U.S. Investors Keep Rate-cut Hopes Alive After Second Inflation Report, ECB Lowers Rates

Alexander Garcia
12 Sep, 2024
Miami

Investors returned to search for tech bargains for the second day in a row and reviewed the latest update on producer price inflation and weekly unemployment claims. 

Market indexes have been treading water as investors debated the future rate path and the appropriate size of the rate cut. 

The S&P 500 index inched up a fraction, and the Nasdaq Composite advanced 0.3%. 

Producer price inflation, a measure of wholesale inflation, advanced 0.2% from the previous month in August, the U.S. Bureau of Labor Statistics reported Thursday. 

The rebound in services inflation contributed to the rise from the downwardly revised flat reading in July. 

On an annual basis, producer price inflation slowed for the second consecutive month to 1.7% from 2.1% in July. 

On Wednesday, investors reviewed that August's consumer price inflation slowed to 2.5%, but the core rate of inflation held steady at 2.8%, highlighting well-entrenched service inflation in the broader economy. 

After the release of two inflations, investors dialed down aggressive rate cut expectations of as much as 50% but still held out for a 25 basis rate cut at the end of the two-day meeting on September 18. 

Separately, the European Central Bank lowered its key lending rate by 25 basis points for the second time since June, but cited elevated wage pressures as contributing to inflationary pressures. 

Initial jobless claims inched higher and stayed well above the weekly average seen earlier in the year. 

Initial jobless claims increased 2,000 from the previous week to 230,000 in the week ending September 7. 

Meanwhile, continuing claims, which lag initial claims by one week, rose 5,000 to 1.85 million. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.03% to 5,559.32, the Nasdaq Composite rose 0.3% to 17,448.04, and the Russell 2000 index rose 0.8% to 2,120.85. 

The yield on 2-year Treasury notes edged higher to 3.67%, 10-year Treasury notes inched up to 3.67%, and 30-year Treasury bonds inched lower to 3.98%.

WTI crude oil increased $2.15 to $69.74 a barrel, and natural gas prices edged up 8 cents to $2.35 a thermal unit.

Gold rose by $34.52 to $2,546.33 an ounce, and silver increased by $0.98 to $29.65.

The dollar index, which weighs the US currency against a basket of foreign currencies, edged higher to 101.54.

 

U.S. Stock Movers

Alaska Air Group declined 0.3% to $39.37, and the regional airline lifted its third quarter profit outlook citing strong demand in the summer travel season. 

The company estimated earnings per share to range between $2.15 and $2.25, compared to its previous estimate between $1.40 and $1.60. 

Oxford Industries dropped 3.3% to $80.95 after the parent company of retailer Tommy Bahama reported weaker-than-expected quarterly results. 

Revenue in the quarter edged slightly lower to $419.9 million from $420.1 million, net income dropped to $40.6 million from $51.4 million, and diluted earnings per share eased to $2.57 from $3.22 a year earlier. 

The company declared a cash dividend of 67 cents per share, an increase from 65 cents a year ago. 

The company also tightened its fiscal year revenue to range between $1.51 billion and $1.54 billion, compared to $1.57 billion in the fiscal year 2023. 

The retailer also estimated GAAP earnings per share in the current fiscal year to range between $6.28 and $6.58, compared to $3.82 in the previous fiscal year.

Moderna plunged 18.1% to $65.11 after the drug company announced its plans to slash its expenses by $1.1 billion by 2027. 

The biotech company said it is shifting its priorities after the COVID-19 pandemic and deprioritizing certain drugs, but still anticipates the release of 10 new drugs over the next three years. 

 

European Markets Advanced 1% as the ECB Delivered Expected Rate Cut

European markets rebounded and erased previous two sessions' losses after the European Central Bank cut rate for the second time in three months as inflation cools. 

Benchmark indexes in Paris, London, and Frankfurt gained around 1%, and investors reviewed the release of monetary policy decisions and economic projections from the European Central Bank. 

The European Central Bank lowered its key lending rates by 25 basis points, as widely anticipated. 

The governing council lowered its rates for the second time after lowering rates in June, reflecting the weakening inflation in the currency union. 

The main refinancing rate is now fixed at 3.65%, the deposit facility rate at 3.5%, and the marginal lending facility rate at 3.9%. 

"The Governing Council today decided to lower the deposit facility rate—the rate through which it steers the monetary policy stance—by 25 basis points. 

Based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction," according to the statement from the ECB. 

Inflation in the currency union has declined over the last nine months, but the core rate of inflation is still well above the central bank's target rate of 2%. 

Moreover, the service sector inflation, still near 3%, has become one of the key drivers of inflation in the currency union and failed to budge over the last few months. 

ECB staff projected average inflation at 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, matching the rates estimated in June. 

Core inflation estimates for 2024 and 2025 have been revised slightly higher, reflecting stronger-than-expected service inflation. 

Core inflation is now expected to slow from 2.9% to 2.3% in 2025 and 2.0% in 2026. 

 

Europe Indexes and Yields

The DAX index increased by 1.0% to 18,507.64; the CAC-40 index rose by 0.5% to 7,435.07; and the FTSE 100 index rose by 0.6% to 8,240.97. 

The yield on 10-year German bonds edged lower to 2.12%, French bonds inched lower to 2.82%, the UK gilts edged down to 3.78%, and Italian bonds increased to 3.53%.

The euro edged down to $1.10; the British pound inched higher to $1.30; and the U.S. dollar gained to 85.40 Swiss cents.

Brent crude increased $1.92 to $72.53 a barrel, and the Dutch TTF natural gas fell by €0.90 to €35.25 per MWh. 

 

Europe Stock Movers

Technology stocks soared in Thursday's trading following a rally in the sector in overnight trading in New York, which also lifted tech-heavy markets in Asia. 

ASML jumped 4.3% to €727.80, BE Semiconductor gained 5.3% to €113.20, Infineon Technologies increased 2.9% to €29.72, and STMicroelectronics inched higher 1.2% to €25.75. 

Roche Holding declined 2.9% to CHF 261.30 on reports that the Swiss drugmaker's early-stage trial for an obesity drug showed a high rate of temporary side effects. 

Santhera Pharmaceuticals decreased 5.2% to CHF 9.22 after the Swiss drug maker posted a first-half loss of CHF 15.3 million. 

Nordex SE advanced 1.5% to €14.31 after the German windmill maker won an order from the Danish renewable energy company Orsted for its 43 MW Farranrory windfarm in Ireland. 

Banks in London edged higher after the Bank of England, bowing to pressure from local banks, delayed and watered down its banking capital requirement proposal for the second time in less than a year.

Barclays PLC increased 2.1% to 219.80 pence, HSBC Holdings jumped 1.8% to 660.70 pence, Lloyds Banking increased 1.1% to 58.08 pence, and Standard Chartered 765.60 pence. 

The Bank of England delayed its increase in tier-1 capital by less than one percentage point to January 2030, down from its previous announcement of three percentage points in December and six percentage points in the earlier directive. 

IG Group Holdings plc increased 8% to 967.50 pence, and the online trading firm reported an increase in revenue in its fiscal first quarter. 

Trainline PLC jumped 8.7% to 326.40 pence after the online rail ticketing app reported strong first-half results and lifted its annual profit estimate. 

  

Nikkei 225 Soared 3%, Japan's Producer Price Inflation Slowed In August 

Japan stocks rebounded and reversed losses in the previous two sessions, and investors reviewed the latest update on inflation and sentiment among large manufacturing companies. 

The Nikkei 225 stock average soared more than 3%, and the broader Topix index advanced more than 2% in Thursday's trading, and the yen edged higher to 142.73 against the U.S. dollar. 

Producer price index inflation slowed to 2.5% in August from 3.0% in the prior month, the Bank of Japan reported on Thursday. 

Producer inflation slowed to the lowest pace since May after the 4% decline in petroleum and coal prices overshadowed a 2.1% increase in food and beverages and a 2.5% rise in electrical machinery. 

On a monthly basis, producer price inflation declined 0.2%, its first decline in ten months, indicating a stronger yen and a weaker price of imported petroleum products. 

Moreover, sentiment among large Japanese companies jumped 4.5% in the third quarter from a 1% decline in the second quarter, the Cabinet Office reported on Thursday. 

The index turned positive for the first time in three quarters despite the Bank of Japan raising rates and signaling possible additional rate hikes in the year. 

Market sentiment was also boosted after the crude oil prices traded around a three-year low of $66 a barrel in New York. 

Japan imports more than 99% of its crude oil from the Middle Eastern nations, including Saudi Arabia and the United Arab Emirates, and the lower cost of oil weakens domestic inflation. 

Investors are also looking forward to the release of monetary policy decisions and economic projections from the European Central Bank later today. 

 

Japan Stock Movers 

The Nikkei 225 stock average jumped 3.4% to 36,838.83, and the Topix index advanced 2.4% to 2,591.88. 

Tech stocks rebounded sharply, tracking gains in overnight trading in New York. 

Softbank jumped 7.6% to ¥8,476.0, Tokyo Electron advanced 4.5% to ¥23,220.0, Advantest Corp. soared 9% to ¥6,283.0, and Screen Holdings added 3.1% to ¥9,949.0. 

Industrial machinery and equipment makers jumped more than 5% after the sentiment among large manufacturing companies improved in the third quarter. 

Ebara soared 11% to ¥1,901.0, IHI Corp added 9.7% to ¥6,691.0, Kawasaki Heavy Industries jumped 5.6% to ¥4,572.0, and Omron gained 4.8% to ¥6,001.0. 

Retailers were in focus after producer price inflation weakened in August. 

Seven & I Holdings added 3.7% to ¥2,198.0, Isetan Mitsukoshi increased 1.2% to ¥2,170.0, Aeon Co. Ltd. gained 2.2% to ¥3,906.0, and Fast Retailing jumped 3.6% to ¥44,470.0. 

Energy importers and distributors were in focus after crude oil prices hovered near three-year lows amid expectations of lower prices in the fourth quarter. 

Eneos Holdings gained 2.3% to ¥738.10, Idemitsu Kosan increased 1.3% to ¥983.20, and Cosmo Energy advanced 3.2% to ¥7,375.0. 

 

Alibaba Leads Hong Kong Stock Rebound, Mainland Indexes Struggle 

Hong Kong stocks advanced and Shanghai stocks turned lower amid heightened market volatility in China. 

The Hang Seng index jumped 1% on the expectations of a rate cut in Europe later today and in the U.S. next week, but the CSI 300 index struggled amid weak investor sentiment. 

The Hang Seng index nearly erased August's 4% advance this month amid worries of an economic slowdown in the U.S.

However, market indexes rebounded in Thursday's trading as investors shifted their focus to monetary policy decisions from the European Central Bank and the U.S. Federal Reserve. 

Moreover, crude oil prices hovered around a three-year low of $66 a barrel in New York, amid demand growth worries in China and the U.S. 

The accelerated structural shift to renewable energy and faster adoption of electric vehicles in China is likely to curtail future demand for crude oil. 

Moreover, China's rapid growth in exports of solar panels, windmills, and electric vehicles to the ASEAN region, Russia, Central Asia, and the rest of the world is also likely to negatively impact global crude oil demand. 

Investors remained cautious as the domestic consumer demand remained weak in China amid job market uncertainties and a protracted property market slump. 

Moreover, China's leadership has shifted its focus from supporting economic growth to investing in military technologies and modernizing its defense capabilities. 

 

China Stock Movers 

The Hang Seng index rebounded 1% to 17,274.72, and the CSI 300 index decreased 0.2% to 3,181.57. 

Energy stocks were in focus for the second day in a row after Hurricane Francine made landfall in Louisiana, halting oil refinery operations and crude oil explorations in the Gulf of Mexico. 

PetroChina declined 1% to HK $5.55, China Petroleum and Chemical fell 1% to HK $4.24, and CNOOC increased 0.1% to HK $18.0. 

In Hong Kong, property developers were in focus ahead of the widely expected rate cut in the U.S. next week. 

China Vanke increased 1.3% to HK $3.89, Longfor Holdings Group added 0.6% to HK $7.72, China Overseas Land declined 1.2% to HK $10.96, and Sun Hung Kai advanced 1.4% to HK $77.40. 

Following the gains in overnight trading in New York, technology stocks advanced in Hong Kong but struggled in Shanghai and Shenzhen. 

Alibaba Group edged up 1.1% to HK $83.50 as mainland investors snapped up HK11.6 billion worth of the company's stock on the first day of trading on the Stock Connect. 

Tencent Holdings added 1.2% to HK $374.60, Baidu jumped 2.2% to HK $82.25, and Meituan advanced 4% to HK $124.20.