Wall Street Looks Past Inflation Angst Before PPI: Markets Wrap

(Bloomberg) -- Wall Street traders looked past mixed economic data, sending stocks and bonds higher before an inflation reading that will help define the Federal Reserve’s next steps.

The S&P 500 hit another record — despite losses in its most-influential group: technology. A drop in retail sales helped soothe investors’ nerves about overheated consumer demand — especially after all the jitters caused by a strong inflation print earlier this week. Bonds saw small moves, with Fed swaps fully pricing in a rate cut in June. The dollar fell.

For months, investors have been dealing with clashing economic narratives. Progress toward lower inflation has shaped the view that the Fed can cut interest rates from multiyear highs to avoid pushing the US into a recession. At the same time, the economy has outperformed expectations, giving the central bank cover to delay.

“The data is complicated — a true dichotomy,” said Gina Bolvin president of Bolvin Wealth Management Group. “The market will be volatile as it digests the data and scrutinizes every data point.”

The S&P 500 rose to around 5,030, erasing this week’s losses. Banks and energy companies rallied, while Tesla Inc. climbed over 6%. In late hours, Applied Materials Inc. gave a bullish revenue forecast. Treasury 10-year yields retreated two basis points to 4.23%.

A hotter-than-expected US inflation print earlier this week hasn’t dimmed the outlook for equities, and any selloff is a buying opportunity ahead of a Fed pivot, according to Citigroup strategists. The team led by Scott Chronert maintained its year-end target for the S&P 500 at 5,100.

They remain overweight tech and recommend adding cyclical exposure via industrial and financial shares.

A seemingly tireless rally in US equities can persist as long as excess liquidity has traders comfortable buying, according to Lisa Shalett at Morgan Stanley Wealth Management. However, she expects liquidity to dry up later this year.

“As long as there’s excess liquidity in the system, we’re going to have the ability for investors to come in and think that they’re getting a bargain and participate in all asset classes when there’s some evidence of weakness,” Shalett told Bloomberg Television.

The amount of money that investors are parking at a major Fed facility dropped below $500 billion for the first time since 2021.

Market participants have been closely watching the pace at which the so-called RRP drains: Some on Wall Street warn that the draining facility is evidence that excess liquidity has been removed from the financial system — that bank reserve balances aren’t as abundant as policymakers believe.

A hot consumer price index earlier this week roiled financial markets, with traders resetting their bets on Fed rate-cuts in 2024.

Next up is Friday’s producer price index — which wouldn’t normally get as much attention from markets as the CPI — but will be highly scrutinized this time around.

“Tomorrow’s PPI will be closely watched by markets and should drive the near-term direction for the equity and bond markets,” said Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report.

Signs that inflation anxiety remains potent included strong demand for Treasury options strategies targeting 10-year yields to exceed 4.4% in the coming weeks, a level last seen in November.

Aside from retail sales, a reading on factory production also pointed to a loss of momentum — but didn’t necessarily signal significant deterioration in the economy. In fact, Thursday’s data also showed sentiment among homebuilders hit a six-month high and jobless claims declined.

“Today’s weak retail sales and middle-of-the-road jobless claims total may help soothe the market’s nerves in the near term,” said Chris Larkin at E*Trade from Morgan Stanley. “But there may still be an element of ‘altitude sickness’ at work, since the higher the market rallies, the more vulnerable it may be to setbacks when individual economic numbers don’t fit the rate-cutting narrative.”

Corporate Highlights:

• Apple Inc., racing to add more artificial intelligence capabilities, is nearing the completion of a critical new software tool for app developers that would step up competition with Microsoft Corp.
• Alphabet Inc. sank after a report that ChatGPT owner OpenAI is developing a web search product that would compete with Google.
• Microsoft Corp. will make four exclusive Xbox games available for Nintendo Co.’s Switch and Sony Group Corp.’s PlayStation, sharing homegrown titles with rivals in the first significant way as the company looks to boost revenue in a stagnant gaming market.
• Digital World Acquisition Corp., the blank-check firm that’s been looking to take Donald Trump’s media company public, soared after receiving a long-awaited nod from the US Securities and Exchange Commission.
• The Justice Department plans to scrutinize the new streaming service proposed by Walt Disney Co., Fox Corp. and Warner Bros. Discovery Inc. over concerns it could harm consumers, media rivals and sports leagues.
• Nvidia Corp., the chipmaker at the heart of an artificial intelligence spending boom, disclosed investments in Arm Holdings Plc, SoundHound AI Inc. and the biotech company Recursion Pharmaceuticals Inc.

Key Events This Week:

• US housing starts, PPI, University of Michigan consumer sentiment, Friday
• San Francisco Fed President Mary Daly speaks, Friday
• Fed Vice Chair for Supervision Michael Barr speaks, Friday
• ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.6% as of 4 p.m. New York time
• The Nasdaq 100 rose 0.2%
• The Dow Jones Industrial Average rose 0.9%
• The MSCI World index rose 0.8%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro rose 0.4% to $1.0771
• The British pound rose 0.2% to $1.2596
• The Japanese yen rose 0.4% to 149.96 per dollar

Cryptocurrencies

• Bitcoin fell 0.1% to $51,701.41
• Ether rose 1.7% to $2,826.92

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.23%
• Germany’s 10-year yield advanced two basis points to 2.36%
• Britain’s 10-year yield advanced one basis point to 4.05%

Commodities

• West Texas Intermediate crude rose 2% to $78.17 a barrel
• Spot gold rose 0.6% to $2,004.17 an ounce

This story was produced with the assistance of Bloomberg Automation.

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