Wall Street gains as megacap tech leads rally

WALL STREET GAINS AS MEGACAP TECH LEADS RALLY (1615 EDT/2015 GMT)

U.S. stocks pulled out of an early decline spurred by concerns about the market's recent run-up to post solid gains on Monday, with the tech titans of Wall Street giving growth stocks an edge over their value counterparts.

Consumer staples S5UTIL, led by a 1.3% rise in Procter & Gamble Co PG, was the biggest percentage gaining sector, while energy SPN fell 1.98%, the most of the two declining sectors.

Tesla Inc TSLA rose 3.10% to provide the single-largest upside to the S&P 500, while information technology S5INFT, led by Apple Inc AAPL, Microsoft Corp MSFT and Visa Inc V, added the biggest boost to the benchmark.

Apple rose 0.63%, Microsoft 0.53% and Visa 2.41%.

The Russell 1000 Growth index rose 0.57% and the Russell 1000 Value index gained 0.16%.

Stocks rallied on Friday on investor optimism that inflation may have peaked in July and drive the S&P 500 and Nasdaq to their fourth straight week of gains. The S&P 500 last week retraced 50% of the losses it incurred after plunging from an all-time peak in January to hit bottom in mid-June.

The retracement is a signal for some of a bull market, while for others it's a bear market rally until a new peak is reached.

U.S. Treasury yields slipped as weak economic data from China revived concerns over the health of the global economy. But the big question for markets is how the Federal Reserve will react to nascent signs of decelerating inflation.

Below is a snapshot of closing market prices

(Herbert Lash)

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DOUBTS ON WHETHER THE FED CAN TAME THE INFLATION SHREW (1245 ET/1645 GMT)

There are two doubts about whether the Federal Reserve can tame inflation without sparking a recession, says the economic research team at Goldman Sachs.

The first is if labor demand can fall mainly through a slide in job openings without knocking the unemployment rate higher, GS says in a note.

"We are optimistic because we are skeptical that job-worker mismatch has increased significantly," GS says.

But GS said it was more uncertain about whether supply and demand can gradually and gently be rebalanced without high inflation becoming embedded.

Slowing economic growth to a below-potential pace so that supply can catch up to demand has gone well, GS says.

But bringing down wage growth and inflation shows little convincing progress so far, GS said. Wage growth has moved sideways at 5.5%, 2 percentage points above the 3.5% pace that GS estimates is compatible with Fed's 2% target inflation.

The good news is that falling commodity prices and supply chain recovery are delivering a long-awaited and much-needed disinflationary impulse from the goods sector.

The bad news is that high inflation is broad-based, measures of the underlying trend are elevated and business inflation expectations and pricing intentions remain high, GS said.

(Herbert Lash)

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ON ANNIVERSARY OF NIXON ENDING GOLD CONVERTIBILITY, WHAT’S THE DOLLAR WORTH? (1210 EDT/1610 GMT)

Monday is the 51st anniversary of when President Richard Nixon put the final nail in the coffin for the gold standard, a move that many blame for the greenback’s rapid loss of purchasing power.

Nixon ended the convertibility of dollars to gold on August 15, 1971 and implemented wage and price controls in an effort to dampen inflation and stop foreign governments from redeeming dollars for the yellow metal.

How has the U.S. currency held up since then? Against its peers, relatively well. The dollar index DXY against six of its major peers is at 106, around 10% lower than the 118 level before Nixon’s action, according to data by Refinitiv.

Against inflation, however, the picture is much worse. The purchasing power of the greenback is down 86% since that date, according to government data, a loss that stings as U.S. price pressures rise at the fastest pace in four decades.

(Karen Brettell)

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STRATEGISTS WORRY THE STOCK MARKET'S JUMPING THE GUN (1145 EDT/1545 GMT)

A risk-on backdrop is in play in equity markets as global government bond yields have taken a material step back since the spring, and as the expected deceleration in inflation has become more evident.

As Bob Doll, chief investment officer at Crossmark Global Investments, sees it in his latest "Deliberations," global inflation expectations have eased amid lower crude oil and commodity prices.

In fact, he says that last week's U.S. CPI report confirmed that "the high-water mark for the past year's surge in inflation" has likely been seen, which should underpin sentiment for a period of time.

However, Doll believes that those expecting a return to the low-inflation environment of the last decade will be sorely disappointed. He thinks inflation will only pullback to the 4%-5% area, well short of the central bank's 2% target.

"A choppy investment environment is probable as investors anticipate an eventual slowing of the pace of rate hikes and less hawkish central bank rhetoric. Once recession fears recede significantly and it becomes apparent that underlying inflation is not headed to the 2% area, then the investing environment may become more difficult again."

Philip Palumbo, founder, CEO, and chief investment officer, at Palumbo Wealth Management, has his own thoughts on inflation.

He says the lesson is that when inflation gets as high as it is, it takes some time to retreat and "that implies that the Fed potentially needs to keep tapping the economic brakes for quite some time."

Palumbo adds that over the last 25 years, the Fed has come to the rescue with increasing speed and urgency.

However, inflation will impede them from repeating that process and the response to economic malaise could come more slowly than the market has come to expect.

"Several Fed commentaries since the CPI data appear to confirm that message but markets continue to rally and the disconnect becomes that much greater. We suspect markets are jumping the gun."

(Terence Gabriel)

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A CASE OF THE MONDAYS: HOMEBUILDER SENTIMENT, EMPIRE STATE (1050 ET/1450 GMT)

A one-two punch of dour indicators released on Monday served as a bitter wake-up call to market participants who have been blithely coasting along over the past week or so under the power of upbeat economic data.

First, the mood of U.S. homebuilders has turned unexpectedly cloudy this month.

The National Association of Home Builders' (NAHB) Housing Market index (USNAHB=ECI) surprised consensus to the downside by sliding 6 points to a reading of 49, the series' first dip into negative territory since the brief pandemic shock.

Excluding that shock, the index's last negative reading was in May 2014.

An NAHB figure below 50 indicates general pessimism in the sector. Analysts expected it to hold steady at July's 55.

"Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders," writes Jerry Konter, chairman of NAHB.

"In a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit," he said.

"Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession," Konter adds.

The report is just the latest among recent indicators that show the U.S. housing market groaning under the weight of the COVID boom, which saw soaring demand sending supply to record lows and home prices through the ceiling. This, along with rising mortgage rates have eroded affordability tossed a bucket of cold water on demand.

Later this week, more housing data is expected in the form of housing starts, building permits and mortgage rates/demand.

Separately, a dire report from the New York Federal Reserve showed East Coast manufacturing activity slamming into reverse.

The NY Fed's Empire State index (USEMPM=ECI) unexpectedly plunged to a stark reading of -31.0 in August, the lowest reading since May 2020.

An Empire State number below zero signifies monthly contraction.

Among the survey's components, new orders and current business conditions also sank into contraction.

Bright spots could be found, however, in the prices paid element shedding 8.8 points to 55.5 and the six-month outlook index flipping back into expansion.

"Momentum in the manufacturing sector certainly has slowed, but this is a collapse" said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We're now very curious about the other regional reports for August, due over the next few weeks. Our bet is that none of them will be as startlingly terrible as this one."

The Philadelphia Federal Reserve is due to release its Philly Fed data on Thursday to flesh out the Atlantic coast manufacturing picture. It's expected to show contraction as well with a slightly less dire reading of -5.

Wall Street was in a mild funk in morning trading, with all three major U.S. stock indexes modestly red.

Energy SPN was suffering the worst of it, dragged down by sliding crude prices CL1!.

(Stephen Culp)

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WALL STREET MEETS SOME INDIGESTION AFTER RECENT RALLY (1000 ET/1400 GMT)

After posting weekly gains for four straight weeks in a surge that drove the S&P 500 past the 50% retracement of its peak to its June lows, the benchmark index may be set to back off recent momentum if history repeats, with China data providing a ready excuse.

The S&P 500 SPX and Dow industrials DJI are slightly red, while the Nasdaq IXIC is edging green. Small caps RUT, semiconductors SOX and Dow transports DJT are down. Five of the 11 S&P 500 sectors are lower, led by an almost 4% drop in energy SPN. Consumer staples S5CONS is leading the gainers.

Weak economic data from China rekindled fears of an economic slowdown in the world's second-largest economy that could snarl supply chains and curb global growth.

Chinese industrial output grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4.6% increase expected by analysts in a Reuters poll.

On average the S&P 500 has stalled a bit once reaching the 50% threshold as the average frequency of advance (FoA) was only slightly better than that of a coin toss at 54%, according to Sam Stovall, chief investment strategist at CFRA.

But two and three month later, the benchmark index has posted a frequency of advance (FoA) of 77% and 69%, respectively, Stovall says.

Another reason the market may be due to dip is that as of Aug. 12, 93% of the sub-industries in the S&P 1500 were trading above their 40-week, or 200-day, moving average, he said.

That's well above the 85% level representing one standard deviation above the mean since 1995. As a result, the S&P 500 may be primed for a digestion of its recent four-week climb.

Here's a snapshot of early market prices:

(Herbert Lash)

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CLEAN ENERGY STOCKS: SUDDENLY NOT SO MESSY (0900 EDT/1300 GMT)

Green energy stocks have certainly been humming of late. In the wake of sweeping legislation to fight climate change, among other initiatives , the WilderHill Clean Energy Index (.ECO) has now risen more than 41% this quarter.

With its recent strength, the renewable energy index is nearing where it ended the day Joe Biden was elected president:

In what was perhaps a classic case of "buy the rumor, sell the news," the ECO topped on a closing basis on Feb. 9, 2021, just shortly after Joe Biden took office. It then lost about 70% of its value into its May 11, 2022 closing low.

Since then, the ECO has strengthened, while outperforming the S&P 500 index SPX and traditional energy stocks. The ECO has rallied 53% since May 11 vs a 9% gain for the benchmark index, and a 1% rise for the S&P energy sector SPN.

The ECO ended Friday at 134.53, which put it back above its 200-day moving average for the first time since Nov. 29, 2021.

However, the index now faces a number of additional hurdles that reside from around 138.75 to 144.27, or only around 3%-7% above Friday's close.

These levels include a log-scale resistance line from the February 2021 high, the level the ECO closed on the day Biden was elected, at 140.71, and the April 5, 2022 high at 144.27.

Since closing below 140.71 on Jan. 6, 2022 , the ECO has only managed one daily close above that level, which occurred on April 4. The index then kicked off a sharp slide into its May low.

Traders now will be watching ECO action closely as it attempts to contend with these levels.

(Terence Gabriel)

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