PKG), General Electric (GE), 3M (MMM), Dow, Inc. (DOW), Nucor (NUE), and Sherwin-Williams (SHW) were among the standouts following their earnings reports.

Tuesday's positive bias was also supported by the July Consumer Confidence Index, which showed the highest reading since July 2021, driven both by a pickup in views about current conditions and the outlook.

The industrials sector (-0.1%) was a notable laggard, weighed down by a big decline in RTX (RTX), which lowered its free cash flow guidance for the year due to a need to inspect a significant portion of the PW1100G-JM engine fleet after finding that a powdered metal used in the production of those engines has a contaminant in it.

In other corporate news, the International Brotherhood of Teamsters and UPS (UPS) announced that they have reached a five year tentative collective bargaining agreement.

Banc of California (BANC) is in advanced discussions to buy PacWest (PACW), according to The Wall Street Journal.

Reviewing Tuesday's economic data:

• The FHFA Housing Price Index rose 0.7% in May following a 0.7% in the prior month.
• The S&P Case-Shiller Home Price Index fell 1.7% in May (Briefing.com consensus -1.9%) following a 1.7% decline in the prior month.
  The Conference Board's Consumer Confidence Index jumped to 117.0 in July (Briefing.com consensus 111.5) from an upwardly revised 110.1 (from 109.7) in June. In the same period a year ago, the index stood at 95.3.
  • The key takeaway from the report is that the uptick in consumer confidence was driven both by a pickup in views about current conditions and the outlook, which are an offshoot of better feelings about inflation coming down and the labor market remaining tight.

Wednesday's trade was mixed as market participants reacted to a heavy batch of earnings, the latest policy move by the FOMC, and Fed Chair Powell's subsequent commentary. 

The market reaction to the policy directive was relatively muted as investors looked ahead to Fed Chair Powell's press conference, which induced some whipsaw price action for the major indices. By and large, the Fed Chair was non-committal about the next move. Ultimately, the major indices closed near where they were trading before the policy directive was released at 2:00 p.m. ET. 

Expectations for a second rate hike at any of the meetings before the end of the year were largely unchanged. According to the CME FedWatch Tool, probability of a second rate hike at any of the remaining FOMC meetings this year remains under 40%.

On the earnings front, Microsoft (MSFT) and Alphabet (GOOG) were among the more influential movers, garnering mixed reactions from investors, along with Visa (V), Boeing (BA), Coca-Cola (KO), and AT&T (T).

The broader market held up fairly well today as evidenced by the 0.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP) while the market-cap weighted S&P 500 closed flat.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index fell 1.8% with purchase applications dropping 3.0% and refinance applications remaining flat from last week.
• New home sales decreased 2.5% month-over-month in June to a seasonally adjusted annual rate of 697,000 units (Briefing.com consensus 722,000) from a downwardly revised 715,000 (from 763,000) in May. On a year-over-year basis, new home sales were up 23.8%.
  • The key takeaway from the report is that new home sales activity, which is measured on signed contracts, was crimped in June by rising mortgage rates that created added affordability pressures.
• The weekly EIA crude oil inventories showed a draw of 600,000 barrels after last week's draw of 708,000 barrels.

The market started the session in rally mode. A nice gain Meta Platforms (META), which reported pleasing earnings and outlook, had initially sparked some buying interest in the mega cap space, helping to bolster index gains.

Stocks started to rollover around 1:00 p.m. ET with several potential catalysts to account for the move. There was a Nikkei report that the BOJ is going to discuss possible changes to its yield curve control policy at Friday's meeting. This news piqued concerns about a possible unwinding of some carry trades that have been supportive for U.S. asset prices.

That news hit around the same time that the $35 billion 7-yr note auction was met with underwhelming demand.

Coincidentally, the S&P 500 was met with resistance on a retest of the 4,600 level around the same time that the BOJ news and 7-yr note auction results hit. The failure to meaningfully break above 4,600, paired with the aforementioned news items, drove participants to take some money off the table in a market that many believe is due for a pullback.

Many stocks participated in the afternoon sell off. Declining issues had a 7-to-2 lead over advancing issues at the NYSE and a better than 5-to-2 lead at the Nasdaq.

The ECB followed suit the FOMC rate hike with a 25 basis points increase in its three key lending rates, although there is some speculation, driven by the language in its directive, that the ECB could also be close to being done raising rates.

Reviewing Thursday's economic data:

• Initial jobless claims for the week ending July 22 decreased by 7,000 to 221,000 (Briefing.com consensus 233,000). That is the lowest level since February. Continuing jobless claims for the week ending July 15 decreased by 59,000 to 1.690 million, also the lowest level since February.
  • The key takeaway from the report is much the same: the low level of initial claims -- a leading indicator -- is a reflection of employers seeing demand holding up well enough such that they are reluctant to let go of employees in a tight labor market.
• The Adv. Q2 GDP report showed real GDP increasing at an annual rate of 2.4% (Briefing.com consensus 1.6%) following a 2.0% increase in the first quarter, although consumer spending slowed to an annual rate of 1.6% from a heady 4.2% in the first quarter. The GDP Price Deflator dropped to 2.2% from 4.1% in the first quarter.
  • The key takeaway from the report is an obvious one: the U.S. economy was a long way from a recession in the second quarter. Real final sales of domestic product, which exclude the change in private inventories, were up 2.3%
• June durable goods orders increased 4.7% month-over-month in June (Briefing.com consensus 1.0%) following an upwardly revised 2.0% (from 1.7%) in May. Excluding transportation, durable goods orders increased 0.6% month-over-month in June (Briefing.com consensus 0.2%) following an upwardly revised 0.7% increase (from 0.6%) in May.
  • The key takeaway from the report is that new orders were up across most durable goods categories, reflecting continued demand for an economy that continues in a growth mode.
• The June Adv. International Trade in Goods deficit narrowed to $87.1 billion from $91.1 billion. Separately, Adv. Retail Inventories were up 0.7% and Adv. Wholesale Inventories were down 0.3%.

The stock market bounced back from Thursday's afternoon sell off, sticking to its winning formula of buying on weakness. The mega cap stocks were favored attractions in that respect, logging sizable gains that boosted index performance. Many other stocks, though, participated in today's rally. The major indices registered gains ranging from 0.5% to 1.9%.

Some notable stocks that reported earnings since yesterday's close garnered positive reactions from investors, acting as added support for the broader market. Intel (INTC), Procter & Gamble (PG), and Roku (ROKU) were among the more influential standouts in that regard.

Also, the June Personal Income and Spending Report was generally supportive of the soft landing narrative, which was another source of support for stocks. Specifically, the report showed a solid increase in real personal spending and ongoing disinflation for the PCE and core-PCE Price Indexes.

Elsewhere, the Bank of Japan surprised market participants when it voted to conduct its yield curve control policy with greater flexibility, saying it will maintain the target rate at 0.5%, but will offer to purchase 10-yr JGBs at 1.0% every business day through fixed-rate purchase operations. The yen rallied initially on this news but soon lost steam as the dollar rallied back in a big way, supported presumably by short covering activity. Down nearly 1.0% at one point, the USD/JPY pair was up 1.2% to 141.13 as of this writing.

Reviewing Friday's economic data:

• Personal income increased 0.3% month-over-month in June (Briefing.com consensus 0.5%) following an upwardly revised 0.5% increase (from 0.4%) in May. Personal spending increased 0.5% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.2% increase (from 0.1%) in May. The PCE Price Index was up 0.2% (Briefing.com consensus 0.2%) and the core-PCE Price Index, which excludes food and energy, was also up 0.2%, as expected.
  • The key takeaway from the report was a combination of solid spending, evidenced by a 0.4% increase in real personal spending, and ongoing disinflation, evidenced by the 3.0% year-over-year increase in the PCE Price Index, which was down from 3.8% in May, and the 4.1% year-over-year increase in the core-PCE Price Index, which was down from 4.6% in May.
• The Q2 Employment Cost Index showed compensation costs for civilian workers increasing 1.0% (Briefing.com consensus 1.1%), seasonally adjusted, for the three-month period ending in June 2023 versus a 1.2% increase for the the three-month period ending in March 2023.
  • The key takeaway from the report is that it featured a deceleration in employment costs, which should be comforting for the market and the Fed.
• The final July University of Michigan Consumer Sentiment Index checked in at 71.6 (Briefing.com consensus 72.6) versus the preliminary reading of 72.6. The final reading for June was 64.4. In the same period a year ago, the index stood at 51.5.
  • The key takeaway from the report is that consumer sentiment about the economic outlook has improved with the slowdown in inflation and the ongoing stability in labor markets.