Stocks posted broad-based gains on relatively low volume Tuesday thanks to some better-than-expected wholesale inflation data and optimism that tomorrow's reading on consumer prices will permit the Federal Reserve to lower interest rates next month. Solid earnings from a blue-chip bellwether also helped boost sentiment.
Inflation in focus
Federal Reserve Chief Jerome Powell has said repeatedly that the Federal Open Market Committee (FOMC) will remain data dependent in deciding when to bring the short-term federal funds rate down from a 23-year high. As such, it should come as no surprise that market participants have become exquisitely sensitive to all the various ways in which the U.S. government measures price changes.
On Tuesday, the main measurement of wholesale inflation was in the spotlight – and traders and investors liked what they saw.
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The Producer Price Index (PPI) increased 0.1% in July after rising 0.2% in June, the Bureau of Labor Statistics reported this morning. Core PPI, which excludes volatile food and energy prices, was flat month-over-month. The data came in lower than the 0.2% rise economists were expecting for both readings.
On a year-over-year basis, headline PPI slowed to 2.2% vs the 2.7% increase seen in June, while core PPI accelerated to 3.3% from 3.2% the month prior.
"The PPI data this morning came in lower than expected – across the board – which is good news for those investors that worried the Fed would have to be more cautious in lowering interest rates due to lingering inflation," says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
Inflation will be front and center once again tomorrow with the release of the more widely followed Consumer Price Index (CPI). As for the next CPI report, the July inflation figures are slated for release by the BLS on August 14 at 8:30 am Eastern time. The Federal Reserve Bank of Cleveland predicts annual headline inflation to increase by 3%, or the same rate seen in the soft June CPI report. On a monthly basis, July inflation is forecast to rise 0.2% vs the 0.1% decline seen in June.
"Investors are piling into risk assets as this morning's news of lighter-than-expected wholesale inflation has rate watchers screaming for 50 [percentage points of rate cuts] in September," writes José Torres, senior economist at Interactive Brokers. "Traders hope that continued economic growth and decelerating price pressures will allow the Fed to engineer a soft landing while corporate earnings projections remain healthy."
As of August 13, interest rate traders assigned a 55% probability to the Fed enacting a half-point cut at its September meeting, according to CME Group's FedWatch, down from 50% a day ago and just 6% one month ago.
While the latest inflation prints will certainly influence what the central bank does at the next Fed meeting, the CPI report is not the Fed's preferred inflation gauge. Rather, the Fed sets its long-term 2% target based on data contained in the Personal Consumption Expenditures Price Index, which is set for release on August 30.
Nevertheless, Tuesday's upbeat inflation report helped stocks finish the session with gains. At the closing bell, the blue-chip Dow Jones Industrial Average rose more than 1%, or almost 409 points, to 39,765, while the broader S&P 500 gained 1.7% to 5,434. The tech-heavy Nasdaq Composite jumped 2.4% to end at 17,187.
Starbucks perks up
Starbucks (SBUX) stock vaulted 24.5% after the coffee chain said Laxman Narasimhan is out as CEO, effective immediately, and will be replaced by Chipotle Mexican Grill (CMG) CEO Brian Niccol on September 9. Rachel Ruggeri, chief financial officer at Starbucks, will serve as interim CEO until Niccol comes on board.
Niccol is replacing Narasimhan, who has had a tough time during his short tenure as Starbucks CEO. Indeed, through the August 12 close, the large-cap stock had declined more than 20% since Narasimhan was named CEO in March 2023.
According to S&P Global Market Intelligence, the average analyst target price for SBUX stock is $89.66, representing implied upside 16% to last night's close – but a 7% discount to current levels. Analysts could upwardly revise their price targets following today's pop.
Chipotle stock, for its part, plunged on the news of the CEO's departure, losing 7.5%. Niccol became the 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 roughly 700%. He is leaving effective August 31.
"I cheered at the Starbucks news and on the Starbucks side, because the stock has been a colossal disappointment, as has Laxman. I'm sorry to say that," said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, in a statement. "It was great to see the board take action, though they had to be prodded by activist investors. But Brian Niccol just worked magic at Chipotle … Niccol will fix Starbucks."
Home Depot helps the Dow
Home Depot (HD) was the most notable name on today's earnings calendar, with the home improvement retailer disclosing top- and bottom-line beats for its second quarter. However, the company also lowered its full-year comparable sales outlook.
"My takeaway from Home Depot's earnings was mostly positive, a solid beat on earnings per share and revenues even on the year-over-year comparisons," says Brian Mulberry, client portfolio manager at Zacks Investment Management. "There were some specific cautious notes from management around slowing in the DIY home improvement segment due to high interest rates and slowing consumer spending."
Mulberry adds that the company's PRO segment continues to do well and recent acquisitions should help bolster this division.
Perhaps most important, Home Depot "highlighted strong underlying long-term fundamentals supporting home improvement demand," wrote Jefferies analyst Jonathan Matuszewski, who rates the stock at Buy. The bellwether retailer's buoyant longer-term view of the housing market helps explain HD's positive price action even as the company's critical metric of same-store sales declined.
According to S&P Global Market Intelligence, the average analyst target price for HD stock is $383.08, representing implied upside of more than 10% to current levels. Meanwhile, the consensus recommendation is a Buy.
As the fourth most important stock in the price-weighted Dow Jones, HD's 1.2% gain helped lift the blue-chip barometer back within striking distance of the psychologically soothing 40,000 level.
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