Stocks were choppy on Wednesday, even as recent inflation data confirmed expectations that the Federal Reserve will begin cutting interest rates at its next meeting in September. The main question now is how deep that rate cut will be.
According to the CME Group FedWatch ToolFutures traders are pricing in a 65% chance that the central bank will cut interest rates. Key interest rate by a quarter of a percentage point next month, up from yesterday’s probability of 47%. The probability of a 50 basis point cut (0.50%) fell to 35% from 53% on Tuesday.
The revised forecasts follow this morning’s release of the Consumer Price Index (CPI), which rose 0.2% month-on-month in July. Year-on-year, the headline CPI rose 2.9%, the smallest annual increase since the start of 2021.
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The core CPI, which excludes volatile food and energy prices, rose 0.2 percent month-on-month and 3.2 percent year-on-year in July – also the slowest annual growth pace in three years.
“Market participants are confused after this morning’s CPI reportwhich, after yesterday’s strong price gains, caused a morning trend reversal in equities and fixed-income securities,” says Jose Torres, senior economist at Interactive Brokers. “On the one hand, inflation pressure is well contained at just under 3%, on the other hand, housing costs are rising due to lower Mortgage interest rates and an underdeveloped housing market.”
As a result Nasdaq-Composite was able to give up most of its early lead and ended the day up just 0.03% at 17,192. S&P500 (+0.4% to 5,455) and the Dow Jones Industrial Average (+0.6% to 40,008) closed with more significant increases.
Kellanova shares rise after rumors of $36 billion takeover
In individual stock news, Kellanova (K) shares rose 7.8% after Mars confirmed It will buy the Pringles parent company in an all-cash deal valued at nearly $36 billion, including debt. The privately held candy and pet food maker’s bid is $83.50 per Kellanova share, or 12 percent more than last night’s closing price.
The deal “speaks to Mars’ snack ambitions,” says Jefferies analyst Rob Dickersonwho rates Kellanova as “Hold.” “Mars has previously stated that its goal is to double its snack business over the next decade. According to our calculations, an acquisition of K would increase Mars’ global and U.S. snack business by about 40% and 60%, respectively.”
Alphabet falls due to further problems at the Justice Department
Elsewhere, alphabet (GOOGL) fell 2.3% after a Bloomberg report indicated that the Justice Department is considering Split of the company’s Google divisionThis follows last week’s court ruling that found Google illegally maintains a monopoly in search and text advertising.
While any process to break up Google has a long legal path ahead of it, Laura Martin (Buy) supports the move. “We believe GOOGL is worth more as separate parts than together, so we welcome regulators’ attempts to break GOOGL apart,” it wrote in a note to customers.
Southwest prepares for proxy fight
In the meantime, Southwest Airlines (LUV) shares fell 0.2% after a report in the Wall Street Journal suggested that activist investor Elliott Investment Management is preparing a proxy war with the low-cost airlineElliott plans to call a special meeting and nominate 10 directors to Southwest’s 15-member board.
“Although Elliott is likely to be able to call a special meeting of the LUV board, we doubt that the 10 proposed (as yet unconfirmed) board members would be supported by the current shareholder base,” said the Jefferies analyst Sheila Kahyaoglu (Underperform, the equivalent of Sell). The analyst does not believe investors will vote out current leadership if a “plan for the future” is in place.
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