U.S. Stocks Rally on Strong Retailer Earnings; Brief Bond Inversion Puts FOMC, Powell on Notice

Investors treated the Fed minutes as a non-event, choosing instead to shift their focus on Powell’s speech at Jackson Hole on Friday. The muted price action in all the final markets indicates some investor indecision and impending volatility. In other words, investors are keeping their powder dry.
James Hyerczyk
U.S. Stock Markets

The major U.S. stock indexes opened better on Wednesday and traded within a narrow range most of the session before finishing higher. Most of the gains occurred in the pre-market session in response to strong quarterly results from retailers Target and Lowe’s.

The reaction to the Fed minutes was a dud with most investors expecting them to reiterate the Fed’s monetary policy statement and press conference remarks from Fed Chair Jerome Powell. The price action clearly indicates investors are keeping their powder dry ahead of the Powell’s speech at Jackson Hole on Friday.

In the cash market, the benchmark S&P 500 Index settled at 2924.43, up 23.92 or +0.85%. The blue chip Dow Jones Industrial Average finished at 26202.73, up 240.29 or +0.95% and the technology-based NASDAQ Composite Index closed at 8020.21, up 71.65 or +0.94%.

Strong Earnings Lift Investor Sentiment

The tone of the day was set in the premarket session after Target posted second-quarter results that topped analyst expectations. The company’s same-store sales, a key metric for retailers, expanded by 3.4%. Analysts expected growth of 2.9%. Shares soared more than 20% to a record high.

Lowe’s followed with strong earnings of their own. Shares surged 10.4% after CEO Marvin Ellison said the company capitalized on strong “holiday event execution and growth in Paint and our Pro business to deliver strong second quarter results.”

Despite recession warnings and market volatility, last week’s retail sales data and Wednesday stronger-than-expected earnings reports from Target and Lowe’s shows the U.S. consumer is strong enough to keep the economy moving forward, which makes the job of the Fed even more difficult.

“The underlying consumer is doing well and making more money. More importantly, they’re spending more money,” Bank of America CEO Brian Moynihan told CNBC’s Becky Quick. “The U.S. consumer continues to spend and that will keep the U.S. economy in good shape,” he added.

Fed Minutes and Another Yield Curve Inversion

Investors treated the Fed minutes as a non-event, choosing instead to shift their focus on Powell’s speech at Jackson Hole on Friday. The muted price action in all the final markets indicates some investor indecision and impending volatility. In other words, investors are keeping their powder dry. But you can’t keep this market down for too long. This means dovish comments from Powell could launch a spectacular rally.

The minutes from the July FOMC meeting showed the Fed has no “pre-set course” for cutting rates. The Fed cut rates by 25 basis points in July, while signaling that it was only a “midcycle adjustment” and the central bank was not returning to the stimulus era.

Another brief inversion by 2-year and 10-year Treasury note yields, however, put the Fed and Powell on notice that they must respond to the threat of a recession aggressively.

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