Stocks Slide as Strong CPI Keeps Aggressive Fed in Play

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.14%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -1.27%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.01%. 

U.S. stock indexes this morning are moderately lower, with the S&P 500, Dow Jones Industrials, and the Nasdaq 100 all falling to 1-week lows.  U.S. stock indexes moved sharply lower after a larger-than-expected increase in U.S. June consumer prices reinforced speculation the Fed will continue to raise interest rates aggressively.  Stock indexes maintained moderate losses after Bank of America forecasted a mild recession in the U.S. this year.

The U.S. June CPI rose +9.1% y/y, stronger than expectations of +8.8% y/y and the largest increase in 41 years.  June CPI ex-food & energy eased to 5.9% y/y from 6.0% y/y in May, but was stronger than expectations of 5.7% y/y.

A report from Bank of America released today forecasts a "mild recession this year" in the U.S., saying service spending is slowing and surging inflation is spurring consumers to pull back spending plans.  The report said, "a number of forces have coincided to slow economic momentum more rapidly than we previously expected."  These include inflation from food and energy prices that are leaving households with less available income for discretionary purchases.

The International Monetary Fund (IMF) cut its U.S. 2022 GDP forecast to 2.3% from last month's estimate of 2.9% and raised its U.S. 2022 jobless rate estimate to 3.7% from 3.2%.

Today’s stock movers…

Financial stocks are falling today on concern that rising U.S. inflation pressures will force the Fed to keep tightening monetary policy, which raises the odds the U.S. economy will fall into recession.  T Rowe Price Group (TROW), Principal Financial Group (PFG), Prudential Financial (PRU), and Lincoln National (LNC) are all down more than -3%.   Also, PNC Financial Services (PNC), Citizens Financial Group (CFG), Ameriprise Financial (AMP), and Franklin Resources (BEN) are down more than -2%. 

Airline stocks are falling today after Delta Air Lines reported Q2 adjusted EPS of $1.44, well below the consensus of $1.64, and said high operating costs would persist through the rest of the year.  Delta Air Lines (DAL) is down more than -7% today to lead losers in the S&P 500.  Also, American Airlines Group (AAL) is down more than -3%.  In addition,  Alaska Air Group (ALK) and Southwest Airlines (LUV) are down more than -2%. 

Fastenal (FAST) is down more than -5% today after its CEO warned of early signs of decelerating demand in the industrial sector. Other stocks in the sector also fell on the news, with Grainger (GWW) down more than -3% and MSC Industrial Direct (MSM) down -1%.

Illumina (ILMN) is down more than -4% today after Barclays cut its recommendation on the stock to underweight from equal-weight.

Twitter (TWTR) is up more than +7% today to lead gainers in the S&P 500 after it sued Elon Musk over his abandoned $44 billion takeover bid.

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are down -3 ticks, and the 10-year T-note yield is up +3.7 bp at 3.008%.  T-note prices are falling today after U.S. June consumer prices rose more than expected at the fastest pace in 41 years.  The surge in price pressures may push the Fed to be even more aggressive in tightening monetary policy.  Fed fund futures have now priced in 150 bp of Fed rate hikes over the next two FOMC meetings. Another bearish factor for T-notes is an increase in supply pressures as the Treasury will auction $19 billion of reopened 30-year T-bonds later today.  A sell-off in stocks today boosted safe-haven demand for T-notes and helped T-note prices recover from their worst levels. 

The dollar index (DXY00) this morning is up by +0.25% and posted a new 20-year high.  A jump in T-note yields today is strengthening the dollar’s interest rate differentials and is supportive of the dollar.  The larger-than-expected increase in June CPI today bolsters expectations for the Fed to maintain an aggressive stance in tightening monetary policy and is bullish for the dollar.  A slump in stocks today has also boosted the liquidity demand for the dollar. 

EUR/USD (^EURUSD) is down by -0.19% today and fell to a new 20-year low.  Dollar strength today is weighing on the euro due to the ECB’s dovish monetary policy relative to the Fed.  The euro is also under pressure on the growing risk that Russia will cut off gas exports to Europe and pushes the Eurozone into recession.  EUR/USD climbed from its worst levels today after ECB Governing Council member and Bank of France Governor Villeroy de Galhau said the ECB is watching the euro’s drop because of its effect on consumer prices.

Today’s Eurozone economic data was bullish for EUR/USD after Eurozone May industrial production rose +0.8% m/m, stronger than expectations of +0.3% m/m and the biggest increase in 5 months.

USD/JPY (^USDJPY) today is up +0.45% and is just below Monday’s 24-year high.  A jump in T-note yields today is weighing on the yen.  Also, the larger-than-expected increase in U.S. June CPI today will keep the pressure on the Fed to keep a large-size rate hike stance, which will weaken the yen’s interest rate differentials against the dollar even further. 

August gold (GCQ22) this morning is down -2.1 (-0.12%), and September silver (SIU22) is down -0.012 (-0.06%.)  Precious metals this morning are slightly lower, with gold dropping to an 11-month low. A rally in the dollar index today to a new 20-year high is undercutting metals prices.  Higher global government bond yields are also weighing on gold prices. Losses in gold are limited by increased demand as an inflation hedge after U.S. June CPI rose more than expected. Also, a slump in stocks today has boosted the safe-haven demand for precious metals.

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