U.S. stocks aim for 5-day winning streak after PCE inflation reading offers no surprises

What’s driving markets

Data showed the cost of goods and services rose a mild 0.2% in July, in line with the forecast for the personal-consumption expenditures index produced by a Wall Street Journal poll of economists. Year over year, the measure showed inflation rose 3.3%, compared with 3% in June.

The core PCE reading, which strips out food and energy prices and is often described as the Fed’s favorite inflation measure, was also in line with expectations, showing a 0.2% monthly rise, while the year-over-year rate ticked up to 4.2% from 4.1%.

“The lack of an inflation surprise to the upside should be cheered by markets because it is unlikely to move the Fed’s bias towards leaving rates unchanged at their next meeting,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note.

All measures of inflation tracked by the Fed moved higher in July on a year-over-year basis, Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a note.

“But monthly gains have downshifted for overall and core PCE prices in recent months. The data bear watching for a reversal of progress on inflation, although our estimates suggest prices pressures will ease over the remainder of the year,” she wrote.

The S&P 500’s rally to a four-week high has coincided with benchmark Treasury yields
BX:TMUBMUSD10Y
pulling back from multiyear peaks as traders bet that some weaker jobs data of late will allow the Federal Reserve to stop raising borrowing costs.

“Since softer employment metrics are one of the most critical inputs for inflation normalization, it has led to a significant shift in the near-term outlook for U.S. interest rates and ignited a rally in stocks and other high-risk assets,” said Stephen Innes, managing partner at SPI Asset Management.

In other data, initial jobless claims fell by 4,000 to 228,000 in the week ending Aug. 26, the Labor Department said. It’s the lowest level of claims since the week ending July 29. Economists polled by the Wall Street Journal had estimated new claims would rise 5,000 to 230,000.

The focus is now on Friday’s August nonfarm payrolls report, which will provide more information “as to whether the labor market is actually softening,” said Richard Hunter, head of markets at Interactive Investor.

The U.S. is expected to add 170,000 jobs in August, down from 187,000 in the prior month, based on a poll of economists by the Wall Street Journal. In contrast, the U.S. added an average 287,000 new jobs a month in the first four months of the year.

See: Hiring likely slowed again last month, but watch out for surprises in U.S. August jobs report

“With traders currently assuming an interest rate pause for September, the question remains as to whether the end of the hiking cycle has been reached. Such an outcome would be positive for growth stocks in particular, which has enabled ongoing strength within the megacap technology sector,” Hunter added.

A trio of well-received earnings reports from technology companies Salesforce Inc., Okta Inc. and CrowdStrike Holdings Inc., delivered after Wednesday’s closing bell, were also providing some support to sentiment.

Companies in focus

• Salesforce shares
  CRM,
  +3.04%
  rallied 3.9%, leading Dow gainers, after the company delivered a strong outlook and improved margins two weeks ahead of the customer-relations-management software giant’s annual Dreamforce confab in San Francisco.

• Shares of Okta Inc.
  OKTA,
  +13.10%
  rose 11.9%. The identity-management software company late Wednesday hiked its annual earnings outlook by about a third after its worst-case scenario of weak business spending never materialized.

• CrowdStrike shares
  CRWD,
  +9.32%
  jumped 9.7% after the cybersecurity company topped expectations with its results and outlook for the latest quarter.

• UBS Group shares
  UBS,
  +4.78%
  rose 4.9%, as the Swiss bank reported a $29 billion profit and said inflows to wealth management have been positive this quarter.

• Dollar General Corp.’s stock
  DG,
  -13.83%
  dropped 14% after the discount retailer posted weaker-than-expected second-quarter earnings and lowered its guidance.

• Shares of AMC Entertainment Holdings Inc.
  AMC,
  +1.30%
  advanced 5% after the announcement that a Taylor Swift movie is coming to theaters in October. Shares of other theater-chain operators, including Cinemark Holdings Inc.
  CNK,
  +1.28%
  and Imax Corp.
  IMAX,
  +0.42%,
  were also higher.