Energy Boost: Stocks Rise on Surprise Upward GDP Estimate, Micron Earnings, Bank Stress Tests

(Thursday market open) As the second quarter and first half of the year wind down, stocks have a firmer tone early Thursday after a surprise upward adjustment to the government’s Q1 Gross Domestic Product (GDP) estimate.

The government raised its third and final estimate for Q1 GDP to 2% today, from the previous 1.3%. That’s rare, as usually these final estimates don’t depart much from the second one. The revision primarily reflected upward revisions to consumer spending and exports, the Bureau of Economic Analysis (BEA) said. While a stronger economy sometimes raises worries about rate increases, currently the market seems to be treating good news as good news.

Today’s early strength could also partially reflect solid earnings released late Wednesday by semiconductor company Micron (NASDAQ:MU). Shares are up across the chip space in premarket trading. In addition, financials stocks are getting an early lift from yesterday’s news that major banks passed the Federal Reserve’s “stress test.” More on both below.

The S&P 500 Index (SPX) is up more than 4% this month and 14% this year—but prospects of higher rates and even a potential recession could keep a lid on rallies approaching July 4 and earnings season. The SPX finished lower in six of the last eight sessions. Volume was well below normal yesterday, however, which could imply lack of conviction.

• The 10-year Treasury note yield (TNX) rose 3 basis points to 3.74%.
• The U.S. Dollar Index ($DXY) slipped to 102.83.
• Cboe Volatility Index® (VIX) futures were steady at 13.51.
• WTI Crude Oil (/CL) climbed to $69.57 after a larger-than-expected U.S. weekly supply draw.

Weekly initial jobless claims fell to 239,000—well below expectations for near 265,000 and down from 265,000 the previous week. This follows three weeks of elevated claims that led to ideas that the labor market might be slowing. The 239,000 number is still up from under 200,000 earlier this year, so the higher trend remains in place.

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Futures trading indicates an 82% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool. That’s up from around 75% earlier this week.

Federal Reserve Chairman Jerome Powell spoke on a panel of central bankers yesterday and raised eyebrows when he wouldn’t rule out consecutive rate hikes (see more below). Powell also appeared to alarm markets by saying “policy hasn’t been restrictive for very long … we believe there’s more restriction coming,” and that the fight against inflation could take another couple of years. Regional bank shares were among the worst performers yesterday.

Passed the audition: On the positive side of the ledger, the Fed took some “stress” off financials sector investors on Wednesday. It declared that every major bank successfully weathered annual stress tests that subject the institutions to a hypothetical worst-case scenario to check how they’d function in such an event. The Fed called the banking system “strong and resilient” after banks passed an even worse scenario than what the Fed put them through last year.

Typically, though not always, some major banks raise dividends and buy back shares after these stress tests, so keep an eye out for any announcements of that sort over coming days. Passing the test makes the financials sector appear stronger heading into earnings season—whether or not banks actually reward investors.

Inflation update: Tomorrow features May’s reading on Personal Consumption Expenditures (PCE) prices, the inflation metric most closely watched by the Fed. The last PCE update—for April—showed an annual increase of 4.4% in the overall rate and 4.7% in the core rate, which excludes food and energy prices.

For May, monthly headline PCE prices are seen up just 0.1%, but the more important core reading is expected to rise 0.3%, according to analyst consensus from Briefing.com. Both rose 0.4% in April. Analysts predict a year-over-year increase of 4.7% for core PCE, unchanged from April. That would imply that “sticky” inflation remains an issue.

Overall PCE has been falling, but core PCE has been stuck near 4.7%, notes Kathy Jones, Schwab’s chief fixed income strategist. Fed Chairman Powell says some of this “stickiness” is due to timing effects, especially for rent costs, and that eventually core PCE will slide. Until that happens, rate hike fears could persist.

Factory floor: Last week featured disappointing manufacturing data from Europe and Japan, hurting markets. Now, China and the U.S. enter the spotlight. It starts this evening at 9:30 p.m. ET with China’s official June PMI. U.S. manufacturing data will be released on Monday.

China’s PMI unexpectedly fell in May to 48.8, from 49.2 in April. That’s contractionary and a five-month low. Output, new orders, and export sales shrank. Since then, China’s added some monetary stimulus, but it’s unlikely it’s had enough time to filter through the economy in a way that would affect tonight’s number. Analysts expect the June PMI to remain in contractionary territory below 50, according to a Reuters survey.

Micron (MU) shares got a boost late Wednesday from better-than-expected earnings. This could provide a lift for the chip sector, which slipped yesterday amid fresh worries about U.S. relations with China. Micron, in a press release, said it believes the struggling memory chip segment has “passed its trough in revenue,” and that it expects margins to improve as the supply and demand imbalance is “gradually restored.” The company also stressed what it called its “competitive positioning” in artificial intelligence (AI).

Nike (NYSE:NKE) ties up the laces on its quarter after the close today. The company’s last earnings report easily beat analysts’ estimates, but margins came under pressure as inventories rose 16% year-over-year.

Listen for anything executives say about the situation in China as it emerges from last year’s pandemic shutdowns. China’s recent economic struggles aren’t good news for companies like Nike with heavy exposure there. China’s recovery, or lack thereof, could also have a big impact on info tech companies as they prepare to report over the coming weeks.