Stock Market Update

[BRIEFING.COM] Today's trade was lackluster with the major indices registering only modest gains or losses. The A-D line favored decliners, but there wasn't a lot of conviction overall. The major indices followed the direction of the mega cap stocks, which drove some choppy action in the morning and later in the afternoon.

Briefly, total CPI was up a robust 0.6%, as expected, and core-CPI, which excludes food and energy, was up 0.3% (Briefing.com consensus 0.2%). That left total CPI up 3.7% year-over-year, versus 3.2% in July, and core CPI up 4.3% year-over-year, versus 4.7% in July.

The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.

The Treasury market saw some knee-jerk selling in response to the data. Things quickly calmed down, though, which was supportive for the stock market. The 2-yr note yield jumped to 5.07% after the data, but finished at 4.99%, one basis point lower from yesterday's settlement. The 10-yr note yield, which hit 4.34% following the data, fell two basis points from yesterday to 4.25%.

Rate hike expectations did not change much following the CPI report. According to the CME FedWatch Tool, the probability of a 25 basis points rate hike at the November FOMC meeting is 40.1% versus 44.2% yesterday.

Six of the 11 S&P 500 sectors logged a gain. The utilities sector (+1.2%), which was the only sector to gain more than 1.0%, led the lineup, and the real estate sector (-1.0%), which was the only sector to lose more than 1.0%, fell to the bottom of the pack.

Airline stocks were a notable weak spot in the market after Spirit Airlines (SAVE 16.20, -1.08, -6.3%), Frontier Group (ULCC 5.95, -0.56, -9.2%), and American Airlines (AAL 13.31, -0.80, -5.7%) warned about their Q3 outlooks due in part to rising fuel costs. The U.S. Global Jets ETF (JETS) fell 2.7%.

On a related note, the industrial sector (-0.7%) was among the weakest performers, partially due to its weak airline components. Separately, Netflix (NLFX 412.24, -22.45, -5.2%) was a key individual laggard, falling in response to its disclosure that the ad business is not material yet to its overall revenue.

• Nasdaq Composite: +32.0% YTD
• S&P 500: +16.4% YTD
• S&P Midcap 400: +5.5% YTD
• Russell 2000: +4.5% YTD
• Dow Jones Industrial Average: +4.3% YTD

Reviewing today's economic data:

• Total CPI increased 0.6% month-over-month in August, as expected, with rising gasoline prices accounting for over half of the increase. Core CPI, which excludes food and energy, rose a stronger-than-expected 0.3% month-over-month (Briefing.com consensus 0.2%). On a year-over-year basis, total CPI was up 3.7%, versus 3.2% in July, and core CPI was up 4.3%, versus 4.7% in July.
  • The key takeaway from the report is that core inflation, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed's 2.0% target, reflecting a sticky quality that probably won't compel the Fed to raise rates further at this point, but which will certainly keep the Fed in a "higher for longer" mindset.
• The weekly MBA Mortgage Index was down 0.8% after decreasing 2.9% a week ago. The Refinance Index was down 5.4% while the Purchase Index was up 1.3%.
• The August Treasury Budget showed a surprising surplus of $89.2 billion compared to a deficit of $219.6 bln in the same period a year ago. The surplus in August resulted from receipts ($283.1 billion) exceeding outlays ($193.9 billion). The Treasury Budget data is not seasonally adjusted so the August 2023 surplus cannot be compared to the July 2023 deficit of $220.8 billion.
  • The key takeaway from the report is that outlays included impacts from the $319 billion Debt Relief Reversal downward modification to the DOE's Federal Direct Student Loans program. August typically shows a budget deficit (68 times out of 69 fiscal years) since there are no major tax due dates.
• Weekly crude oil inventories increased by 3.954 mln barrels after decreasing by 6.307 mln barrels a week ago.

Thursday's economic calendar features some potentially market-moving releases. The weekly jobless claims report, the August Producer Price Index, and the August Retail Sales report will be released at 8:30 a.m. ET. Other data includes:

• 10:00 ET: July Business Inventories (Briefing.com consensus 0.1%; prior 0.0%)
• 10:30 ET: Weekly natural gas inventories (prior +33 bcf)