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Midday Market Summary: S&P 500 and Nasdaq hit record highs as Powell strikes diplomatic tone
The S&P 500 (+0.8%) and Nasdaq Composite (+1.1%) are trading in record territory following a positive reaction to Fed Chair Powell's Jackson Hole speech on the economy and monetary policy. The Russell 2000 outperforms with a 2.8% gain amid strength in energy stocks while the Dow Jones Industrial Average (+0.7%) underperforms on a relative basis.
Briefly, Fed Chair Powell said "substantial further progress" has been met on inflation and that "clear progress" has been made on employment, implying it's not yet time for the Fed to start tapering asset purchases because the labor market still has room for improvement. Prior to his speech, Fed Presidents Bostic, Harker, Mester, and Bullard made the case for tapering asset purchases before the year ends, which is something the Fed chair seemed to agree with in his speech.
Mr. Powell reminded listeners that even when the central bank ends purchases, financial conditions will still be accommodative and that the criteria for interest-rate hikes will be based on a more stringent assessment on the economy.
The stock market has liked the diplomatic approach from Fed Chair Powell, as advancing issues outpace declining issues by a 5:1 margin at the NYSE and a 4:1 margin at the Nasdaq. Every sector in the S&P 500 is trading higher, including the energy sector (+3.3%) alone at the top with a 3% gain.
Treasuries are also moving higher in response, pushing yields modestly lower across the curve. The 10-yr yield is down two basis points to 1.32%, and the 2-yr yield is down one basis point to 0.22%. The U.S. Dollar Index is down 0.4% to 92.66, which has supported higher energy prices.
Treasury yields might also be factoring in PCE inflation data that was in-line with expectations and, by some accounts, was supportive of the narrative that inflation rates are peaking. The core-PCE Price Index, which excludes food and energy, was unchanged at 3.6% on a year-over-year basis. The PCE Price Index was up 4.2% yr/yr, versus 4.0% in June.
Separately, Workday (WDAY 270.25, +23.48, +9.5%) and Gap (GPS 27.09, +0.74, +2.8%) are attracting additional buying interest following their earnings reports. Conversely, Peloton (PTON 106.05, -7.98, -7.0%), Marvell (MRVL 61.25, -1.99, -3.2%), and HP Inc. (HPQ 28.83, -0.27, -1.0%) trade lower following their reports.
The CBOE Volatility Index (16.47, -2.38, -12.6%) has dropped back below the 17.00 level, as the record-setting bias in the market alleviates hedging interest.
Reviewing today's economic data:
Personal income was up 1.1% month-over-month in July (Briefing.com consensus +0.2%), bolstered by a 1.0% increase in wages and salaries and a 2.9% increase in personal current transfer receipts (think Child Tax Credit payments). Personal spending increased 0.3% (Briefing.com consensus +0.4%), but real PCE declined 0.1% with the PCE Price Index up 0.4% (Briefing.com consensus +0.4%). The core PCE Price Index, which excludes food and energy, increased 0.3% (Briefing.com consensus +0.3%).
The key takeaway from the report is twofold: (1) the decline in real PCE will be a drag on Q3 GDP forecasts and (2) inflation pressures continue to run persistently high. The PCE Price Index was up 4.2% year-over-year, versus 4.0% in June, and the core PCE Price Index held steady at 3.6%.
The final University of Michigan Consumer Sentiment Index for August checked in at 70.3 (Briefing.com consensus 70.7), nearly even with the preliminary reading of 70.2. The final reading for July was 81.2. The downturn from July was one of the largest losses since 1978.
The key takeaway from the report is the recognition that higher inflation trends have led to a worsening in sentiment regarding personal financial prospects.
The Advance report for International Trade in Goods for July showed a deficit of $86.4 billion, versus a revised $92.1 billion (from $91.2 billion) in June. The Advance report for Retail Inventories for July increased 0.4%, while the Advance report for Wholesale Inventories for July increased 0.6%.
