Major US stock market averages opened mixed this morning. The Dow is currently 28 pts and the SPX is down .2%. The Nasdaq is also down .2%. Industrials (especially transports) and materials sector stocks are rallying. On the other hand, utilities and real estate are down on a bump in interest rates. Commodities are mixed; gold and iron ore are down, but oil continues to recover. WTI crude oil is hovering around $60/barrel. It was trading down around $51/barrel one month ago. Bonds are selling off a bit today on rising interest rates. It seems like the better-than-expected jobs report back on July 5th marked a turnaround in rates. The 10-year Treasury yield has risen to 2.13% from 1.95% since then.
In addition, last week’s inflation report helped move rates higher. The headline Consumer Price Index (CPI) decelerated in June to 1.6% from 1.8%, but that’s only because gasoline prices declined sharply. Core underlying inflation (excluding food & energy) actually accelerated. Core CPI jumped to 2.1% from 2.0%. Firming inflation supports the view that the economy is not falling into recession. Bloomberg economists say the report “vindicates” the Federal Reserve’s assertion that some factors keeping a lid on inflation are only temporary.
In addition, we found out this morning that US retail sales jumped more than expected in June. Consumer spending in the world’s #1 economy is alive and well. June spending surged .4% from prior month levels, and accelerated to 3.4% from year-ago levels. Gains were pretty much across the board: clothing, building materials, restaurants, furniture, autos, etc. Consumer spending is clearly benefiting from a very tight jobs market. Better economic data is going to make it harder for the Federal Reserve to justify cutting interest rates later this month.
Earnings season kicked off this morning with JP Morgan (JPM) and Goldman Sachs (GS), both of which beat Wall Street revenue & profit forecasts. Both stocks are up about 1% this morning. GS surprised investors with a much smaller than expected loss in its securities trading business, and also raised its dividend by nearly 50%. JPM reported a bigger than expected trading loss. Beyond that, JPM’s net-interest income—the difference between interest collected on loans and interest paid to its customers—fell due to interest rate declines throughout the economy this year. And of course, it doesn’t help that Fed Chair Jerome Powell has hinted at possibly cutting interest rates further to deal with slowing economic growth and trade war concerns. CEO Jamie Dimon said that while he sees “positive momentum with the US consumer,” net interest income will continue to be challenged by low rates. Citigroup (C) and Wells Fargo (WFC) have also reduced profit expectations. This comes as no surprise to investors, who know that ultra-low interest rates aren’t good for banks. So while most of the big US bank stocks are up nicely this year, they have lagged behind the overall stock market.