Better-Than-Expected GDP, Strong Meta Earnings Propel Stocks Despite Rate Hike

Morning rush

• The 10-year Treasury note yield (TNX) rose 2 basis points to 3.87%.
• The ($DXY) dropped to 100.69.
• Cboe Volatility Index® () futures fell sharply to 12.98, near the 2023 low.
• WTI (/CL) climbed to $79.54 per barrel.

Just in

Q2 Gross Domestic Product () posted a 2.4% annualized gain, up from 2% in Q1. The consensus was for a slight pullback to 1.8%, according to Trading Economics. Other data out this morning also showed the economy in good shape, including better-than-expected personal consumption and business investment, as well as falling to 221,000—the lowest in more than a month. also looked robust.

The GDP deflator, which measures inflation in the price of goods and services produced in the U.S., fell to a 2.2% annualized rate, the lowest since Q2 2020 and a sign that prices appear to be softening. It peaked at 9% in Q2 of 2022.

To little surprise, the European Central Bank (ECB) raised rates 25 basis points this morning, citing continued inflation.

Eye on the Fed

Futures trading indicates a 20% probability that the FOMC will raise rates at its September meeting, according to the CME FedWatch Tool. The probability for November is close to 30%.

During his press conference, Powell expressed satisfaction with recent economic progress, including cooling in the labor market and the positive June Consumer Price Index (CPI) reading. Still, he sounded determined to keep rates elevated as long as necessary to get inflation down to the Fed’s 2% goal. Rate cuts aren’t on the near horizon.

“We have to be ready to follow the data, and given how far we’ve come, we can afford to be a little patient, as well as resolute,” Powell said. “What our eyes are telling us is that policy has not been restrictive enough for long enough to have its full desired effects. It’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady, and we’re going to be making careful assessments, as I said, meeting by meeting.”

Stocks in Spotlight

Meta shares flew higher in premarket trading after the Facebook (NASDAQ:) parent reported better-than-expected earnings results lifted by improved metrics in digital ads. Revenue climbed 11% in fiscal Q2.

Company watchers had seen signs of an advertising rebound even back in June, and Alphabet’s (GOOGL) earnings results yesterday offered yet more evidence. Meta CEO Mark Zuckerberg called it “a good quarter” in the company’s press release, citing “strong engagement across our apps” and new artificial intelligence (AI) products in the pipeline.

On the less favorable side, Meta’s expenses appear to be growing faster than the company had previously hoped. This didn’t appear to hurt shares, but it’s a disappointment considering all the cost-cutting measures the company committed to over recent months.

In other corporate news, Boeing (NYSE:) shares climbed in premarket trading following yesterday’s 8% rally. The company reported narrower-than-expected losses, and then got an upgrade from Bank of America (NYSE:), which said it “appears as though the worst may be behind” for the jet builder after years of both internal and pandemic-related turmoil.

What to Watch

Personal Consumption Expenditures (PCE) prices take center stage before tomorrow’s open, and investors should be prepared for possible volatility, depending on the results of this closely watched inflation indicator.

Analysts expect both PCE prices and core PCE prices to rise 0.2% in June, compared with 0.1% and 0.3%, respectively, in May, according to Briefing.com. The core data, which strips out volatile food and energy costs, is the one the Fed watches most closely. It’s been “sticky” at 4.6% to 4.7% on an annual basis most of the year, so any sign of easing there might be welcomed—though it’s likely to remain well above the Fed’s goal of 2%.

Core PCE is expected to rise 4.2% year-over-year in June, but if the first digit is a “3,” that could raise optimism that inflation is on the run and therefore that the Fed might stop raising rates. However, no single data point tells the entire story, as Powell reminded media and investors yesterday in referring to the cooler June CPI reading.

The government will publish June Personal Income and Personal Spending figures at the same time on Friday as PCE. Analysts expect them to climb 0.5% and 0.3%, respectively. Both would reflect what appears to be continued job market strength. Any sign of weakness in either might trigger new recession worries, especially following soft housing data yesterday and reports of rising delinquencies on auto and credit card loans.

Russell 2000 Index Daily Chart

CHART OF THE DAY: SMALL-CAPS STILL OUTGUNNED. The Russell 2000 (RUT-candlesticks) is underperforming the S&P 500 Index (SPX – purple line), which suggests the rally isn’t very broad. From a technical standpoint, that means the soldiers aren’t following the generals, which is usually a bad sign for the market. On the bright side, at least they seem to be holding the line. Data sources: S&P Dow Jones Indices, Russell.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Inflation hits revenue: Through Wednesday morning, just 57% of S&P 500 companies reporting in Q2 had exceeded analysts’ revenue growth estimates—the lowest for this point in earnings season since Q2 of 2019, according to Bloomberg. This looks like solid evidence of softening inflation. When inflation started spiking in mid-2021, revenue beats hit a decade-high, notes Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. Companies enjoyed nice revenue gains simply by raising prices. Pricing power helped propel revenue growth until about Q3 of last year, when tougher year-over-year comparisons began pushing it down. The lack of inflation-generated revenue growth could be good news for consumers but not the stock market. Net profit margins for companies reporting to date are on average running below the previous quarter, according to FactSet.

BOJ Goose Egg? Most economists surveyed by Bloomberg see the Bank of Japan (BOJ) sticking with its easy money policy when it concludes this week’s meeting even though Japan’s inflation rate is above the central bank’s 2% goal. The BOJ’s target rate is zero for 10-year government debt yields, though it allows yields to move in a band 0.5% above and 0.5% below target. This policy has kept the yen weak versus the dollar in a strategy the BOJ hopes could stimulate the economy. However, there’s speculation that the BOJ may soon abandon its yield control policy. If that happens, the yen would likely firm versus the dollar, potentially hurting Japan’s strong stock market. Conversely, a stronger yen potentially helps China, the top exporter to Japan. (The United States is second.) Keep an eye on the BOJ as the year advances, because if it does abandon yield control, it’ll likely cause volatility in U.S. and European markets as well.

Beyond rate hikes: Raising rates isn’t the only way the Fed is squeezing the economy. The balance sheet reduction process continues behind the scenes, with the Fed’s Treasury holdings falling by almost $700 billion over the last year, notes Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. Fed research suggests that quantitative tightening may have a similar effect as one or two additional rate hikes. Another potential “tightening” factor is the credit market, where rejections of loan applications are up and loan applications have slowed. This trend, if it continues, could slow the economy, and policymakers might take it into account as they ruminate over future rate moves.

Calendar

July 28: June Personal Spending, June Personal Income, June PCE Prices, July University of Michigan Final Consumer Sentiment, and expected earnings from Colgate-Palmolive (NYSE:), Aon (NYSE:), Exxon-Mobil (XOM), and Procter & Gamble (PG)

July 31: July Chicago PMI and expected earnings from CNA Financial (CNA) and Tenet Healthcare (NYSE:)

Aug. 1: July ISM Manufacturing Index and June Job Openings, and expected earnings from Altria (NYSE:), Caterpillar (NYSE:), Illinois Tool (ITW), Advanced Micro Devices (NASDAQ:), Merck (MRK), Pfizer (NYSE:), Uber (NYSE:), Allstate (NYSE:), and Starbucks (NASDAQ:)

Aug. 2: ADP Employment Change, and expected earnings from DuPont (NYSE:), Kraft Heinz (NASDAQ:), Yum Brands (YUM), Clorox (NYSE:), PayPal (NASDAQ:), Shopify (NYSE:)

Aug. 3: June Factory Orders, July ISM Non-Manufacturing Index, and expected earnings from Amazon (NASDAQ:), Apple (NASDAQ:), Coinbase (NASDAQ:), Amgen (NASDAQ:), Alibaba (NYSE:), Hyatt Hotels (NYSE:), Kellogg (NYSE:)

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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