Stocks were choppy Wednesday even as the latest inflation data all but solidified expectations the Federal Reserve will start cutting interest rates at its next meeting in September. The main question now is how large that rate cut will be.
According to CME Group's FedWatch Tool, futures traders are pricing in a 65% chance the central bank will lower the federal funds rate by a quarter-percentage point next month, up from yesterday's 47% probability. The odds of a 50 basis-point cut (0.50%) fell to 35% from Tuesday's 53%.
The revised outlooks follow this morning's release of the Consumer Price Index (CPI), which increased 0.2% in July vs the prior month. Year-over-year, headline CPI was up 2.9%, the smallest annual increase since early 2021.
Core CPI, which excludes volatile food and energy prices, was up 0.2% month-over-month and 3.2% year-over-year in July – also the slowest pace of annual growth in three years.
"Market participants are confounded following this morning's CPI report, which produced a morning reversal in equities and fixed income after yesterday's strong gains," says José Torres, senior economist at Interactive Brokers. "On the one hand, inflationary pressures are well contained near 3%, but on the other, shelter costs accelerated fiercely due to lighter mortgage rates and an underbuilt housing market."
As a result, the Nasdaq Composite pared most of an early lead to end the day up just 0.03% at 17,192. Meanwhile, the S&P 500 (+0.4% at 5,455) and the Dow Jones Industrial Average (+0.6% at 40,008) finished with more notable gains.
Kellanova stock pops on $36 billion buyout buzz
In single-stock news, Kellanova (K) shares jumped 7.8% after Mars confirmed it will buy the Pringles parent in an all-cash deal valued at nearly $36 billion, including debt. The bid from the privately held candy and pet food maker works out to $83.50 per Kellanova share, or a 12% premium to last night's close.
The deal "speaks to Mars' snacking ambitions," says Jefferies analyst Rob Dickerson, who has a Hold rating on Kellanova. "Mars has stated previously that doubling its snacking business is a goal over the next decade. By our math, a K acquisition would increase Mars' global and U.S. snacking businesses by roughly 40% and 60%, respectively."
Alphabet drops on more DOJ woes
Elsewhere, Alphabet (GOOGL) fell 2.3% after a Bloomberg report indicated the Justice Department is considering breaking up the company's Google division. This follows last week's court ruling that found Google has illegally maintained a monopoly in search and text advertising.
While any process of splitting up Google faces a long road in the legal system, Needham analyst Laura Martin (Buy) supports the move. "We believe that GOOGL is worth more in pieces than together, so we welcome regulators' attempts to break up GOOGL," she writes in a note to clients.
Southwest gears up for proxy fight
Meanwhile, Southwest Airlines (LUV) stock slipped 0.2% after a report in The Wall Street Journal suggested activist investor Elliott Investment Management is readying a proxy battle with the discount airline. Elliott plans to call for a special meeting and nominate 10 directors to Southwest's 15-member board.
"Although Elliott is likely able to convene a special meeting of the LUV board of Directors, we are doubtful that the 10 proposed (still unconfirmed) board members would be supported by the current shareholder base," said Jefferies analyst Sheila Kahyaoglu (Underperform, the equivalent of Sell). The analyst doesn't believe investors will vote out current leadership with a "go-forward plan" in place.
