Market Wrap US-Europe 13 August: Nasdaq Climbs 0.8 Percent as Core Producer Prices Rise and Europe Slips

By The Edge Research Team

Wall Street rallied on Thursday after headline producer prices came in flat, with the Nasdaq Composite climbing 0.81 percent, while European bourses mostly fell and crude extended its decline. All three US benchmarks rose and three of the four European indices closed lower.

The inflation report set the backdrop, and it was more mixed than the headline suggested. The Bureau of Labor Statistics reported that the producer price index for final demand was unchanged in July, with final demand goods down 0.7 percent and services up 0.2 percent, and the index up 4.7 percent over twelve months. The flat headline rested on a 3.1 percent fall in energy prices and a 0.9 percent fall in food. Prices for final demand less foods, energy and trade services rose 0.4 percent in July after rising 0.1 percent in June, and 4.7 percent over twelve months, so the underlying measure accelerated while the headline did not. The bureau also revised June, which it had reported as a fall of 0.3 percent and now describes as a decline of 0.1 percent. Treasury yields fell across the curve, the 2-year down 4.8 basis points to 4.151 percent, the 10-year down 4.1 basis points to 4.651 percent and the 30-year down 2.8 basis points to 5.219 percent, with the front end falling furthest. Equities followed. The Nasdaq Composite closed at 26,803.03, up 0.81 percent and the strongest of the seven developed benchmarks tracked here, per CNBC. The S&P 500 added 0.65 percent to 7,798.99 and the Dow Jones 0.13 percent to 53,839.99, a spread between the Nasdaq and the Dow of some 68 basis points, our calculation.

Europe went the other way. The Euro Stoxx 50 was the exception, up 0.18 percent at 6,545.47. Germany’s DAX slipped 0.12 percent to 26,299.74, France’s CAC 40 lost 0.28 percent to 8,650.56 and Britain’s FTSE 100 fell 0.56 percent to 10,772.67, the weakest of the seven. European markets were open when the producer price data was released and closed before the final stretch of the US session.

In commodities, the declines extended. Brent crude traded at 86.97 dollars a barrel, down 2.26 percent, and West Texas Intermediate at 81.18 dollars, down 2.51 percent, after the US Energy Information Administration reported that commercial crude inventories rose 17.4 million barrels in the week to 7 August. Gold for December delivery on the COMEX exchange was quoted at 4,403.90 dollars an ounce, down 1.42 percent. These are intraday quotes rather than settlement prices.

In currencies and crypto, the dollar was mixed and volatility was subdued. The euro was little changed at 1.1526 dollars, up 0.02 percent, while sterling eased 0.06 percent to 1.3484. The dollar firmed 0.08 percent against the yen to 159.53. The Kuwaiti dinar was unchanged at 0.3072 to the dollar. The National Bank of Egypt published the dollar at 50.23 pounds to buy and 50.33 to sell, updated at 14:09 Cairo time. Bitcoin rose 0.11 percent to 63,374.20 dollars and the CBOE volatility index edged up 0.55 percent to 14.63.

For reference, Thursday’s closes across the Middle East and Asia from our earlier wrap were led by South Korea’s Kospi, up 3.56 percent for a fourth consecutive session. Japan’s Nikkei 225 rose 1.16 percent and Taiwan’s weighted index 1.11 percent, while both mainland Chinese boards fell and five of the eight Gulf lines closed lower.

Table – US equities, 13 August close, ranked by change:

Table – Europe equities, 13 August close, ranked by change:

Table – MENA equities, Thursday 13 August closes, for reference, ranked by change:

Table – Asia equities, Thursday 13 August closes, for reference, ranked by change:

Table – Commodities, intraday 13 August, ranked by change:

Table – Currencies, intraday 13 August:

Table – US Treasury yields, intraday 13 August, ranked by change:

Table – Volatility and crypto, intraday 13 August, ranked by change:

Why it matters: Thursday reads better as a narrow repricing of US rate risk than as a broad risk rally, and the producer price report is the reason to be careful about it. The headline was unchanged, which is what markets traded, but the flat print was built on a 3.1 percent fall in energy and a 0.9 percent fall in food, while the measure stripping out foods, energy and trade services rose 0.4 percent after 0.1 percent in June. Underlying producer inflation accelerated in the same report that looked benign at the top line, and the bureau also revised June’s decline from 0.3 percent to 0.1 percent. Bonds and equities responded to the headline. The whole Treasury curve fell with the 2-year down furthest at 4.8 basis points, a shape consistent with a repricing of near-term policy expectations rather than a material reassessment of growth, and the equity response fits: the Nasdaq’s 0.81 percent against the Dow’s 0.13 percent is a 68 basis point spread, our calculation, and longer-duration equities are where a lower rate path is worth most. Confirmation stops there. The volatility index rose slightly rather than falling, Bitcoin barely moved, and crude fell more than 2 percent on its own inventory data. Europe’s three declines are not evidence that Europe read the data differently, since European markets were open for the release but closed before the final stretch of the US session, so the two closes are not a synchronous comparison. US equities and Treasuries rallied on the inflation headline; the response did not broaden consistently across other asset classes.

Outlook: The first question is whether the front-end move survives contact with the next data, because it was made on a headline that the same release partly contradicts underneath. The 4.8 basis point fall in the 2-year reflected a meaningful repricing of near-term policy expectations, but a core measure accelerating to 0.4 percent monthly and holding 4.7 percent annually could limit the durability of that move if subsequent inflation data remain firm, and the July personal consumption expenditures price index and subsequent inflation releases will test which half of Thursday’s report the market was right to trade. The second is Europe, which reopens on Friday with a completed US session to price rather than a partial one. Crude is the third and it is trading on its own physical fundamentals, with the 17.4 million barrel US inventory build accompanied by a rise in crude imports of about 1.14 million barrels a day on the week and a fall in crude exports of 627,000 barrels a day to 3.058 million. Together those shifts moved the crude trade balance by roughly 1.77 million barrels a day week on week, equivalent to about 12.4 million barrels over seven days, our calculation, or close to three quarters of the reported build. For the Gulf, Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, Egypt and Jordan are closed until Sunday and will reopen with two US sessions and the crude move to price at once; Dubai and Abu Dhabi trade Friday and will take the first of it.

Sources: CNBC; US Bureau of Labor Statistics; US Energy Information Administration; Cboe; National Bank of Egypt.

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