Markets rebounded sharply Friday from yesterday's selloff after the latest consumer sentiment and inflation data boosted bets that the Federal Reserve would start cutting interest rates in September. Meanwhile, big banks kicked off earnings season with mixed results.
The day kicked off with some mixed economic news that fueled optimism for a more dovish Fed. On the inflation front, the U.S. Bureau of Labor Statistics said the Producer Price Index (PPI), which measures wholesale inflation, rose 0.2% in June, or slightly ahead of economists' forecast for a 0.1% increase.
Core PPI – a relevant metric for the Fed that excludes food, energy and trade costs – remained unchanged month-over-month.
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Separately, the University of Michigan Survey of Consumers hit a yearly low, but both short- and long-term inflation expectations ticked lower.
"The stock market is continuing to hit record highs amid expectations for strong earnings, softening inflation, excitement over Fed rate cuts and a belief that the economy was able to withstand these past few years of high interest rates," writes Clark Bellin, president and chief investment officer at Bellwether Wealth.
Although Friday's strong PPI comes after yesterday's weak June CPI report, Bellin notes that the Fed remains data dependent – and has plenty more data ahead to consider. Nevertheless, "even with Friday's strong PPI, we still believe a September rate cut is in play," Bellin adds.
Markets are desperate for the Fed's Federal Open Market Committee (FOMC) to bring rates down from a 23-year high. The FOMC penciled in just one quarter-point cut to the short-term federal funds rate at its June meeting, but markets are increasingly convinced it will have to ease sooner rather than later.
As of July 12, interest rate traders assigned an 88% probability to the FOMC enacting its first quarter-point cut at its September meeting, up from 85% a day ago, or 60% a month ago, according to CME Group's FedWatch Tool.
At the closing bell, the tech-heavy Nasdaq Composite gained 0.6% to 18,398, while the broader S&P 500 added 0.6% to 5,615. The blue-chip Dow Jones Industrial Average rose 0.6% to finish at 40,000.
Mixed bag for big bank earnings
The nation's largest banks by assets unofficially kicked off second-quarter earnings season with widely divergent results.
JP Morgan Chase (JPM, -1.2%) fell Friday despite releasing second-quarter earnings that topped analysts' expectations.
In the quarter ended June 30, JP Morgan’s revenue increased 20.3% year-over-year to $51 billion and its net income jumped 25% year-over-year to $18.1 billion. Excluding certain items, its net income came in at $13.1 billion, or $4.40 per share.
"The Firm performed well in the second quarter, generating net income of $13.1 billion and a ROTCE (return on average tangible common shareholder's equity) of 20% after excluding a net gain on our Visa shares, a contribution to the Firm’s Foundation and discretionary securities losses," JP Morgan CEO Jaime Dimon said in a statement.
Citigroup (C, -1.8%) stock also declined despite beating top- and bottom-line expectations for its second quarter.
In the quarter ended June 30, Citigroup's revenue increased 3.6% year-over-year to $20.1 billion, which it said was driven by growth across all businesses, particularly in Banking, U.S. Personal Banking and Markets. Its earnings per share (EPS) increased 14.3% to $1.52 from the year-ago period.
Citigroup reiterated that it will be increasing its dividend by 6% in the third quarter, which it first announced on June 28 after the Federal Reserve stress test process.
Woe unto WFC
But the biggest loser in the S&P 500 on Friday was Wells Fargo (WFC, -6%).
The banking giant beat analysts’ expectations on the top and bottom lines for its second quarter, but its net interest income, a key metric for banks, failed to meet expectations.
In the quarter ended June 30, Wells Fargo’s revenue increased 0.8% year-over-year to $20.7 billion despite a 9.4% year-over-year decline in net interest income to $11.9 billion. Its earnings per share (EPS) increased 6.4% to $1.33 from the year-ago period.
"Our efforts to transform Wells Fargo were reflected in our second quarter financial performance as diluted earnings per common share grew from both the first quarter and a year ago," Wells Fargo CEO Charlie Scharf said in a press release.
WFC generated a total return (price change plus dividends) of 24% for the year-to-date through July 11, vs 30% for Citigroup and 24% for JPM. Analysts give WFC a consensus recommendation of Buy, but with mixed conviction, according to S&P Global Market Intelligence.
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