Stocks Finish Wednesday’s Session in the Green; GDPNow Points to Third Quarter Expansion
Last Updated 4:30 PM EST
Stock indices finished today’s trading session in the green. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 1.63%, 2.13%, and 2.85%, respectively.
The utilities sector was the session’s laggard, as it gained 0.44%. Conversely, the consumer discretionary sector (XLY) was the session’s leader, with a gain of 2.86%. In addition, WTI crude oil remained below $100 per barrel, trading at around $91.53.
The Atlanta Federal Reserve recently updated its GDPNow reading, which allows it to estimate GDP growth in real-time. Currently, it estimates that the economy will see an annualized expansion of 2.45% in the third quarter after experiencing two consecutive quarters of decline. This seems possible when considering last week’s Nonfarm Payrolls report, which came in way higher than expected.
In addition, inflation came in lower than expected, showing signs that the central bank’s rate hikes might be working. However, this doesn’t mean that the economy still isn’t at risk of a recession. Inflation is still very high, and the hot labor market likely indicates to the Federal Reserve that it can move forward with more rate hikes, which will slow the economy down.
Indeed, the bond market remains inverted, as the spread between the 10-Year and Two-Year U.S. Treasury yields sits at -44 basis points.
Gas Prices Continue to Decline
Last Updated 3:25PM EST
Equity markets are in the green halfway into the trading session. As of 3:25 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 1.4%, 1.9%, and 2.7%, respectively. The utilities sector remains the laggard so far, as it is up 0.1%. Meanwhile, the best performing sector, materials, is up 2.8%.
WTI crude oil is currently hovering around $91.60 per barrel, as it trades not too far away from its session high of $92.41 per barrel. The price has pulled back considerably from last week’s high of $98.63.
Consumers will be happy to see that the commodity’s recent pullback has led to lower gas prices across the country. The national average for regular gas was last $4.01 per gallon, down from yesterday’s reading of $4.033. This is significantly lower than the all-time high of $5.016 per gallon on June 14.
The highest prices can be found in Hawaii, where prices are substantially higher than the national average at $5.414 per gallon. On the other hand, Texas is the state with the lowest gas prices, at $3.512 per gallon.
It’s likely that this downward trend will continue going forward as the Federal Reserve looks to raise interest rates to fight inflation. However, higher rates will destroy demand throughout the whole economy. As a result, lower gas prices might have to come at the cost of a recession.
Mortgage Rates and Applications Increase Compared to Last Week
Last Updated 12:20PM EST
Stocks are in the green halfway into today’s trading session. As of 12:20 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 1.4%, 1.8%, and 2.3%, respectively. The utilities sector (XLU) is the laggard so far, as it is down 0.2%, while the best performing sector, materials (XLB), is up 3.1%.
WTI crude oil is up on the day, at $90.83 per barrel while the U.S. 10-Year Treasury yield is hovering around 2.77%, pulling back more than four basis points from the session high. The spread between the 10-Year and Two-Year U.S. Treasury yields remains negative, as it currently sits at -40 basis points.
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-Year mortgage rate. The mortgage rate increased by four basis points from last week’s reading of 5.43%, reaching 5.47%.
Despite the slightly higher rates, the number of mortgage applications increased week-over-week by 0.2%. This follows last week’s increase of 1.2%, indicating that homebuyers might be thinking that the Federal Reserve won’t be as aggressive as initially believed.
Nevertheless, mortgage application volume is down substantially on a year-over-year basis, with the Mortgage Market Index at 279.8 compared to 754.8 on August 11, 2021.
Inflation Comes in Lower than Expected
Last Updated 10:00AM EST
The much-anticipated CPI report was released today, which came in better than expected. The year-over-year headline number was 8.5%, compared to the forecast of 8.7%. The month-over-month print, which helps investors gauge whether or not inflation is accelerating, came in at 0% versus the expected 0.2%.
In addition, core CPI, which strips out volatile categories such as energy and food, increased 5.9% year-over-year and 0.3% month-over-month. Expectations were 6.1% and 0.5%, respectively. Today’s inflation report gives investors hope that inflation may have peaked.
As a result, stocks began the first 30 minutes of Wednesday’s trading session in positive territory, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 up 1.6%, 1.7%, and 2.1%, respectively.
The energy sector (XLE) is the laggard so far, as it is down 0.8%. Conversely, the communications sector (XLC) is the session leader, up 2.6%. Furthermore, WTI crude oil is trading at $88.67 per barrel, a decrease of 2%, while the U.S. 10-Year Treasury yield fell to 2.71%.
However, inflation still remains very high, which means that the Federal Reserve may still have to raise rates significantly above the neutral rate, going forward. Thus, investors should be mindful of that before getting overly optimistic about today’s results.
Pre-Market Update
U.S. stock futures rose early Wednesday morning ahead of the much-awaited inflation data due out later in the day.
Futures on the Dow Jones Industrial Average (DJIA) gained 0.19%, while those on the S&P 500 (SPX) inched 0.25% higher, as of 5.28 a.m. EST, Wednesday. Meanwhile, the Nasdaq 100 (NDX) futures advanced by 0.36%.
What Happened in the Stock Market on Tuesday?
At market close Tuesday, the S&P 500 and the Nasdaq 100 continued their losing streak, shedding 0.42% and 1.15%, respectively. The Dow also closed the regular trading session with a 0.18% loss.
Weak outlooks provided by Micron (MU), Novavax (NVAX), and Upstart (UPST) led to a decline in the share prices of these stocks. Again, the sale of almost $7 billion worth of Tesla shares by its CEO, Elon Musk, led to a 2.44% decline in TSLA share price on Tuesday. These losses weighed heavily on the market.
Investors are looking forward to Disney’s (DIS) earnings report, which is slated to be released after the market closes on Wednesday.
Investors Anxiously Await July CPI Report
The consumer price index (CPI) reading for July is set to be released on Wednesday, giving us a clearer picture of the current inflation situation. A Dow Jones survey shows that most economists expect a sequential reduction in the July number (8.7% expected in July compared with 9.1% in June), led by reduced oil prices. However, nothing can be firmly said about it. Recall, that CPI in June came way above what economists had expected.
The Federal Reserve is expected to draw its policy roadmap for the September meeting, based on the CPI report. If the inflation number meets expectations or comes below expected, the Fed may relax its tone and consider an interest rate hike of a lesser magnitude.
The Federal Reserve has so far kept the possibility of a third consecutive 75 basis point interest rate hike on the table, possibly uplifted by the strong labor market.
Other Economic Data that Failed to Impress
Tuesday also brought some discouraging economic data. Revealing the flip-side of the strong labor market, the U.S. Bureau of Labor Statistics announced that labor productivity in the U.S. slowed, marking the second quarter of falling productivity, in a row. Moreover, contraction in economic output was met by higher spending on new appointments by employers.
However, in Q2, productivity declined 4.6% over the past 12 months, whereas economists surveyed by the Wall Street Journal had expected a 5% drop. In the first quarter, productivity had declined a sharp 7.4%.
In a situation where productivity falls despite more wages, companies tend to increase the prices of their products and services to avoid compromising profitability. This fuels inflation, and in an already high-inflation environment, this cannot be good news.
Intensifying Tensions in Taiwan
Another worry for the U.S. is brewing in Taiwan, with China continuing to hold military drills around the latter country on Monday, breaching Sunday’s ceasefire notice.
Nancy Pelosi’s visit to Taipei last week did not go down well with China, and Beijing’s defense ministry expressed China’s dissent by suspending military talks with the U.S.
If the situation escalates into a conflict, it may weigh heavily on stocks that have operations in China.
