Stocks Rise as Data Keep September Fed Bets Alive: Markets Wrap

(Bloomberg) — Stocks rose and bond yields fell after the latest economic data bolstered speculation the Federal Reserve will set up the stage next week for an interest-rate cut in September.

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All major groups in the S&P 500 advanced on bets that the start of the Fed’s policy easing cycle will keep fueling the outlook for Corporate America. Those bets continued to boost riskier corners of the equity market, with smaller firms largely outperforming the cohort of tech megacaps — and extending their July rally to 10%. That trade brought a glimmer of hope that the bull market will broaden out.

US Consumer Sentiment Falls to Eight-Month Low on High Prices

The rotation into economically sensitive shares that suddenly took hold this month came on the heels of Fed-friendly data. Small caps are typically more sensitive to higher interest rates and economic turmoil, given their higher debt loads and weaker earnings. They do better when borrowing costs fall and the economic outlook improves.

Friday’s economic data only reinforced that view. The Fed’s preferred measure of underlying US inflation — the so-called core personal consumption expenditures price index — rose at a tame pace in June and consumer spending remained healthy. US consumer sentiment eased in July to an eight-month low as high prices continued to weigh on attitudes about personal finances.

“The Fed can still set the table at the July meeting and serve the first cut in September,” said Tim McDonough at Key Wealth.

The S&P 500 rose 1%. The Russell 2000 Index climbed 2%. A Bloomberg gauge of the “Magnificent Seven” megacaps added 0.7%. Treasury 10-year yields dropped four basis points to 4.2%.

The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.2% from May. From a year ago, it rose 2.6%. Inflation-adjusted consumer spending rose 0.2%, while May’s increase was revised higher.

“It’s been a good week for the Fed,” said Chris Larkin at E*Trade from Morgan Stanley. “The economy appears to be on solid ground, and PCE inflation essentially remained steady. But a rate cut next week remains a longshot.”

While the Fed has the data to cut rates next week, the market has already fully priced in two cuts this year already so it really doesn’t matter, according to Peter Boockvar at The Boock Report.

“The bottom line from here is whether we are going to see a rate tweaking cycle or a real rate-cutting cycle.”

To David Russell at TradeStation, the PCE number gives more evidence that we’re on the downward slope in terms of inflation.

“Investors can now focus on the big earnings next week and worry less about prices and rates because it seems the tide has finally turned,” he noted.

The rally in the biggest US technology stocks is at risk of fading further if the US economy continues to cool, according to Bank of America Corp.’s Michael Hartnett.

The strategist — who is bullish on bonds for the second half of 2024 — has said signs of an economic slowdown would fuel a rotation into stocks that have lagged behind the pricey tech mega-caps this year.

In a note on Friday, Hartnett said recent data suggested the global economy was “ill,” and that “we are one bad payroll away” from big tech stocks losing their dominance.

Corporate Highlights:

3M Co. raised its full-year profit forecast in a sign of progress as its new chief executive officer looks to reinvigorate the iconic manufacturer after a lengthy period of turmoil.
McDonald’s Corp.’s new $5 meal deal has led to a modest increase in US visits and brought back some low-income diners — the first signs that the burger chain’s strategy to appear more affordable is paying off.
Bristol Myers Squibb Co. raised its 2024 profit forecast as demand for its new medicines suggested the company has gotten past a dip in performance.
Apollo Global Management Inc. has agreed to buy International Game Technology Plc’s gaming division and the gambling machines company Everi Holdings Inc. in a $6.3 billion, all-cash deal that will see the two businesses merged.
Apple Inc. lost ground in China’s smartphone market in the June quarter after local companies like Huawei Technologies Co. surged ahead.

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