S&P 500 hits record as tech rallies but hot and sticky summer inflation could yet see Sep rate hike

S&P 500 hits record as tech rallies but hot and sticky summer inflation could yet see Sep rate hike …from  Saxo UK Investor Strategist, Neil Wilson

Fresh records: The S&P 500 added +0.65% for a record closing high of 7,798.99 after hitting an all-time intraday high earlier in the session, whilst the tech-heavy Nasdaq Composite rose +0.81%.

The Nasdaq 100 gained 1.15% to 30,084.50 and the Russell 2000 touched a record above 3,060 during the session. There are growing signs of fresh confidence in the AI trade and the market is rotating positively once again. The proxy for the AI hardware trade is the Kospi, which extended its gains after entering a technical bull market on Thursday, rising +2.4% overnight. Software stocks – badly beaten up in the first quarter on a broad AI fear trade, have rebounded with the IGV Expanded Tech-Software Sector ETF now almost +30% higher in the last six months having fallen by a quarter in Q1. It was up over 3% on Thursday. European stock markets were broadly higher on Friday morning but the FTSE 100 eased back further from its recent stab at the record high, back towards the 10,700 level.

Crude futures have given back some of the geopolitical risk premium – both sides claim the Strait is shut but we know oil is leaking out, albeit not perhaps as much as US energy secretary Chris Wright submits. But the war of words continues to stoke tensions and rattle the nerves – US defense secretary Hesgeth says the US can keep the Strait shut “indefinitely” and crude prices have tracked higher overnight into this morning’s session to rise about +3% from the lows yesterday.

Treasuries fell as the US got off a 30yr Treasury auction at the highest yield since 2001. Not a great surprise given where the long bond was at coming into this with the bear steepening in the wake of the 29 July Fed decision and the jump in the US deficit. Investors want compensation for duration for a lot of reasons – fiscal fragility is one, but so too is a reassessment of just how tough the Fed is going to be on inflation. PPI data looked cool enough but what the market should be interested in is what all the data is suggesting regards the PCE index reading for July. The headline PCE is likely around 3.7%, down from the 4.1% peak in May. The all-important core PCE index for July seems to be heading for a gain of +0.3% on the month, which holds the core at 3.3% YoY…in other words hot and sticky. Talking of hot and sticky, the Atlanta Fed’s sticky-price consumer price index —a weighted basket of items that change price relatively slowly—rose 3.5% (on an annualised basis) in July, following a 0.8% increase in June. On a year-over-year basis, the series is up 2.8%. Meanwhile, the Cleveland Fed nowcast indicates +0.25% for July and +0.27% for August…which if repeated through the rest of the year (and why not?) gives the Fed no reason not to cut. The recent inflation reports may have been a bit cooler but a) won’t change the minds of the hawks, and b) don’t indicate that PCE is about to roll over, which means the rest of the FOMC could come around to a September hike. Rising long-end rates is the last thing the Fed wants but that is exactly what we’ve had since the FOMC’s July meet because the market decided Warsh wasn’t going to act and because CPI cooled; but with the deficit rising and inflation sticky the Fed may decide that the bear steepening requires a re-anchoring of the front end in September to flatten the curve, jacking up the front end and bringing in the long.

Today sees US July retail sales, with consensus near 0.2% to 0.3% on the month and a 0.2% rise excluding autos, followed by the preliminary August University of Michigan sentiment survey and the consumer inflation expectations survey. Year-ahead inflation expectations ticked down from 4.6% in June to a still-elevated 4.2% in July