Nasdaq rally spurred by improving inflation data

Nasdaq and tech stocks led equity markets higher this morning, supported by slightly better inflation data than expected, moderating rate hike fears, and this week’s favorable economic data overall. Apple's market cap hit $3 trillion on Friday, the second time since January 2022. Month-end portfolio repositioning and an upcoming Federal holiday on July 4, were also factors in the market rally, with traders placing bullish bets as we enter the second half of the year.

Bottom-line: Risk-on.

TODAY’S MAJOR NEWS

Fed’s favorite inflation measure moderates, consumer sentiment still strong

Today’s Personal Consumption Expenditures (PCE) inflation data gave traders a sense of optimism that the Federal Reserve ‘might’ back off of its hawkish stance. PCE inflation data, which the Fed historically favors, hasn’t thus far led the market to say that the Fed won’t do what it says that it will do, but it eases some fears that the Fed might prove to be more hawkish than it previously understood.

Better-than-expected consumer sentiment data for June reflects a striking upswing in attitudes among consumers – perhaps generated by the end of the debt ceiling crisis and a sense that inflation is softening. Even so, consumer’s views of their own personal financial situation were unchanged, as persistent high prices and expenses continue to weigh on consumers.

Today’s Fed fund futures trading, the market’s best guess on interest rates, still gives 84% odds of a 25-basis point rate hike when the Fed meets on July 25, 37% odds of an additional rate hike by the November meeting, but with benchmark rates falling as far as 4% by the end of 2024.

SEC nixes BTC ETF (again)

For several years the crypto industry has banked on gaining wider retail investment if Bitcoin ETFs were approved. Surprise, surprise. The SEC is reported to have commented that recent applications by major asset managers, like BlackRock and Fidelity, to launch Bitcoin ETFs were not sufficiently clear or comprehensive. It’s reported that these concerns were communicated to the Nasdaq and CBOE Global Markets exchanges, which recently filed applications on behalf of asset managers. Bitcoin’s recent rally, up 85% this year to $30,539, was in part driven by the anticipation of more accessible retail products. The SEC rejected dozens of spot bitcoin ETF applications on the basis that the filings did not meet the standards designed to prevent fraudulent and manipulative practices and protect investors and the public interest.

Chinese economy continues to cool, Western tech companies drawing back

Factory activity contracted in China for the third consecutive month in June, but by a narrower margin The service sector continued to post modest growth, albeit at a slower pace. That’s more concerning, since the service sector needs to carry China’s economy this year amid a loss of export trade to Europe and to the United States.

Foreign companies recently withdrew from Chinses trade shows, an interesting development in what appears to be a tech trade war. Samsung, Ericsson and Qualcomm were absent from the MWC Shanghai 2023 mobile industry event. The absence of these tech giants suggests that they may be shifting their focus away from China at a time when the US and the Netherlands are introducing restrictions on the export of AI chips to China.

Personal Consumption Expenditures inflation data moderating

• The Personal Consumption Expenditures (PCE) price index, a key inflation measure for the Fed, was up 3.8% year-on-year in May, again inline, down from 4.3% last month – that’s good news
• May’s PCE price index rose just 0.1% month-on-month in May, as expected, down from 0.4% in April
• Core PCE rose 4.6% year-on-year in May, a shade lower than expected, and down from 4.7% in April
• Core PCE price inflation, excluding more volatile food and energy, rose 0.3% month-on-month in May, down from 0.4% in April
• Personal incomes rose 0.4% month-on-month in May, as expected, up from 0.3% last month
• Personal consumption expenditures rose 0.1% month-on-month in May, down from 0.6% in April

Better consumer sentiment data, moderating inflation expectations

• The final consumer sentiment index for June came in at 64.4, up slightly from a preliminary estimate of 63.9, according to data from a survey carried out by the University of Michigan
• Today's final number is up from 59.2 in May, and it is up considerably from the 50.0 registered in June of last year
• The survey’s year-ahead inflation expectations receded for the second consecutive month to 3.3%, down from 4.2% in May – the lowest since March of 2021
• The current economic conditions index rose to 69.0 in June, up from 64.9 in May, and up from 53.8 the previous year.
• The index of longer-term economic expectations rose to 61.5 this month, up from 55.4 in May, and up from 47.5 a year ago

TODAY’S MAJOR MARKETS

Equity markets

• The Nasdaq Composite and S&P 500 were markedly higher in morning trade, up 1.5% and 1.2% respectively, with the more broadly-based Russell 2000 up 0.8%
• Global markets continue to be un-inspired, with the DAX and FTSE 100 up 1.3% and 0.8%, respectively, while the Nikkei 225 was down 0.1%
• The VIX, Wall Street’s fear index, fell again close to a 12-month low at 13.1

Currencies and Bonds

• The dollar index fell 0.5% against a basket of currencies to 102.8, reflecting moderating interest rate expectations
• Euro/dollar and Sterling/dollar cross-rates rose by 0.5% and 0.9%, respectively
• Bond yields fell after yesterday’s rise, with yields on 2- and 10-year Treasuries down to 4.87% and 3.81% respectively

Commodities

• Gold prices were 0.6% higher at $1,929 per ounce
• Crude oil prices rose 0.8% to $70.4 per barrel
• Grain and oilseed markets are reacting to today's USDA quarterly stocks and planted acreage reports with smaller corn, soybean and wheat stocks, and much higher corn and much lower soybean acreage

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com