US Markets: A Day of Mixed Signals
Today saw a mixed bag for US stock markets. The Dow Jones and S&P 500 faced declines, while the Nasdaq managed to eke out a small gain. The Russell 2000, representing smaller companies, experienced a significant drop, highlighting increased market volatility.
Index Performance
- The Dow Jones Industrial Average finished down 0.98% at 44,222.58.
- The S&P 500 Index also fell, losing 0.40% to close at 6,243.68.
- The Nasdaq Composite, however, edged up 0.18% to 267.80, primarily driven by strength in a few large-cap tech names.
- The Russell 2000 was hit hardest, falling 1.66%, indicating struggles for small-cap stocks.
Volatility Rises Amidst Soaring Bond Yields
Market volatility is on the uptick. The VIX index, a key measure of market fear, registered 17.03. While a slight dip today, it’s been trending higher, moving from the 15s to the 17s, signaling increased market uncertainty. Still, remaining below 20 suggests extreme panic hasn’t set in yet.
A primary driver of today’s market weakness was rising bond yields. The 10-year Treasury yield climbed 5 basis points (bp) to 4.48%. More significantly, the 30-year Treasury yield gained 3 bp, breaking the psychological 5% barrier to reach 5.01%. The 2-year Treasury yield also saw a 4 bp increase to 3.9%. Higher bond yields make future earnings less valuable when discounted to the present, putting downward pressure on asset prices. This directly impacted the stock market and hit interest-rate sensitive sectors like automobiles particularly hard.
The US Dollar Index strengthened, rising 0.58% to 98.32. A stronger dollar typically weighs on commodities; indeed, gold prices fell 0.65%, and oil prices dipped into the $68 range. Simply put, today was largely about dollar strength and widespread weakness elsewhere.
CPI Data and the Hidden Hand of Tariffs
The latest Consumer Price Index (CPI) data was a central focus. The headline CPI came in at 2.9%, just under the 3% forecast. Core CPI, excluding volatile food and energy, rose 0.2%, also below the 0.3% expectation. While seemingly positive on the surface, a deeper dive revealed underlying concerns.
Analysis showed price pass-through occurring at the consumer level in core inflation. This observation unnerved the market. Speculation quickly turned to the impact of recent tariffs. Are the tariffs, in place for several months, finally causing price increases? This worry fueled the rise in bond yields. For instance, while cereals and meat prices fell, imported fruits and vegetables jumped 0.9%, creating specific concern.
The service sector generally saw prices stabilize or fall, with shelter costs up only 0.2%, and rental costs up 0.3%. Even auto prices (new down 0.3%, used down 0.7%) showed some moderation. However, the Federal Reserve likely looked beyond these figures, recognizing the emergent tariff effects. Year-over-year data painted a clearer picture: eggs up 27%, coffee 12.7%, sugar 5.5%, and soybeans 4.5%. This suggests that companies, after exhausting stockpiles, are now passing on increased costs to consumers, leading to the uptick in inflation and subsequent rise in interest rates.
Uncertainty Looms for Future Rate Cuts
The tariff impact remains a key factor. Federal Reserve Chair Jerome Powell had previously stated the need to monitor inflation in August and September. Today’s data underscores that vigilance. As a result, the FedWatch Tool shows dwindling expectations for a rate cut. The probability of a cut to the 4.00-4.25% range has dropped to 52.5%, down from 59% just yesterday. Similarly, the likelihood of two rate cuts by December (to 3.75-4.00%) now stands at only 40.3%. This leaves the September meeting highly uncertain, with only about a 50/50 chance of a rate cut.
Some, like the “Scarface Senator,” are openly criticizing Powell for not cutting rates and suggesting his departure. However, given today’s inflation data, the Fed is in a tough spot. Future inflation readings, including the upcoming PCE data and next month’s CPI, will be critical. Boston Fed President Susan Collins has urged patience on interest rates, emphasizing the need to monitor the full impact of tariffs.
Trade Policy and Key Stock Movers
In trade news, Trump mentioned a potential agreement with Indonesia for a 19% tariff rate. Vietnam was also discussed for a 20% rate, though neither country has confirmed. Such tariffs impact companies like Crocs and Lululemon, which have strong ties to Vietnam.
A major market mover today was Nvidia. Its shares surged over 4% after receiving US export approval for its H20 chip to China. This chip, previously restricted, is a lower-spec version but marks a significant shift. This development appears to be part of a broader negotiation; it’s speculated that the US is allowing these chip exports in exchange for China’s approval of rare earth element exports. Commerce Secretary Rossini confirmed H20 is Nvidia’s “fourth-best” AI chip, suggesting a strategic compromise.
This H20 approval is expected to significantly boost Nvidia’s revenue, potentially adding an estimated $50 billion in sales, or about $5 per share. This could lead to an upward revision of Nvidia’s target price after its next earnings report.
Company and Sector Performance Highlights
Nvidia’s strength helped the Nasdaq, with its stock breaking above $170, reaching analysts’ target prices. Broadcom and AMD also saw gains due to licensing approvals and Broadcom’s announcement of a new networking chip to compete with Nvidia. These three semiconductor giants led the tech sector.
Nvidia has now solidified its position in the $4 trillion club, boasting a market capitalization of $4.15 trillion. Microsoft and Apple follow in the $3 trillion club, with Amazon, Google, and Meta behind them. Broadcom’s rise pushed its market cap to $1.3 trillion, making it the 8th largest, with TSMC at 9th. Tesla maintained its spot in the $1 trillion club, ranking 11th.
However, most other stocks struggled. Bank stocks were largely down despite mixed earnings, with JPMorgan falling even after good results, due to its CEO’s cautious economic outlook. Wells Fargo also declined after lowering its guidance.
Automotive stocks generally fell, including Tesla, Rivian, GM, and Ford, as they are highly sensitive to rising rates and trade tensions. Tesla’s stock dipped to its 5-day moving average of $310.73, with its 15-day moving average at $312 being breached. The company’s insurance registrations in the US for the first month of the quarter were surprisingly strong at 12,300 units, but its Model Y’s entry into India faces a steep 100% tariff, potentially hindering sales. Leadership changes within Tesla’s North American sales division also raised some concerns.
The Fear & Greed Index moved back to “greed” at 74 from “extreme greed” yesterday. Market breadth was poor, with only 63 stocks rising and 4,772 stocks declining, affecting mid-cap stocks significantly.
Beyond semiconductors, most shopping stocks (Macy’s, Home Depot, Lululemon, Crocs) fell, impacted by tariffs, trade wars, and inflation. Lululemon is nearing oversold territory, and Crocs fell below its $100 target price. Healthcare and airline stocks also mostly declined. In crypto, the sector saw a broad decline due to House legislative hurdles, impacting Coinbase and other related companies.
Disclaimer: This content is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor before making investment decisions.