U.S. Indexes May Have to Adjust to the Growing Possibilities of Higher-for-Longer Inflation

Alexander Garcia
14 May, 2024
Miami

Benchmark indexes on Wall Street meandered after hotter-than-expected producer price inflation raised the prospect of interest rates staying higher for longer. 

This week, two inflation reports are expected to garner investors' attention because the updates on price pressure provide key input to policymakers in determining the level of interest rates. 

Factory gate prices rose 0.5%, surpassing the 0.3% estimated by the Ticker.com survey. 

The higher-than-expected producer price inflation dashed hopes that the Federal Reserve would lower rates toward the end of the year. 

Investors shifted their attention to the consumer price inflation report on Wednesday, after the release of the producer price inflation update today. 

Investors are anticipating monthly inflation to slow to 0.3% from 0.4% in March and the annual pace to ease to 3.6% from 3.8%, respectively. 

Investors also reviewed the latest batch of earnings, including results from Alibaba Group and Home Depot and AMC Entertainment raised $250 million through a secondary offering.  

Meme stocks soared after the man behind the "Roaring Kitty" social account, which powered the frenzy to buy stocks that are heavily shorted, posted for the first time in three years. 

 

Producer Prices Advanced in April

Producer price index increased 0.5% in April from the previous month and rose 2.2% from a year ago, the U.S. Bureau of Labor Statistics reported Tuesday. 

Goods costs rose 0.4% after falling 0.2% in March, and service prices increased 0.6% from the previous month, following the downwardly revised 0.1% decline in March. 

Core producer prices on a monthly basis rose 0.5% and advanced 2.4% on an annual basis from the downwardly revised 2.1% in March. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.02% to 5,222.78, and the Nasdaq Composite fell 0.3% to 16,394.49. 

The yield on 2-year Treasury notes edged lower to 4.85%, 10-year Treasury notes inched lower to 4.48%, and 30-year Treasury bonds edged lower to 4.63%.

WTI crude oil increased $0.14 to $79.15 a barrel, and natural gas prices decreased 3 cents to $2.34 a thermal unit.

Gold increased by $5.83 to $2,344.07 an ounce, and silver rose 9 cents to $28.36. 

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 105.21.

 

U.S. Stock Movers

Home Depot declined 0.9% to $338.0 after the home improvement retailer reported weaker-than-expected results in the first quarter. 

Comparable sales in the first quarter declined by 2.8%, and in the U.S. they fell by 3.2% from a year ago. 

Revenue in the first quarter ending in April declined 2.3% to $36.4 billion from $37.3 billion, net income dropped 7% to $3.6 billion from $3.87 billion, and diluted earnings per share fell to $3.63 from $3.82 a year ago. 

The specialty retailer said fiscal 2024 sales are likely to decrease 1.0%, including the 53rd week, but excluding the recent acquisition of SRS Distribution Inc. 

Home Depot anticipated comparable same-store sales to fall 1% for the 52-week period, but 53-week diluted earnings per share to increase 1.0%. The 53rd week is expected to contribute 30 cents of diluted earnings per share. 

Games Global Limited said it plans to postpone its initial public offering, citing uncertain market conditions, which was previously scheduled for May 14. 

The online casino game supplier was looking to sell 14.5 million shares at a price between $16 and $19 per share. 

Shares of AMC and GameStop shot up in early trading following the resumption of social media postings by "Roaring Kitty." 

GameStop catapulted 130% to $69.67, and AMC Entertainment Holdings soared 123% to $11.81. 

Alibaba Group declined 5% to $80.39 after the China-based online e-commerce platform operator reported higher-than-expected revenue and said net income plunged 86% as the company stepped up investment in artificial intelligence tools. 

 

European Markets Trade Near Record Highs

European markets traded around the flatline, and the euro edged higher in Tuesday's trading. 

Benchmark indexes in Paris, London, and Frankfurt edged up, and bond yield advanced amid interest rate uncertainty as investors debated reviewed the latest update on German inflation and UK's labor market update. 

 

German CPI Holds Steady in April

Germany's consumer price inflation was confirmed at 2.2% in April, matching the annual rate in March, and the preliminary report released on April 29 was unrevised, the Federal Statistical Office, or Destatis, reported Tuesday. 

Retail inflation dropped to the lowest level since May 2021, while the EU harmonized inflation inched slightly higher to 2.4% from 2.3% in the preliminary estimate. 

 

German Investor Morale Improves to a 26-month High

German investor morale improved and surged to the highest level in May since February 2022, the Centre for European Economic Research reported Tuesday. 

The ZEW Indicator of Economic Sentiment increased to 47.1 in May from 42.9 in April, the tenth consecutive month of improving confidence among financial experts, driven in part by the indications of German economic recovery and better-than-expected first-quarter GDP growth.

The British pound held steady after the latest update on the labor market showed improving conditions. 

 

UK Real Wages Advance 10th Consecutive Month 

Regular pay in the UK increased 6% from a year ago in the March quarter to £637 per week, the Office for National Statistics reported Tuesday. 

Wage gains matched the annual increase in the previous three-month period ending in February and held at the 2022 lows. 

Total pay, which includes bonuses, rose 5.7% in the period from a year ago. 

The jobless rate edged higher for the third month in a row to 4.3%. 

Adjusted for inflation, real total wages increased 1.7%, and real total pay advanced 2.0%. 

 

Europe Indexes and Yields

The DAX index decreased by 0.2% to 18,711.42; the CAC-40 index fell by 0.2% to 8,225.80; and the FTSE 100 index inched higher by 0.2% to 8,428.13.

The yield on 10-year German bonds edged up to 2.51%; French bonds inched higher to 3.02%; the UK gilts edged higher to 4.16%; and Italian bonds inched higher to 3.87%.

The euro edged higher to $1.079; the British pound inched higher to $1.254; and the U.S. dollar edged higher to 90.78 Swiss cents.

Brent crude decreased $1.03 to $82.33 a barrel, and the Dutch TTF natural gas fell by €0.01 to €29.66 per MWh.

 

Europe Stock Movers

Anglo American declined 2% to 2,650.50 pence after the mining company announced its plans to sell several units as part of a turnaround effort. 

Vodafone Group increased 3.4% to 72.42 pence after the international wireless telecom carrier said organic earnings in 2024 rose 2.2%. 

Flutter Entertainment declined 2.4% to 15,800 pence after the sports betting and gambling company reported a wider quarterly net loss. 

Hannover Re fell 3.4% to €227.20 despite the reinsurance company announcing strong first quarter results and confirming its 2024 outlook. 

Delivery Hero SE soared 22% to €30.93 after Uber Technologies agreed to acquire the company's Foodpanda delivery business in Taiwan for $950 million in cash. 

Rheinmetall AG decreased 3.2% to €519.20 after the German arms manufacturer missed its sales and earnings estimate in the first quarter. 

Veolia Environnement SA gained 3.1% after the French waste and water management company met first quarter core profit expectations. 

The company also announced winning a $320 million contract for a desalination plant in the United Arab Emirates. 

 

Earnings and Yen Weakness Dominate Tokyo Market Sentiment

Market indexes in Tokyo edged higher in nervous trading as the yen struggled to hold above the flatline. 

The Nikkei 225 and the Topix inched higher in active trading following the lackluster trading in the previous session. 

The movement in the yen and the latest batch of earnings dominated market sentiment in Tokyo. 

The yen gained 0.45 to 146.58 against the U.S. dollar as traders continued to bet against the yen on the wide gap between the U.S. and Japan bond yields. 

Traders in Tokyo are estimating the yen to resume its steady decline after two days of suspected intervention last week that cost the Bank of Japan at least $35 billion. 

The trading sentiment in the Japanese yen is driven by the expectations of the U.S. interest rates staying higher for longer and the Bank of Japan in no hurry to lift its policy rate much higher from the current rate near zero. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average rose 0.4% to 38,333.17, and the Topix gained 0.2% to 2,729.78. 

Tech stocks were in focus following the slight rebound in tech stocks in overnight trading in New York. 

Tokyo Electron decreased 0.4%, Advantest rose 2.6%, Screen Holdings dropped 2.6%, and Socionext fell 2.2%. 

Sumitomo Mitsui Fudosan, Mitsubishi UFJ, and Mizuho Financial edged up between 0.2% and 0.6%. 

Toyota Motor, Honda Motor, and Nissan Motor gained between 0.1% and 1.3%. 

Furukawa Electric soared 18.6% to ¥4,092.0 after the company reported financial results that were ahead of market expectations. 

Revenue in the fiscal year 2024 ending in March declined 0.9% to 1.056 trillion yen from 1.06 trillion yen, net income attributable to shareholders decreased to 6.5 billion yen from 15.6 billion yen, and earnings per share fell to 92.40 yen from 225.80 yen a year ago. 

Obayashi Corp. increased 13.4% to ¥1,901.0 after the construction company reported a strong increase in annual sales. 

Revenue in the fiscal year 2024 ending in March rose 17.2% to 2.3 trillion yen, net income attributable to shareholders rose to 75 billion yen, and consolidated orders received 13.1% to 2.5 trillion yen. 

 

China Indexes Hover Near 8-month High

Stocks in Shanghai and Hong Kong lacked direction, and investors awaited the release of earnings from Alibaba Group and Tencent Holdings. 

Benchmark indexes in Shanghai have rebounded after Chinese regulators and policymakers announced market-supportive measures and regional governments eased mortgage restrictions for new home buyers. 

The Hang Seng index extended 4-week gains to a nine-month high in the hopes that policymakers would follow through with more concrete measures to support the faltering property market in mainland China and that state-controlled financial organizations would step up their buying of domestic stocks. 

 

Yuan Devaluation Worries Keep Traders On Edge

The yuan was also in focus and traded at 7.24 against the U.S. dollar on the growing worries of a string of competitive devaluations sparked by the sharp decline in the Japanese yen. 

Moreover, the widening gap between the U.S. and Japan interest rates is weighing on the Japanese yen, and traders are bracing for the yen to drop to as low as 170 against the U.S. dollar.

The persistent decline in the yen is likely to set in motion a chain of events that could force China, Taiwan, and Korea to devalue their currencies. 

The Japanese yen has fallen to the lowest level since 1992 against the yuan, trading at a low since 2008 against the Korean won, and the currency is hovering at a 31-year low against the Taiwanese dollar.

The Japanese yen inched 20 cents higher to 156.43 against the U.S. dollar in late Monday's trading in Tokyo.

 

China Stock Movers 

The CSI 300 index decreased 0.3% to 3,654.77, and the Hang Seng index dropped 0.1% to 19,089.83. 

ESR Group jumped 24.4% to HK$12.44 after the logistics group received a non-binding offer to go private. Warburg Pincus, the largest investor in the company, is not part of the consortium, but the company welcomed the takeover proposal. 

The consortium of private equity groups led by Starwood Capital Partners, Sixth Street, and SSW proposed to take the company private. 

The conditional offer was reported by the company in a filing with the exchange but the offer did not disclose the price.  

Electric vehicle makers, financial services providers, and Internet-driven companies were in focus in Tuesday's trading. 

Tencent Holdings increased 0.9% to HK$381.60, Meituan jumped 0.7% to HK$123.20, Alibaba Group rose 2.2% to HK$82.95, and Baidu advanced 1.1% to HK$108.60.

BYD advanced 0.3% to HK$223.40, Li Auto dropped 1.7% to HK$103.20, and Xpeng added 1.3% to HK$31.15. 

Bank of China decreased 0.7% to HK$3.70, China Construction Bank dropped 1.1% to HK$5.57, and ICBC declined 1.1% to HK$4.49. 

CATL dropped 0.2% to ¥199.05, and the company is preparing to invest about US$7.9 billion to build its manufacturing plant in Hungary and meet the demands of its customers in the European Union.