Nasdaq hit by Tesla results, Banks still buoyant

Nasdaq fell sharply following a disappointing earnings report from Netflix, with Tesla adding a somber counterpoint. Netflix lost subscribers, less than expected but still negative, and its price fell 8%. Tesla’s sharp price drop, down 6% this morning, came in the face of better revenues and earnings than forecast, and was attributed to margins below expectations. Third quarter production was reported as being lower on factory upgrades. This morning's weekly jobless numbers also raised risks of a more hawkish Fed, which may then have negative implications of the economy and stocks. Commodity prices spiked on issues relating to the war in Ukraine.

Bottom-line: Risk-off.

TODAY’S MAJOR NEWS

Unemployment claims highlight tight labor market

Wall Street focused on the declining headline unemployment claims number, reflecting the current trend of a tightening jobs market. This matters to the Federal Reserve, as containing wage inflation is one of the primary keys to closing that gap to the 2% inflation mandate. It took two years to get down to 3% but going the final 1% to get to 2% will likely be the most difficult part of this fight if the economy is heating up again with a tightening jobs market.

• First-time claims for unemployment benefits fell to 228,00 in the week ending July 15, less than an expected 241,00, and down from 237,00 the previous week
• The four-week moving average fell to 237,500 claims, down from 246,750 claims last week.
• Continuing claims for the week ending July 8 increased by 33,000 to 1.754 million, while the four-week moving average slipped lower by 1,750 to 1.732 million

Higher commodity prices bad for inflation

Headline inflation fell to 3% over the past year largely with the help of declining commodity prices. Wall Street has largely operated off the assumption that commodity prices were down to stay, but that can no longer be assumed. Soft commodity prices are spiking on fears over crop yields and Russia curtailing Ukrainian exports. There are implications there for the crude oil market as well, particularly if shipments from Russia are limited and with OPEC+ tightening production.

Russia executed airstrikes on Ukraine port facilities for a third night in a row, although the response by the commodity markets was less explosive this time. The seriousness of the situation was seen in a threat from Russia on Wednesday when it said that it would consider any ship moving toward Ukraine as possibly containing military equipment and a possible target. Ukraine has since warned that any ships heading to ports in Russia, or occupied areas of Ukraine, may also be considered military targets.

Jamie’s risk list

JPMorgan Chase CEO Jamie Dimon signaled risks the US economy as he reported Q2 earnings, all of which we’ve echoed in this column: stubborn core inflation, the need for higher interest rates than markets anticipate, large fiscal deficits, and the Ukraine war.  When Jamie suggests that "headwinds are substantial and somewhat unprecedented” we should all listen very closely.

"Consumers are slowly using up their cash buffers, core inflation has been stubbornly high — increasing the risk that interest rates go higher and stay higher for longer — quantitative tightening of this scale has never occurred, fiscal deficits are large and the war in Ukraine continues, which in addition to the huge humanitarian crisis for Ukrainians, has large potential effects on geopolitics and the global economy."

Ending the grain deal’s humanitarian cost

The UN Security Council will meet tomorrow to discuss the "humanitarian consequences" of Russia's withdrawal from the Black Sea Grain Initiative, with many potential geopolitical implications. Does the UN become more involved in the Ukraine war by taking additional steps against Russia, that further angers President Putin, leading him to take additional actions? Does it mean that the UN offers "safe corridor" protection for ships to keep grain flowing, potentially pulling other nations into the war if their resources are then a target of Russia? If so, what then might Russia do in response? There are a lot of questions going into tomorrow's meeting, and that meeting may create more questions which impact commodity markets.

Get paid quickly with FedNow

The Federal Reserve has launched its FedNow instant payment service, allowing consumers and businesses to send and receive money in seconds. The service will challenge the rational for competing money services, from PayPal and Zelle to crypto’s like Bitcoin and Ethereum. FedNow isn’t offered directly to individuals and businesses, but as infrastructure to enable banks to make instant payments. The initial limit per customer credit transaction will be $100,000, and money can move from consumer to consumer, from consumers to businesses, or from business to business.

"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," said Federal Reserve Chair Jerome Powell. Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid."

TODAY’S MAJOR MARKETS

Equity markets

• Markets fell sharply in morning trade, led by a 1.9% fall in Nasdaq, with the S&P 500 and Russell 2000 down by 0.6% and 1.0% respectively
• The KBW Bank Index was up for a third day by 0.3%, and up by 4.3% over a week
• Global markets fell, with the Nikkei 225 and DAX down by 1.2% and 0.5%respectively, while the FTSE was up 0.3%
• The VIX, Wall Street’s fear index, was unchanged at 13.7

Currencies and Bonds

• The dollar rallied 0.6% against a basket of currencies, at 100.9
• Yen, Euro and Sterling cross rates were all off 0.6%
• Bonds edged lower, with yields on 2- and 10-year Treasuries at 4.87% and 3.87% respectively

Commodities

• Crude oil prices rose 0.4% to $75.6 per barrel, moving closer to another possible test of chart resistance at the 200-day moving average
• Silver led the precious metals lower, down 1.7% to $25.0 per ounce, while gold was off by 0.6% at $1,969 per ounce
• Grain and the oilseed sector consolidated following recent sharp gains as the Ukraine grain deal ended, with all eyes on developments in the Black Sea

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com