Fed's Planned Rate Cut May Reverse Slow Decline In Inflation

Alexander Garcia
11 Sep, 2024
Miami

Wall Street indexes lacked direction after the latest update on inflation dampened hopes of an aggressive rate cut next week. 

U.S. benchmark indexes slipped as investors reviewed the inflation report and searched for clues about the health of the broader economy. 

The S&P 500 index and the Nasdaq Composite traded in a tight range after consumer price inflation matched market expectations, but core inflation failed to improve. 

Consumer price inflation in August slipped for the fifth month in a row to 2.5%, largely because of the weakness in energy prices, the Bureau of Labor Statistics reported Wednesday. 

Energy costs declined 4% compared to a rise of 1% in the previous month, overshadowed by the increase in housing inflation to 5.2% from 5.1% in July. 

Prices of food and non-food items are still rising in larger nominal amounts, and the service costs are increasing at an elevated pace, stretching household budgets. 

Moreover, if the Fed starts the rate cut cycle, as widely anticipated, at the end of the policy meeting next week, this will stoke inflationary pressures again, keeping the central bank away from its elusive but widely advertised goal of lowering inflation to 2%. 

In other words, interest rates are still not restrictive, and they have not been despite the Federal Reserve raising rates eleven times over 2022 and 2023. 

On a monthly basis, inflation held steady at 0.2%, matching the rate in the previous month, driven by a 0.5% rise in shelter costs. 

Core inflation, which excludes volatile food and energy prices, steadied at a three-year low of 3.2%, indicating slow progress in weakening well-anchored inflation. 

After the inflation report, investors still held out for at least a 25 basis rate cut next week. 

Despite the widely anticipated rate cut, inflation is well-anchored in the economy, and rates are far from restrictive, as the U.S. economy is still adding jobs above the long-term average and GDP is expanding at a faster rate than 2%. 

Moreover, an interest rate cut is not likely to alter the long-term structural issues with the economy, international trade competitiveness, widening inequality, and deepening poverty. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.1% to 5,496.11, the Nasdaq Composite rose 0.7% to 17,145.16, and the Russell 2000 index fell 0.5% to 2,087.23. 

The yield on 2-year Treasury notes edged lower to 3.59%, 10-year Treasury notes inched down to 3.62%, and 30-year Treasury bonds inched lower to 3.93%.

WTI crude oil decreased $1.51 to $67.25 a barrel, and natural gas prices edged up 4 cents to $2.27 a thermal unit.

Gold rose by $3.15 to $2,518.74 an ounce, and silver increased by $0.36 to $28.80.

The dollar index, which weighs the US currency against a basket of foreign currencies, edged higher to 101.43.

 

U.S. Stock Movers

GameStop Corp. dropped 11% to $20.86, and the video game retailer reported sharply lower revenue in its latest quarter. 

Revenue in the second quarter dropped more than 20% to $798 million from $1.16 billion; net income was $14.8 million compared to a loss of $2.8 million; and diluted earnings per share were 4 cents compared to a loss of 1 cent. 

The company also announced the sale of up to 20 million shares at an "at-the-market" price. 

Dave & Buster's jumped 14% to $34.13 after the entertainment company reported better-than-expected quarterly results. 

Revenue in the second quarter ending on August 6 gained 2.8% to $557.1 million, net income jumped to $40.3 million from $25.9 million, and diluted earnings advanced to 99 cents from 60 cents a year ago. 

Comparable store sales declined 6.3% from the same calendar period in the year earlier. 

Petco Health and Wellness jumped 7.2% to $3.20, and the pet food retailer reported revenue meeting investor expectations. 

Revenue declined 0.5% to $1.52 billion, net loss expanded 70% to $24.8 from $14.6 billion, and diluted earnings per share rose 66% to 9 cents from 5 cents. 

 

Cautious Optimism Prevailed In European Markets Ahead of ECB Rate Decisions 

European markets were mixed ahead of the closely watched monetary policy decision on Thursday. 

Benchmark indexes in Paris, London, and Frankfurt edged higher as investors anticipated a rate cut by the European Central Bank tomorrow. 

The ECB has been signaling that policymakers are likely to lower rates following the weakening in inflation over the last eighteen months. 

Investors are also keenly awaiting the release of economic projections for the rest of the year and next year, amid weak consumer demand and a high cost of living. 

On the economic front, the UK's GDP stagnated for the second month in a row in July, after the growth in service output was overshadowed by the weakness in manufacturing and construction.

Production output weakened by 0.8% in July, following a growth of 0.8% in June, and decreased by 0.1% in the three months to July 2024.

Construction output decreased by 0.4% in July, following a growth of 0.5% in June, but expanded by 1.2% in the three months to July, its first positive three-month growth since September 2023.

Over the three months to July, the real economy expanded by 0.5% from the previous three-month period with a strong contribution from service output, the Office for National Statistics reported Wednesday. 

GDP growth in the three-month period slowed from a 0.6% increase in the previous period ending in July. 

 

Europe Indexes and Yields

The DAX index increased by 0.3% to 18,330.27; the CAC-40 index fell by 0.2% to 7,396.83; and the FTSE 100 index fell by 0.2% to 8,193.94. 

The yield on 10-year German bonds edged lower to 2.13%, French bonds inched lower to 2.83%, the UK gilts edged down to 3.78%, and Italian bonds increased to 3.49%.

The euro edged down to $1.10; the British pound inched higher to $1.30; and the U.S. dollar weakened to 84.62 Swiss cents.

Brent crude increased $1.72 to $70.91 a barrel, and the Dutch TTF natural gas rose by €0.61 to €36.17 per MWh. 

 

Europe Stock Movers

Commerzbank soared 16.8% to €14.73, and the German government agreed to sell its 4.5% stake in the bank to Italian lender UniCredit. 

UniCredit said it plans to seek permission to acquire an additional stake in the German bank, according to sources in the German finance ministry. 

The Italian lender acquired the entire stake priced at €13.20 per share for €702 million, making UniCredit the largest shareholder in the German bank. 

Santander Bank Polska declined 7.9% to 463.0 zloty after parent company Banco Santander sold a 5.2% stake in the Polish bank. 

Rightmove Plc increased 0.3% to 673.0 pence after the UK-based property platform rejected an acquisition offer from the Australia-based REA Group. 

Ricardo plc declined 1.5% to 508.0 pence despite the renewable energy-focused company announcing improved financial results in fiscal year 2024. 

Rentokil Initial plc plunged 18.5% to 385.90 pence after the pest control company issued a profit warning. 

Inditex increased 4.4% to €48.30 after the Spanish apparel company reported strong first-half results. 

Sales in the first-half increased to 7.2% to €18.1 billion and net income advanced 10.1% to €2.8 billion. 

The increase in sales were driven by the success of its Spring/Summer collections. 

Total sales, including store sales and online sales, between August 1 and September 8 rose 11% from a year ago, suggesting positive impact on its results in the third quarter. 

 

Japan Averages Drop Neary 2% Following Hawkish Comments from BoJ Official 

Stocks in Tokyo extended losses of the previous session after hawkish comments from the Bank of Japan official lifted the yen. 

The Nikkei 225 stock average dropped 1.6%, and the broader Topix index fell 1.8%.

The Bank of Japan board member Junko Nakagawa said that the central bank is prepared to lift rates if inflation and economic data meet targets set by the policymakers. 

Nakagawa's comments lifted the yen to this year's high of 141.35 against the U.S. dollar. 

Manufacturing sentiment in Japan dropped to a seven-month low amid ongoing demand weakness from China. 

Reuters Tankan sentiment index for manufacturers in Japan fell to +4 in September from +10 in August, on the worries of demand weakness from China, global electric vehicle demand slowdown, and raw material price inflation. 

Investors also reviewed the sharp fall in crude oil prices in international trading amid demand growth outlook in the U.S. and China. 

Texas crude oil dropped to a three-year low of $66.85 a barrel, despite the likely supply disruption in the Gulf of Mexico following the expected landfall of Hurricane Francine later today. 

 

Japan Stock Movers 

The Nikkei 225 stock average declined 1.6% to 35,585.24, and the Topix index dropped 1.8% to 2,529.33. 

Tokyo Gas declined 5.4% to ¥3,346.0, and Osaka Gas fell 4.9% to ¥3,348.0. 

Financial stocks were in focus after the yen jumped to this year's high following hawkish comments from the Bank of Japan official. 

Sumitomo Mitsui Financial decreased 1.7% to ¥8,880.0, Mitsubishi UFJ Financial dropped 1.3% to ¥1,427.50, and Mizuho Financial fell 2.4% to ¥2,765.50. 

Energy explorers and distributors fell following a sharp decline in crude oil prices. 

Idemitsu Kosan declined 3.7% to ¥968.0, Cosmo Energy Holdings fell 5.1% to ¥7,150.0, and Eneos Holdings decreased 3.4% to ¥721.20. 

 

Hang Seng Index Dropped to One-Month Low After Crude Oil Prices Signaled Global Weakness 

Stocks in Shanghai and Hong Kong dropped following renewed worries about the health of the economy after crude oil prices dropped 4%. 

The Hang Seng index dropped 1.4% and the mainland-focused CSI 300 index fell 0.4% as investors struggled to understand the latest decline in oil prices. 

Crude oil prices fell below $69 a barrel amid worries of lack of demand growth from the U.S. and China, and the OPEC trimmed its global demand growth outlook for 2024 and 2025. 

Crude oil prices are now trading at a three-year low after OPEC lowered its global demand growth estimate for 2024 by 80,000 barrels per day to 2 million bpd. 

The lowered demand growth primarily reflected demand weakness in China, as the second-largest economy relied more on renewable energy and electric vehicles. 

Market sentiment in Hong Kong and Shanghai was dented after consumer price and producer price inflation data confirmed the ongoing demand weakness. 

 

China Stock Movers 

The Hang Seng Index dropped 1.4% to 16,992.42, and the mainland-focused CSI 300 index fell 0.4%. 

CNOOC fell 3.6% to HK $18.46, PetroChina decreased 4% to HK $5.46, and China Petroleum and Chemical dropped 4% to HK $4.24. 

Wuxi AppTec rose 4.8% to HK $33.75 after the company said it plans to buyback stocks worth one billion yuan. 

Wuxi Biologics rose 2% to HK $11.12. 

Li Ning Co. Ltd. dropped 6.8% to HK $12.64 after Citigroup lowered its opinion on stock to "neutral" from "buy" and lowered its price target by 27%. 

Flaircomm Microelectronics opened more than 60% on its first day of trading to 65.89 yuan in Shenzhen. 

Tech stocks were also under pressure and led the declines in Hong Kong. 

Alibaba Group declined 0.9% to HK $80.95, Tencent Holdings fell 0.5% to HK $366.60, and Meituan decreased 0.8% to HK $117.90.