Stocks Retreat Ahead of Wednesday’s U.S June CPI Data

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday close down -0.27%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.13%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.44%. 

U.S. stock indexes Tuesday closed moderately lower.  The overall market Tuesday was weighed down by concern a flare-up in Covid infections in China could lead to expanded pandemic restrictions that slow economic activity and lead to supply-chain turmoil.

Stock indexes extended their losses Tuesday afternoon on inflation concerns ahead of Wednesday’s U.S. consumer price index for June, which is expected to climb to a new 40-year high of +8.8% y/y although the core CPI on a year-on-year basis is expected to move lower.

A slump of more than -7% in crude oil prices Tuesday undercut energy stocks but also boosted airline stocks.  Cautious comments Tuesday from the CEO of ServiceNow weighed on software stocks when he warned about the macroeconomic environment.

Hawkish comments Tuesday from Richmond Fed President Barkin were bearish for stocks when he said he expects another elevated reading from U.S. June CPI, and he backs raising interest rates to neutral "expeditiously as we can."

The markets remain cautious ahead of the Q2 earnings season that starts this week, which will provide clues about the state of the economy and how companies are navigating inflation and supply constraints.   Major Wall Street banks are expected to begin reporting this week, along with other companies such as Fastenal, Delta, Cintas, and Conagra.

Today’s stock movers…

ServiceNow (NOW) closed down more than -12% Tuesday to lead losers in the S&P 500 after CEO McDermott gave cautious commentary on the macroeconomic environment, which prompted Stifel to say that the company “is likely” to lower expectations when they report earnings in two weeks.

Other software stocks tumbled on his comments.  Atlassian Corp Plc (TEAM) closed down more than -8% to lead losers in the Nasdaq 100.  Also, Datadog (DDOG) and Crowdstrike Holdings (CRWD) closed down by more than -6%, and Microsoft (MSFT) and Intuit (INTU) closed down by more than -4%.  Finally, Salesforce (CRM) closed down more than -4% to lead losers in the Dow Jones Industrials.

Energy stocks and energy service companies were under pressure Tuesday after crude prices plunged more than -7%.  As a result, Occidental Petroleum (OXY), Diamondback Energy (FANG), Hess Corp (HES), and Marathon Oil (MRO) closed down by more than -3%. Also, ConocoPhillips (COP), Valero Energy (VLO), Devon Energy (DVN), Baker Hughes (BKR), and Haliburton (HAL) closed down by more than -2%.

The Gap (GPS) closed down -5% Tuesday after CEO Syngal was terminated, and the company said it expects rising costs and deepening discounts to erase this quarter’s operating profit.

Airline stocks rallied Tuesday after crude prices sank more than -7% and after American Airlines stuck with its forecast for a Q2 sales jump despite rising costs. American Airlines Group (AAL) closed up more than +9% to lead gainers in the S&P 500.  Also, United Airlines Holdings (UAL) closed up by more than +8%, and Delta Air Lines (DAL) closed up by more than +6%.  In addition, Southwest Airlines (LUV) closed up more than +4%, and Alaska Air Group (ALK) closed up more than +3%. 

Boeing (BA) closed up more than +7% Tuesday to lead gainers in the Dow Jones Industrials after Air Lease said it has 430 new aircraft on order from Boeing and Airbus set to deliver through 2028.

Across the markets…

Sep 10-year T-notes (ZNU22) on Tuesday closed up +9 ticks, and the 10-year T-note yield fell -3.9 bp at 2.954%.  A rally in German bund prices Tuesday provided carry-over support to T-notes after the 10-year German bund yield fell to a 5-week low Tuesday of 1.092%.  Also, a slide in stocks Tuesday boosted the safe-haven demand for T-notes.  In addition, T-note prices saw support with Tuesday’s decline in the 10-year breakeven inflation expectations rate to a 10-1/2 month low of 2.268%. 

T-note prices fell back from their best levels Tuesday afternoon on weak demand for the Treasury’s $33 billion auction of reopened 10-year T-notes.  The auction had a bid-to-cover ratio of 2.34, well below the 10-auction average of 2.49. Hawkish comments Tuesday afternoon from Richmond Fed President Barkin also weighed on T-notes when he said he expects another elevated reading from U.S. June CPI on Wednesday.

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