The Stock Market Rallies on Ppi as Starbucks Gains 20%

Stocks climbed, and bond yields dropped following a recent U.S. inflation report, which bolstered expectations that the Federal Reserve may implement an anticipated interest rate cut in September. This optimism was fueled by data revealing a smaller-than-expected increase in the producer price index (PPI), which is often seen as a precursor to broader inflation trends. The S&P 500 rose by approximately 1%, while shorter-term Treasuries led gains, and the dollar weakened.

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Chris Larkin from E*Trade, a subsidiary of Morgan Stanley, remarked that the markets, which have been searching for stability, received further evidence of cooling inflation. He noted that the lower-than-expected PPI data might serve as a precursor to the more significant consumer price index (CPI) report due the following day. This PPI reading, which showed a mere 0.1% month-over-month increase, was below the 0.2% forecasted by economists and indicated that inflation pressures might be easing. Year-over-year, the PPI increased by 2.2%, and excluding the volatile food and energy sectors, the index remained unchanged from the previous month, marking the most modest rise in four months.

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The easing of inflationary pressures has given Federal Reserve officials more confidence that they can begin to lower borrowing costs while refocusing on the labor market, which has shown signs of slowing. Swap markets have already priced in nearly a 40 basis-point cut from the Fed in September and predict a total rate reduction of around 105 basis points by the end of 2024.

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Ian Lyngen from BMO Capital Markets commented that there was nothing in the day’s data to suggest the Fed would hesitate to cut rates next month. However, he emphasized that the following day’s CPI report would be more crucial in shaping near-term policy expectations.

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The S&P 500 was on track to achieve its most significant four-day gain of the year, with the Nasdaq 100 rising by 1.5% and the Russell 2000, which tracks smaller companies, increasing by 0.7%. The VIX, Wall Street’s preferred volatility gauge, dropped below 20, indicating reduced market anxiety. Notable gains in the stock market were led by major companies like Nvidia Corp., while Starbucks Corp. surged over 20% following the announcement of a new chief executive. Additionally, investors were gearing up for a Google hardware event, further boosting sentiment around Alphabet Inc.

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Treasury yields on 10-year bonds fell by four basis points to 3.87%, while oil prices slipped, ending a five-day winning streak. This decline in oil was attributed to traders weighing the risks of escalating conflicts in the Middle East against the potential for a crude surplus.

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Paul Ashworth from Capital Economics described the muted PPI data as more positive news for the markets. He noted that this development aligns with the Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, which has been increasing at a pace below 2% on an annualized basis.

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Chris Zaccarelli from Independent Advisor Alliance suggested that if the CPI report also comes in lower than expected, the Fed might have the green light to implement a 50-basis-point rate cut at their upcoming meeting. Jamie Cox from Harris Financial Group echoed this sentiment, stating that if such data trends persist, the Fed would have ample room to cut rates further throughout the year.

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David Russell from TradeStation added that the PPI data provided further evidence that inflation, particularly in services, is beginning to subside. He suggested that this trend could continue or even accelerate in the coming months, especially as economic weakness in China exerts downward pressure on commodity prices. As a result, Federal Reserve Chair Jerome Powell may feel more confident heading into the Jackson Hole symposium.

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Krishna Guha from Evercore observed that there was “nothing threatening” in the latest PPI data. He noted that the broader takeaway is that minor fluctuations in month-over-month inflation figures are unlikely to significantly impact Fed policy or the rate outlook, which is now primarily driven by labor market data.

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Analysts at Brown Brothers Harriman & Co., including Win Thin and Elias Haddad, suggested that Powell’s upcoming speech at Jackson Hole would be important but is unlikely to deviate from the Fed’s current narrative, given the consistent messaging from both hawks and doves within the Fed.

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Scott Helfstein from Global X highlighted that producer prices have been leading the inflation cycle, rising ahead of consumer prices and now leading the decline. He praised companies for effectively managing through this inflation cycle while maintaining near-record profit margins, with technology advancements in artificial intelligence and automation playing a crucial role.

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Despite the recent volatility in global financial markets, investor optimism around U.S. technology giants and the prospects of a soft economic landing remain strong, according to a global survey by Bank of America Corp. Although the survey, conducted during the height of last week’s market turmoil, indicated a defensive shift into bonds and cash, long positions in major tech stocks, known as the “Magnificent Seven,” remain popular, albeit slightly less so after the recent selloff.

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Bank of America clients were net buyers of U.S. equities for the first time in over a month, with institutional investors leading net purchases of $5.8 billion in stocks, despite hedge funds and retail investors selling shares. However, Chris Montagu from Citigroup Inc. warned that U.S. tech stocks are under significant pressure, with investor positioning remaining heavily skewed toward the bullish side despite the recent market downturn. He cautioned that any negative economic data could put further pressure on these long positions, potentially amplifying near-term market declines.

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