Tech earnings drive Nasdaq higher

European equities were higher, benefiting from the risk-on sentiment in the U.S., but Asian markets declined. 

Oil prices rose but finished below $100, while government bond yields were little changed.

After accounting for inflation, consumer spending rose slightly in June after declining in May. 

While personal income rose more than expected, it was not able to keep up with inflation, and consumers dipped into savings to sustain spending, with the savings rate declined to 5.1% in June from 5.5%.

The personal consumption expenditures price index, which is the Federal Reserve’s preferred inflation index, rose 1 percent from a month earlier and was up 6.8 percent from a year ago. The annual advance was the biggest in 40 years.

Excluding food and energy, the price index increased 0.6 percent from last month and 4.8 percent from a year ago, a slight acceleration from the previous month.

The takeaway is that inflation remains too high and is weighing on consumer spending, but there are some signs that the peak might be behind us.

Commodity prices have fallen since their June peak, used car prices have started to moderate, and demand in the interest-rate-sensitive sectors of the economy is slowing.

After entering a bear market in the first half of the year, the S&P 500 gained 9 percent in July, its biggest gain since November 2020. 

The encouraging start to the second half has been aided by easing inflation expectations, lower bond yields, and the potential for an earlier Fed pivot. 

Yesterday’s GDP data showed that the economy contracted for the second straight quarter, confirming the steep slowdown in growth that the decline in equities has been discounting. 

The rebound in stocks likely suggests that a lot of bad news was already in the price. To gauge whether the recent stabilization can build into a durable rally will likely be determined by the path of inflation and the pace of Fed tightening. 

Last week’s rate hike brings the fed funds rate to what officials think is the neutral rate, a rate that is not restricting or stimulating economic activity. 

With more signs that growth is weakening and with indications that price pressures are easing, the Fed will likely move more gradually in the three remaining meetings of the year, helping stocks find their footing. But the rate cuts currently assumed by the futures market in 2023 might not materialize if inflation proves stickier than expected.