Markets whipsaw as rotation out of tech shares continues

Dow rebounded 250, advancers over decliners 3-1 & NAZ remained weak, sliding back 12.  The MLP index was flat at 290 & the REIT index added 3 to 401.  Junk bond funds inched higher & Treasuries saw buying which lowered yields (more below).  Oil was fractionally off in 77s & gold retreated a huge 49 to 2366.

Dow Jones Industrials 

The US economy grew at a faster pace than expected at the beginning of 2024 as consumers continued to open their wallets despite ongoing inflation & high interest rates.  Gross domestic product, the broadest measure of goods & services produced across the economy, grew by 2.8% on an annualized basis in the 3-month period from Apr- Jun, the Commerce Dept said in its first reading of the data.  That is much higher than the 2% increase forecast & the 1.4% pace seen during the first qtr.  Consumer spending, which accounts for about 2/3 of GDP, saw a solid increase during the 2nd qtr.  It rose 2.3% for the period, up from the 1.5% figure recorded the previous qtr, as Americans boosted their spending on goods.  Business investment also rose at a brisk 5.2% pace in the spring, even as companies dealt with headwinds like high interest rates.  "GDP doubled from the first quarter as consumers spent more than expected and businesses built up inventories expecting continued good consumer demand," said Robert Frick, corp economist at Navy Federal Credit Union.  "This was a nice surprise in further support of the expansion continuing, but not so nice as to make the Fed hesitate in cutting interest rates."  Despite the increase last qtr, the economy still appears to be moderating in the face of higher borrowing cost, the steepest in more than 2 decades.  Before the Federal Reserve aggressively hiked interest rates in 2022 & 2023 to cool inflation, economic growth was much higher than it is now.  There are other signs that growth is slowing in the face of tighter monetary policy.  Job growth is moderating.  The housing market, which is vulnerable to higher interest rates, is trapped in a prolonged downturn & consumer spending has shown signs of leveling off.

US economy grew faster than expected during the second quarter

Treasury yields declined as investors sifted through a batch of economic data & prepared for next week’s Federal Reserve meeting.  The yield on the 10-year Treasury was down by 5 basis points to 4.234% & the 2-year Treasury yield was less than 1 basis point lower to 4.406%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Yields ticked up slightly after a Commerce Dept report suggested that economic growth has been stronger than expected.  Meanwhile, initial jobless claims for last week came in at 235K, matching expectations.  This week has shown conflicting signs of which way the US economy is headed.  Data released from the manufacturing sector for Jul came in below expectations, with the US PMI flash manufacturing output index falling to 49.5 as new orders, production and inventories fell.  The forecast expected the figure to come in at 51.5.  Readings below 50 indicate a contraction, while those above 50 reflect growth.  Markets are widely expecting interest rates to remain unchanged then, but are hoping to gain hints about what the path ahead for rates could look like, including when cuts may begin & how many there could be this year.

Treasury yields fall as traders weigh economic data, look to next week’s Fed meeting

Ford (F) came in short of 2nd-qtr earnings expectations while beating on revenue, due to warranty costs that have plagued the automaker for several years now.  The automaker increased its full-year target for free cash flow but maintained its 2024 earnings guidance, disappointing some investors who had hoped for a hike.  Ford's guidance for the year includes adjusted earnings before interest and taxes (EBIT) of $10-12B.  Profitability was affected by increases in its warranty reserves used to pay for vehicle issues.  The costs are related to vehicles for the 2021 model year or older, CFO John Lawler said.  But recent initiatives to improve quality & vehicle launches are paying off & are expected to help bring down future warranty costs.  “We’re making real progress in raising quality, lowering costs and reducing complexity across our entire enterprise,” Lawler said.  “We’re making real progress on quality that will benefit us down the road.  EPS was 46¢ compared to 47¢ a year earlier.  Adjusted EBIT declined 27% year over year to 47¢ per share, compared to 72¢ per share, during the 2nd qtr of 2023.  Overall revenue for the 2nd qtr, including its finance business, increased about 6% year over year to $47.8B.  CEO Jim Farley said that his Ford+ restructuring plan remains on track to make the automaker more profitable.  The stock sank 2.32 (17%).

Ford shares tumble after massive earnings miss

Stocks are running into a wall as traders start to question when tech companies' huge investments in AI will start to pay off.  Unimpressive earnings from big tech companies this week have dented hopes that Big Techs can live up to their AI-fueled sky-high valuations.  At the same time, concerns about the robustness of the US economy are emerging as big-name earnings misses cast doubt on how consumers are holding up in the face of historically high borrowing costs.  Gold's decline today may be getting caught up in risk-asset selloff.