Stocks posted broad-based gains on Tuesday in relatively light volume, on better-than-expected inflation data and optimism that tomorrow’s consumer price trend will allow the Federal Reserve to cut interest rates next month. Solid gains from a blue-chip leader also helped lift sentiment.
Inflation in focus
Federal Reserve Chairman Jerome Powell has repeatedly stated that the Federal Open Market Committee (FOMC) will continue to be data-dependent when it comes to deciding when to cut short-term interest rates from a 23-year high. So it should come as no surprise that market participants are extremely sensitive to the various methods the U.S. government uses to measure price changes.
On Tuesday, the most important indicator, wholesale inflation, was in the spotlight – and traders and investors were pleased with what they saw.
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The Producer Price Index (PPI) rose 0.1% in July, after rising 0.2% in June. Office of Labor Statistics was reported this morning. The core PPI, which excludes volatile food and energy prices, was unchanged from the previous month. The data came in lower than the 0.2% increase economists had expected for both measures.
On an annual basis, the headline PPI increase slowed to 2.2% (up from 2.7% in June), while the core PPI increase rose to 3.3% from 3.2% in the previous month.
“This morning’s PPI data came in lower than expected – across the board – which is good news for investors who feared the Fed would have to be more cautious in cutting rates. Interest charges due to ongoing inflation,” says Chris ZaccarelliChief Investment Officer at Independent Advisor Alliance.
Inflation will be back in the spotlight tomorrow with the release of the widely followed Consumer Price Index (CPI). next CPI reportThe inflation figures for July will be released by the BLS on August 14 at 8:30 a.m. Eastern Time. The Federal Reserve Bank of Cleveland forecasts an increase in annual headline inflation of 3%, or the same rate as in the soft CPI report for JuneOn a monthly basis, inflation is forecast to rise by 0.2% in July, after a decline of 0.1% in June.
“Investors are rushing to buy risky assets as this morning’s news of lower-than-expected inflation has prompted rate watchers to expect a 50 percentage point cut in September,” writes José Torres, senior economist at Interactive Brokers. “Traders hope that continued economic growth and easing price pressures will allow the Fed to deliver a soft landing while corporate earnings forecasts remain healthy.”
According to CME Group’s FedWatch, interest rate traders estimated on August 13 that the probability that the Fed would decide on a half-percentage point rate cut at its September meeting was 55 percent. A day ago, the probability was 50 percent, and a month ago it was only 6 percent.
While the latest inflation figures will certainly influence what the central bank decides on next Fed meetingThe CPI report is not the Fed’s preferred inflation indicator. Rather, the Fed sets its long-term 2% target based on data collected in Price index for personal consumption expenditurewhose release is scheduled for August 30th.
Nevertheless, Tuesday’s optimistic inflation report helped stocks to end the session with gains. At the close of trading, the blue-chip Dow Jones Industrial Average rose more than 1%, or nearly 409 points, to 39,765, while the broader S&P500 rose by 1.7% to 5,434. The technology-heavy Nasdaq-Composite rose 2.4% to close at 17,187.
Starbucks is recovering
Starbucks (SBUX) shares rose 24.5% after the coffee chain said Laxman Narasimhan is no longer CEOwith immediate effect and is replaced by Chipotle Mexican Grill (CMG) CEO Brian Niccol on September 9. Rachel Ruggeri, Starbucks’ chief financial officer, will serve as interim CEO until Niccol comes on board.
Niccol replaces Narasimhan, who has had a tough time during his short tenure as Starbucks CEO. In fact, the Large-cap stock had declined by more than 20% since Narasimhan was appointed CEO in March 2023.
Accordingly S&P Global Market Intelligencethe average analyst price target for SBUX shares is $89.66, representing an implied upside of 16% from last night’s close – but a 7% discount from current levels. Analysts could revise their price targets higher after today’s rise.
Chipotle shares, for their part rushed to the news from the CEO’s departure and lost 7.5%. Niccol became head of Chipotle in March 2018 after serving as CEO of Taco Bell for several years. During his tenure at the burrito chain, its stock returned about 700%. He is leaving the company on August 31.
“I was happy to hear the news from Starbucks and to see the Starbucks site because the stock was a colossal disappointment, just like Laxman. I’m sorry to say that,” said Nancy TenglerCEO and Chief Investment Officer of Laffer Tengler Investments, in a statement. “It was great to see the board take action, even if they had to be pushed to do so by activist investors. But Brian Niccol just did wonders at Chipotle… Niccol will fix Starbucks.”
Home Depot helps the Dow
Home Depot (HD) was the most famous name on today’s Results calendarThe home improvement retailer announced sales and profit figures for the second quarter. However, the company also lowered its sales forecast for the full year.
“My conclusion on Home Depot’s earnings was predominantly positive. Earnings per share and sales were significantly above expectations even year-on-year,” says Brian MulberryClient Portfolio Manager at Zacks Investment Management“There were some particularly cautious comments from management regarding the slowdown in the home improvement market due to high interest rates and Slowdown in consumer spending.”
Mulberry adds that the company’s PRO segment continues to perform well and recent acquisitions should help strengthen this division.
Perhaps most importantly, Home Depot “highlighted strong underlying long-term fundamentals that support demand for home improvement supplies,” wrote Jefferies Analyst Jonathan Matuszewski, who rates the stock as “Buy”. The leading retailer’s optimistic long-term view of the real estate market helps explain HD’s positive share price development, even though the company’s key metric of like-for-like sales declined.
According to S&P Global Market Intelligence, the average analyst price target for HD shares is $383.08, implying more than 10% upside from current levels. The consensus recommendation, meanwhile, is Buy.
As the fourth most important stock in the price-weighted Dow Jones, HD’s 1.2 percent gain helped bring the blue-chip barometer back within striking distance of the psychologically reassuring 40,000-point mark.
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