Traders look for rate cuts, Tech stocks rally

Tech stocks led a morning rally in anticipation of earnings results from Google and Microsoft after the close, both up 1.4%, and tomorrow's highly anticipated quarter point interest rate hike from the Federal Reserve. Numerous economic data points signal that previous rate hikes are working, and should justify a pivot by the Fed next year; however, several data points suggest that the economy remains resilient, with inflationary factors still intact, arguing for the Fed to remain hawkish. Hearing what Fed chair Powell has to say will be instructive.

Bottom-line: Risk-on.

TODAY’S MAJOR NEWS

Traders look beyond the next rate hike to rate cuts – but is this too optimistic?

The Federal Reserve begins two days of meetings this morning to discuss potential changes in monetary policy, with a statement and press conference due tomorrow. Traders are convinced that the Fed will bump up its benchmark interest rate by 25 basis points, but with only than 30% odds that we’ll see another rate hike later in the year, before rates start to fall next year.

What has the Fed said about its objectives? The Fed repeatedly stated its commitment to its 2% inflation mandate, and the challenges that wage inflation and shelter present in reaching that objective. Shelter indicators are trending lower, although sustaining the move amid improving consumer sentiment may prove difficult when housing supplies remain tight. The jobs sector remains tight, with recent data points indicating that it is again getting tighter. That doesn’t mean that rates necessarily need to go higher, but it does suggest that they may stay higher for longer than the market currently anticipates, until more pain is inflicted on the economy.

What if commodity inflation returns? Declining commodity prices have been a major contributor to pulling the headline inflation number back down to 3%, but this appears to be ending. Oil prices broke higher above chart resistance at the 200-day moving average on Monday, signaling a belief in higher prices. Food-based commodities are also on the rise, driven by fears that Russia will continue to destroy Ukraine’s ability to deliver corn and wheat and dissuade farmers from planting crops they cannot sell.

Nasdaq, S&P 500 highs is multiple driven

The Nasdaq Composite and the S&P 500 indexes are up close to 34% and 19% respectively in the year-to-date, with little change in earnings expectations and a discount rate, the 10 year US bond yield, stuck in a 3.5-4.0% trading range. As our colleague Vincent Deluard has commented, “Stocks’ rally since October (2022) has been entirely driven by multiple expansion, especially for large cap growth stocks … while a stock market correction might be required to bring broad indices close to fair value, and the much-hyped tech growth stocks could fall more than the broad averages.” Multiple-driven rallies can be fickle if and when investor sentiment changes.

Is the surge in stocks P/Es justified?

Consumer confidence ticks up in July, but recession is still on consumer’s minds

• The Conference Board’s Consumer Confidence Index rose to 117.0 in July, well ahead of the anticipated 112.0, and the highest reading in two years and up from the revised 110.1 in June
• The board’s survey found consumers' 12-month expectations of a US recession increased in July, but remained below the recent peak earlier in the year – 70.6% of consumers say a recession is "somewhat" or "very likely," up from 69.9% in June

TODAY’S MAJOR MARKETS

Equity markets

• Markets rallied ahead of tech results with the Nasdaq up 0.8%, with the S&P 500 and Russell 2000 up 0.4% respectively
• Global markets were flat with the FTSE was up 0.2%, while Nikkei 225 and DAX unchanged
• The VIX, Wall Street’s fear index, was unchanged at 13.9

Currencies and Bonds

• The dollar index was unchanged against a basket of currencies, at 101.4
• Sterling cross rates were up 0.4%, while the Euro and Yen both fell 0.2%
• Bonds were unchanged, with yields on 2- and 10-year Treasuries at 4.91% and 3.90% respectively

Commodities

• Crude oil prices rose 1.4$ to $79.8 per barrel, now up 12% in the past month
• Silver rose 1.0% to $24.8 per ounce, while gold rose 0.2% at $1,965 per ounce
• Grain and oilseed prices were mostly lower this morning, albeit well off session lows, on profit taking in an uptrend

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]